Why Average Returns Are a Lie
Understanding why using average market returns in retirement planning can lead to failure, and how Monte Carlo simulations provide a better answer.
Why Average Returns Are a Lie
When planning for retirement, most simple calculators ask for an "expected return" and project your wealth in a straight line. They might say: "If the market averages 7%, you will have $2 million."
This is dangerous.
The stock market does not move in a straight line. It is volatile. And when you are withdrawing money in retirement, the order of those returns matters just as much as the average.
The Sequence of Returns Risk
Imagine two retirees. Both average 7% returns over 30 years.
- Retiree A gets positive returns early, and negative returns later.
- Retiree B gets negative returns early (a crash), and positive returns later.
Retiree A dies wealthy. Retiree B runs out of money in 15 years.
How Monte Carlo Helps
Instead of guessing one "average" number, we run 1,000 simulations using historical volatility data.
This shows you the range of outcomes, not just the happy path.
Try It Yourself
Don't rely on averages. Run a simulation to see your probability of success.
Related: Can You Retire With $1 Million? - We ran the numbers on the classic retirement question.
Ready to run the numbers?
See how 1,000 different market scenarios could affect your retirement plan.
Try the Monte Carlo Calculator