How do I use Monte Carlo to decide on a safe retirement spending schedule?
As you know, your portfolio returns are subject to fluctuations and uncertainty, and the Monte Carlo method can be used to assess the impact of that on your wealth distribution at some target advanced age, to make sure your assets will survive you. RSP enables individuals and advisors to do this job for you, efficiently and insightfully. We are sometimes asked why can’t this process be simplified by performing many production runs of the analysis and boiling it all down into rules of thumb. Such as, if my portfolio has to last 30 years, it is safe to spend 4.5% of it in Year One. That can actually be done to some extent. But realize that the correct withdrawal rate depends on more than just the number of years the portfolio has to last. It also depends most importantly on: the expected return, the volatility or standard deviation of the return, the individual’s tax status (how much of the portfolio is sheltered and what is the cost basis of the taxed part), an assumption about inflatio
