Saturday, February 19, 2011
Start saving and planning before its too late: WSJ 2/19/2011
Monday, February 14, 2011
Monte Carlo and Your Probabilty of Success
Are You saving enough for retirement?
How much can you withdraw from your retirement portfolio?
A retirement savings/investment plan should take into account how much you are saving, how that money is invested, and what your spending will be in retirement.
Monte Carlo simulators have been around since World War II, and with the power of personal computers, it is available to financial planners. Monte Carlo will use the historical risk and return characteristics of your investment portfolio , combined with your anticipated withdrawals, and simulate 10,000 different possibilities in order to give probabilities of success.
Monte Carlo will produce outcomes much different than assuming your money will grow at a constant return. Constant returns do not occur in the real world. Investors do not receive a constant 7% or 8% on their investment portfolio. One year they may be up 12%, the next down 3% etc. Over time, the average may be 7% but the ups and downs result in very different outcomes, especially when one is withdrawing money every year from the portfolio.
Years of study by academics and financial planners using monte carlo analysis has shown that withdrawing more than 4% per year out of a 50% stock/50% bond portfolio could result in a retiree running out of money before he/she dies.
The important point in all the analysis is that there is no investment magic that will allow a retiree to withdraw more than 4% per year and not risk running out of money in retirement. That is why it is important to develop a savings plan before retirement in order to build enough savings so that you can live the lifestyle you want in retirement.