Monte Carlo retirement planning: will your savings last?

Most retirement calculators give you one line that rises smoothly to a big number. It is comforting and it is wrong in one important way: markets never move in a straight line, and the order of good and bad years matters a great deal once you start spending.

This guide shows how to plan retirement in today’s money, the three numbers worth knowing, and how a Monte Carlo simulation replaces the smooth line with a more honest answer: in how many possible futures does your money last?

Plan in today’s money

Inflation makes future dollars hard to picture. At 3% a year, $5,400 a month today is about $11,300 a month in 25 years. Both buy the same groceries.

The simplest fix is to plan entirely in today’s money. You do that by typing a return above inflation, often called a real return. If a mix of investments is expected to earn 8% a year and inflation runs at 3%, you would type about 5%. Every other amount in the plan, what you will live on and what you put in each month, then stays in what money buys today. There is no separate inflation guess to get wrong.

The three numbers that matter

1. What has to be there on the first day of retirement. Enough to pay your spending, minus any pension or Social Security, every month until the age you plan to.
2. What your savings grow to by then. What you have today plus your monthly contributions, grown at your assumed return.
3. What you would need to put in each month to make the plan work in most of the futures the simulation tries.

Why a straight line is not enough

A straight-line projection assumes the same return every year. Two problems follow.

Swings slow growth. A portfolio that averages 5% a year but swings up and down grows more slowly than one that earns exactly 5% every year. A 20% fall followed by a 20% rise leaves you 4% behind, not even.

Order matters once you spend. This is called sequence of returns risk. A bad decade right after you retire, while you are selling to live, does far more damage than the same decade twenty years earlier, when you were still buying. Two retirees with the same average return can end up in very different places.

What is a Monte Carlo simulation?

A Monte Carlo simulation plays your plan through many possible market histories. It draws, say, 1,000 sequences of yearly returns around the average and the swing you chose. It runs your savings, contributions and spending through each one, and counts how many still have money at the end. That share is your chance of success.

The result is usually shown as a fan: a middle line, a band holding the middle half of the outcomes, and a wider band holding the middle 80 of 100. The fan makes the uncertainty visible instead of hiding it inside one line.

A worked example

You are 42 with $160,000 saved for retirement and put in $1,100 a month. You want to retire at 65 and plan to 92. You expect to spend $5,400 a month in today’s money, with $2,300 a month of Social Security from 67. You assume 5% a year above inflation with a yearly swing of 14%.

Number	Result
Needed on the first day of retirement	about $612,000
Savings at 65 on the straight line	about $1.05 million
Monte Carlo: histories that last to 92	679 of 1,000, about 68 in 100
Monthly amount for 80 in 100	about $1,630

The straight line says you will have far more than you need. The simulation says roughly one future in three runs dry before 92. Both are using the same average return; the difference is the swings and their order.

Here is what a few changes do, one at a time:

Change	Chance of success
None	about 68 in 100
Put in $1,630 a month instead of $1,100	about 82 in 100
Raise the $1,100 by 3% each year	about 80 in 100
Retire at 67 instead of 65	about 80 in 100
Spend $5,000 a month instead of $5,400	about 76 in 100

Small, early changes do a lot of work. Raising contributions a little each year, from the age of 42, gets the plan to the same place as working two more years at the end.

How to read the success rate

• 80 in 100 or better is a common comfort level.
• Between 60 and 80, the plan works in most futures but has little room for surprises.
• Below 60, something should change: save more, retire a little later, plan to spend less, or accept more swing for a higher average.

Aiming for 100 in 100 is not free either. It usually means saving much more than you will ever spend. The point of the number is to compare versions of your own plan, not to chase certainty.

Choosing your assumptions

• Return above inflation: be modest. A mix of stocks and bonds has historically earned less above inflation than stocks alone, and fees come off the top.
• Swing: more stocks means a higher average and a wider swing. Cash and bonds narrow both. See how to read risk and swings in a portfolio.
• Spending: start from what you spend now, then adjust for what changes: a paid-off mortgage, more travel, health costs.
• Social Security: use your own estimate from your Social Security account at ssa.gov, and enter it from the age you plan to claim.

Common mistakes

• Typing a nominal return and nominal spending together with today’s prices.
• Planning to an average life expectancy instead of an age you might well reach.
• Treating the result as a forecast. It is arithmetic on assumptions, and it is only as good as they are. If you are retiring soon, a fee-only planner can check your plan.

How Money Kit runs your retirement plan

The Retirement module in Money Kit works in today’s money and suggests a return and swing from the mix you already hold, which you can change. It takes your savings from your investment accounts and your monthly amount from the savings lines in your budget, and you add a pension or Social Security from an age and a yearly raise for contributions. It runs 1,000 simulated markets, seeded so the same inputs always give the same answer, and shows the share that last to your age, the amount needed on the first day and the monthly amount for 80 in 100 on a fan chart. A Take a break card shows what a sabbatical would do to your chance of success.

This article is general education, not personal financial advice.