Retirement Analyzer

A retirement analyzer is a valuable retirement planning tool that enables investors to assess their financial health, specifically their probability of running out of money during retirement. It is best used as a guide in making decisions on saving, spending, and investing and should be revisited annually. The retirement analyzer at provides the tools to assess an investor's probability of portfolio survival.

The retirement analyzer performs a Monte Carlo simulation which generates 10,000 individual scenarios. Each scenario is calculated using randomly selected annual returns from distributions based on the performance of historical data. The results of a Monte Carlo simulation are heavily dependent on the following specific inputs:

  1. Beginning portfolio value
  2. The number of years for the projection
  3. Future cash flows (both deposits and withdrawals)
  4. Inflation rate to be applied to the cash flows
  5. The distribution of returns
  6. Investment strategy

Quite often, the results of an initial analysis will appear unsatisfactory. Several changes in assumptions can be made to improve the expected outcome, these include:

  1. Save a larger percentage of salary
  2. Spend less in retirement
  3. Shorten years in retirement
  4. Take more risk during the working years
  5. Take less risk during the drawdown phase
  6. Use glide path (steadily decreases risk over time)

Figure 12-4 depicts the results of a portfolio simulation for an individual with a retirement age starting at 67. The green and gold bars represent the probability of the portfolio surviving through various ages. A portfolio survival simulation is a valuable tool for investors to use for establishing a degree of confidence about the sustainability of their portfolio through their lifetime. Revisiting the retirement analyzer each year allows investors to make sure they are on course — much like an onboard navigation system for a car. The closer one gets to their destination, the more finely tuned the directions become.

Figure 12-4

Step 12Monte Carlo SimulationProjectionProbabilityPortfolio SurvivalSimulation