Monte Carlo Retirement Simulator

How the Retirement Simulation Works

The model tracks your portfolio value year by year. In each simulated year, it applies a random investment return and subtracts your planned withdrawal. The process repeats until either the years you selected are finished or the balance hits zero.

For each simulation run, the calculator repeats the following steps:

1. Start with your initial balance (current savings).
2. Draw a random annual return from a normal distribution with the mean and volatility (standard deviation) you specified.
3. Update the portfolio balance using the formula below.
4. Subtract the same withdrawal amount each year in nominal dollars.
5. Stop that path if the balance reaches zero or you complete the chosen number of years.

The core update formula is:

In plain language:

• B is your new balance at the end of the year.
• B_prev is your balance at the start of the year.
• r is the random annual return in percent (for example, 5 means 5%).
• W is the fixed dollar amount you withdraw for spending each year.

This simulator assumes the withdrawal happens once per year, after the investment return is applied for that year.

Choosing Realistic Inputs

Your results are only as useful as the numbers you enter. The fields in the form typically represent:

• Current Savings ($): The total portfolio value you plan to draw from in retirement.
• Annual Spending ($): The dollar amount you plan to withdraw each year, before taxes and inflation adjustments.
• Expected Return (%): The average annual return you hope to earn before inflation, fees, and taxes.
• Return Volatility (%): The annual standard deviation of returns, which reflects how much returns vary from year to year.
• Years Simulated: How long you want your portfolio to last (for example, 25–35 years).
• Simulation Runs: How many random paths to simulate. More runs give smoother statistics but may take longer to compute.

The following table shows illustrative ranges for return and volatility assumptions for different portfolio risk levels. These are not recommendations or forecasts, just rough examples based on historical patterns.

Consider running optimistic, middle-of-the-road, and conservative scenarios to see how sensitive your plan is to different assumptions.

Interpreting the Simulation Results

After you run the simulation, the tool summarizes the outcomes in two main ways:

• Survival probability: The percentage of simulated paths where your portfolio stayed above zero for the entire number of years you chose.
• Ending balance statistics: Typical measures such as the median (50th percentile) ending balance and sometimes higher or lower percentiles.

On the chart, each gray line represents one simulated path of your portfolio over time. The blue line usually shows the average balance across all runs at each year.

Ways to read these outputs:

• If a large share of paths dip to zero early, your current withdrawal level may be aggressive relative to your assumptions.
• If most paths stay comfortably positive and the survival probability is high, your plan may be more robust under the modeled conditions.
• Comparing the median and lower-percentile ending balances gives a sense of typical outcomes versus more stressful scenarios.

Remember that even a 5–10% probability of running out of money can be unacceptable for some retirees who need more safety, while others may be comfortable with higher risk.

Worked Example

To see how the pieces come together, imagine the following scenario:

• Current Savings: $1,000,000
• Annual Spending: $40,000
• Expected Return: 5%
• Return Volatility: 10%
• Years Simulated: 30
• Simulation Runs: 1,000

In each of the 1,000 runs, the calculator simulates 30 years of returns drawn from a normal distribution with mean 5% and standard deviation 10%. Each year, it applies the return to the balance, then subtracts $40,000.

After all runs are complete, you might see results such as:

• Survival probability: 88% of simulations still had a positive balance after 30 years.
• Median ending balance: around $900,000 (some paths much higher, some much lower).
• 10th percentile ending balance: around $100,000, highlighting stressful but not worst-case outcomes under the model.

From this example, you would learn that, under these particular assumptions, your spending level has historically looked fairly sustainable, but there is still a non-trivial chance of running low on funds in poor market sequences.

Key Assumptions and Limitations

The simulator necessarily simplifies reality. Keep these assumptions in mind when reviewing your results:

• Normally distributed returns: Yearly returns are drawn from a normal distribution specified by your expected return and volatility. Real markets often have fat tails and extreme events that occur more frequently than a normal curve would suggest.
• No inflation, taxes, or fees: All amounts are in nominal dollars. The model does not adjust for rising prices, taxes on withdrawals, or investment management fees.
• Fixed withdrawal amount: The annual spending you enter is kept constant in dollar terms over time. Many retirees adjust spending in response to markets or life events.
• Single aggregated portfolio: The model treats your investments as one combined balance, without modeling different asset classes individually or rebalancing between them.
• Timing of withdrawals: Withdrawals are assumed to happen once per year, after that year’s investment return. In reality, people spend continuously throughout the year.
• No behavior changes: The simulation does not automatically change your spending, asset allocation, or retirement age in response to good or bad markets.

Because of these limitations, the results should be viewed as a rough probability-based illustration, not as a guarantee or exact plan.

Monte Carlo vs. Simple Average-Return Calculators

Traditional retirement calculators often assume the same average return every single year. This ignores sequence-of-returns risk: the idea that the order of good and bad years matters a lot when you are withdrawing money.

A Monte Carlo approach adds value by:

• Modeling many different return sequences with the same long-term average.
• Highlighting how early bad markets can be more damaging than later ones.
• Providing survival probabilities and a range of possible ending balances instead of a single point estimate.

However, it is still a simplified model. It does not know your full financial situation, other income sources, or future policy changes.

Using the Results to Inform (Not Dictate) Your Plan

Consider running several scenarios and comparing them. For example, you might:

• Reduce annual spending and see how the survival probability changes.
• Test a longer retirement horizon to reflect the chance of living into your 90s.
• Explore more conservative return or higher volatility assumptions to stress-test your plan.

If the simulation suggests a high chance of running out of money under reasonable assumptions, you might respond by:

• Lowering your withdrawal rate.
• Saving more before retirement.
• Delaying retirement to shorten the drawdown period.
• Discussing a more detailed plan with a qualified financial professional.

Ultimately, this calculator is best used as one input into your decision-making, helping you build intuition about risk and uncertainty rather than delivering definitive answers.