What is Monte Carlo Simulation?
Monte Carlo simulation is a computational technique that runs thousands of scenarios with different random market returns. Unlike simple calculators that assume a fixed rate of return (e.g., "7% every year"), this approach accounts for the reality that markets fluctuate.
This calculator runs 1,000 different simulations, each with its own sequence of market returns drawn from a realistic probability distribution. This gives you a complete picture of possible outcomes, from worst-case to best-case scenarios.
For the technically curious: This calculator uses the same Monte Carlo technique that major financial institutions use, powered by proven mathematical models including Geometric Brownian Motion (GBM). This is professional-grade analysis—free to use.
Geometric Brownian Motion
This calculator uses Geometric Brownian Motion, a widely-used model in financial analysis. This mathematical approach models portfolio growth as a combination of:
- Expected Return: The average annual return you expect (e.g., 7%)
- Volatility: How much returns vary year-to-year (e.g., 15% standard deviation)
- Random Variation: Realistic market fluctuations each year
This creates realistic portfolio paths where you might see +25% one year and -10% the next, just like real markets.
Two-Phase Retirement Model
📈 Accumulation Phase
From your current age until retirement:
- Add monthly contributions
- Apply market returns each year
- Compound growth builds your nest egg
📉 Withdrawal Phase
From retirement until life expectancy:
- Withdraw annual income (% of balance)
- Remaining portfolio continues growing
- Track if money lasts through retirement
Understanding Your Results
Success Rate
Percentage of simulations where your money lasted through retirement. A 90%+ success rate is generally considered very good.
Projected Balance
The median (50th percentile) retirement balance across all simulations. Half of scenarios result in more, half in less.
Percentile Ranges
Shows the distribution of outcomes:
- • 10th percentile: Worst 10% of scenarios
- • 25th percentile: Below-average outcomes
- • 75th percentile: Above-average outcomes
- • 90th percentile: Best 10% of scenarios
Annual Income
Based on your withdrawal rate and projected balance. Remember that a high income means nothing if your success rate is low – you need both!
How to Use the Calculator
- Enter Your Basic Info: Current age, retirement age, and life expectancy
- Set Your Savings: Current savings and monthly contributions
- Choose Market Assumptions:
- • 7% return, 15% volatility = typical stock portfolio
- • 5% return, 8% volatility = conservative mix
- • 9% return, 20% volatility = aggressive stocks
- Set Withdrawal Rate: The famous "4% rule" is a good starting point
- Review Your Results: Look for 90%+ success rate and comfortable income
- Adjust Parameters: Experiment with different scenarios to find your optimal plan
Ready to Plan Your Retirement?
Use the calculator to run your own Monte Carlo simulation - completely free
Try the Calculator