Ask the Retirement Expert: What’s a Monte Carlo Simulation, and Should My Retirement Plan Include It?
Each week our Northwestern Mutual retirement experts answer your questions. This week’s question:
What’s a Monte Carlo simulation, and should my retirement plan include it?
A Monte Carlo simulation takes a number of different variables and simulates numerous outcomes given different combinations of those variables. For example, it can simulate different inflation rates throughout retirement, different investment returns and even different life spans.
Should you include an analysis in retirement planning? Absolutely. No one can predict future tax rates, future investment returns, lifespan or future income needs (spending, health care, etc.) with 100 percent certainty. In fact, I find people often tend to underestimate how long they will live. By using a Monte Carlo simulation, you can take these variables into account and simulate your retirement picture.
When you include Monte Carlo simulations in your plan, you can look at the various results of these simulations to see how your plan fares over time under hundreds of different scenarios. Ask your financial professional whether he or she can share results with you to see the probability of you reaching your retirement income goals. While Monte Carlo simulations can test the probability of outcomes, they are hypothetical, do not reflect actual investment results, and are not guarantees of future results.
Do you have a question for our Northwestern Mutual retirement experts? Click here to send your questions.