When it comes to planning for retirement or long-term goals, uncertainty is inevitable. That’s where Monte Carlo simulation becomes an invaluable tool in wealth management. It allows financial advisors and investors to test the probability of success for a financial plan—under thousands of possible future scenarios.

What Is Monte Carlo Simulation?

A Monte Carlo simulation is a computerized modeling technique that runs thousands of randomized simulations based on variables like market returns, inflation rates, and withdrawal patterns. Instead of predicting a single outcome, it shows a range of possible outcomes—and the likelihood of each one occurring.

In other words, it helps answer the question:

“What are the chances my retirement plan will work under real-world market conditions?”

How It Works in Financial Planning

Let’s say you plan to retire at 65 with $1.5 million in savings and withdraw $60,000 per year. A Monte Carlo simulation will analyze:

• Your asset allocation
  
  
• Market volatility and returns
  
  
• Inflation rates
  
  
• Life expectancy
  
  

The result? A success rate (often shown as a percentage) indicating how many of the simulated scenarios allowed you to reach your goals without running out of money.

For example:

• 90% success rate = high confidence your plan will work
  
  
• 50% success rate = moderate risk of falling short
  
  

Why It Matters in Wealth Management

• Realistic expectations: Markets don’t move in straight lines. Monte Carlo accounts for the ups and downs.
  
  
• Better decision-making: Helps you adjust savings, spending, or retirement age to improve your odds.
  
  
• Custom planning: Financial advisors use it to tailor plans to individual clients’ risk tolerance and goals.
  
  

Limitations to Keep in Mind

• It uses historical data and assumptions—it’s not a guarantee.
  
  
• Simulations may differ depending on the model or software used.
  
  
• It doesn’t account for unexpected events like health crises or tax changes unless factored in manually.
  
  

Final Thoughts

Monte Carlo simulation brings clarity to uncertain financial futures. It helps investors and advisors stress-test retirement plans and make data-driven adjustments. If you’re nearing retirement or want to ensure your wealth plan is solid, ask your fee-only financial advisor to run a Monte Carlo analysis today.

‍