top of page
  • Writer's pictureMark Fonville, CFP®

How A Monte Carlo Analysis Can Help With Your Retirement Income Projection

How a monte carlo analysis can help with your retirement income projection

To feel confident in retirement, you know you need a plan.

You may even have something in place with a specific retirement income number in mind. But are you on track to reach it?

Having a clear idea of what you’re working towards is excellent, but it’s equally critical to know if that plan will stand the test of (retirement) time.

  • Wouldn’t it be nice to know if you’re on the right pace to reach your retirement “number”?

  • How do you know if you’re spending too much (or too little) in your golden years?

  • Is there a way to track everything to see if you are still on the path to a successful retirement?

There sure is! And it’s called Monte Carlo Analysis.

A Monte Carlo Analysis is an excellent tool to gauge how likely you are to reach your retirement spending goals. Today we’ll dive into what a Monte Carlo analysis is, how it works, and how it can inform your plan's efficacy.

Breaking Down A Monte Carlo Analysis

By now, you’re probably picturing a high-class casino nestled in the French Riviera. But we’re not referencing this famous Monaco gambling landmark.

Monte Carlo Analysis is a mathematical method for forecasting and evaluating risk more comprehensively—not as much fun as trying your hand at Roulette, but far more practical.

To get started, you load all appropriate data into the software, like your retirement age, nest egg, spending goals, asset allocation, etc. After you input all the required data, the system uses the repetition of random variable assumptions based on your inputs to produce projected outcomes. Most models will usually run over 1,000 times!

You’ll see the results populate on a bell curve. By evaluating the raw data, you’ll have access to a broad spectrum of outcomes from unrealistically good to unrealistically poor, with many reasonable ones in between. You’ll find the average of the entire range of projected outcomes in the middle, which is usually the most accurate.

Projections via a Monte Carlo analysis are more valuable than a simple straight-line projection in an excel spreadsheet because it helps you estimate the likelihood of different outcomes.

For example, are you wondering if $2 million is enough to retire at 60? Or is $1.5 million enough money to retire at 65?

A Monte Carlo analysis can help bring color and context to the answer and give you the tools to make informed investing and spending decisions in retirement.

Monte Carlo Simulation And Finance

There are several ways a Monte Carlo Analysis can help you create and track a better financial plan because it specializes in randomness and uncertainty.

Sound familiar?

Much of your financial plan focuses on the future, and future results are far from certain. So you can model any aspect of your plan that fits the bill with Monte Carlo: Portfolio valuation, spending projections, long-term financial planning items like planned withdrawals, investment rate of return, and more.

But why is it helpful?

By taking the time to create an accurate model, the results you receive will be heads and shoulders above an “educated guess,” which, unfortunately, is often what people rely on. Instead, you’ll have an outcome that is produced with real data.

You’ve worked too hard and saved too much to base your retirement savings plan on a guess. Monte Carlo helps you make informed, data-driven decisions, which can inspire confidence in your overall plan. Perhaps you’ll need to adjust your investment strategy to reach your financial goals.

As you know, understanding risk is a core element of your financial plan.

Monte Carlo Analysis is a much more technical way to quantify risk and understand your probability of success because you can view the end result as a probability figure. That figure details whether or not your plan is projected to succeed exactly as you have it. Rather than a single straight-line estimate that you might see on an excel spreadsheet, Monte Carlo Analysis helps you model a range of possible outcomes.

It’s also a great visual aid! Here’s an example of what Monte Carlo results might look like.

What Monte Carlo results look like
What Monte Carlo results look like

Although the process of running a Monte Carlo simulation is technical, you can present and understand the outcome with a simple chart.

That’s more than just a nice-to-have feature; it actually makes the tool more effective. If you can understand a core concept, there’s a better chance you’ll implement and stick with it.

How A Simulation Can Impact Your Real Retirement Experience

It’s important to synthesize a simulation into your real life. How can you do that with Monte Carlo?

This type of analysis brings content to your retirement plan—you’re not planning in a vacuum. It’s useful for helping you understand how well your portfolio may do decades from now if you’re planning on spending too much throughout retirement and even if you could spend more than you are planning to.

Even though the inner workings of the simulation are technical, we can easily customize it for your unique situation. For example, we can input variables and assumptions we do know, such as when you plan to retire, how you plan to invest, and your life expectancy, then let the algorithm work its magic.

The result of the Monte Carlo Analysis can even help inform us of how to adjust your plan when needed. Say your Monte Carlo score is far too high (yes, there is such a thing). That result might indicate you’ll have too much money leftover once you pass.

Perhaps you consider adding an extra vacation each year or buying a new vehicle into your cash flow plan without risking your retirement.

You can also see which variable (spending, investment returns, or taxes) impacts the outcomes the most. This knowledge can help you think about the areas of your plan to focus on or which element carries the most risk.

You may find that an item you thought was important doesn’t have a notable impact on your plan. Or that something you didn’t think mattered is responsible for a larger portion of your success.

We use Monte Carlo Analysis as part of our larger planning software with all of our clients who want a better sense of their financial security in retirement because we think it is a great tool to understand risk and obtain a more nuanced picture of your retirement plan. Covenant Wealth Advisors is a trusted group of financial advisors that can help you visualize your retirement and make necessary changes to get you where you want to be.

Call us today to talk about how a Monte Carlo Analysis can help you identify key risks in your retirement plan or how you can get set up to easily track your plan going forward.


Mark Fonville, CFP®

Mark is a fiduciary, fee-only financial advisor at Covenant Wealth Advisors serving clients across the United States. He specializes in helping individuals aged 50 plus plan and invest for retirement.

Forbes nominated Mark as a Best-In-State Wealth Advisor*, and he has been featured in the New York Times, Barron's, Forbes, and Kiplinger Magazine.



Covenant Wealth Advisors is a registered investment advisor with offices in Richmond and Williamsburg, VA. Past performance is no guarantee of future returns. Investing involves risk and possible loss of principal capital.

The views and opinions expressed in this content are as of the date of the posting, are subject to change based on market and other conditions. This content contains certain statements that may be deemed forward-looking statements. Please note that any such statements are not guarantees of any future performance and actual results or developments may differ materially from those projected.

Please note that nothing in this content should be construed as an offer to sell or the solicitation of an offer to purchase an interest in any security or separate account.

Nothing is intended to be, and you should not consider anything to be, investment, accounting, tax, or legal advice. If you would like accounting, tax, or legal advice, you should consult with your own accountants or attorneys regarding your individual circumstances and needs. No advice may be rendered by Covenant Wealth Advisors unless a client service agreement is in place.


Don't Miss Out

Join 8,067+ individuals who receive our retirement insights by email and get a free copy of "Key Issues To Consider Before You Retire."

bottom of page