In my last “No Dumb Questions” video, we introduced a great, and frequently asked question – How Much Do I Need to Retire? – and we explored how the answer is based as much on understanding yourself and your goals as it is on the dollar amounts involved.
That said, unless you just built a second swimming pool to store your spare Loonies, you probably also reach a point when you want to know how the heck you’re doing so far in cold, hard cash. That calls for an occasional deep dive into the numbers involved. In this “No Dumb Questions” segment, I’ll talk about how we use something called Monte Carlo analysis to think through the financial end of funding your retirement – without leaving your head swimming over it.
When it comes to retirement planning, you might say that the true goal is to bend those pesky numbers to your will, rather than the other way around – and to make sure you’re using your money to capitalize rather than cramp your style.
So let’s talk about that realistic plan: What is it going to take to get there? For this, we often use a technique with a quirky name but a serious role in retirement planning. It’s called Monte Carlo analysis.
The name comes from acknowledging that life is full of uncertainties. Rather than fixating on a single outcome, it’s more realistic to consider life’s many, future “What ifs?” What if good fortune smiles on your money-making goals? What if you experience a mixed bag of results? What if you just can’t seem to catch a break? What do you do under each possibility?
With Monte Carlo analysis, we plug in your income, investing and spending numbers. The analysis then displays a wide range of possible outcomes – from best- to worst-case scenarios. This helps us think through those quality-of-life tradeoffs we talked about in my last video: your career, spending, saving and risk tolerance profiles. [Do you have a Monte Carlo illustration you can display here?]
Let me offer a quick illustration. With your salary, pensions and investments, what if you have an 80 percent change of accumulating at least $2 million by the time you’re 65 – adjusted for inflation, by the way. Are you comfortable with those odds, knowing that there’s a 20 percent chance you may fail, and need to work harder or save more later on? If you would rather ensure 90 percent odds in your favor, are you willing to invest more aggressively or save more right away?
There is no “right” or “wrong” answers for everyone, but Monte Carlo analysis helps us quantify a satisfying answer for you and your family. After that, we get to work implementing a plan that suits your needs, and of course tracking your progress as those curve balls come your way. If your investments end up performing better or worse than hoped for, the planning can begin anew.
As always, let me know if you have any new subjects I can cover in future segments.
