For the past week or so, I have been playing with a free Retirement Calculator that I downloaded from Pivot Point Advisors. I urge you to stop by their website, download the calculator, and start looking at your numbers. This link also has step-by-step instructions on how to use the calculator and Martin Gremm from Pivot Point has agreed to check in and answer any questions via the comments to this post.
I am by no means an expert on Monte Carlo analysis. I do know enough to know that Monte Carlo Analysis helps avoid planning based on market averages, which can be deadly to a portfolio. I did a little research and found this article from Business Week that does a nice job introducing the concept. The article also lists several websites that may be of assistance:
ANALYCORP, www.analycorp.comStanford’s Sam Savage has books and software to learn about Monte Carlo simulations
DECISIONEERING, www.decisioneering.comSoftware firm specializing in risk analysis, with test spreadsheets available for downloads
FINANCIAL ENGINES, www.financialengines.comFinancial planning Web site makes projections based on Monte Carlo simulations
PALISADE, www.palisade.comThe @Risk Monte Carlo program works as an Excel add-on
T. ROWE PRICE, www.troweprice.comRetirement Income Calculator uses Monte Carlo to project withdrawal rates
Finally, if you are heavy into math, you might like Monte Carlo Analysis section at RiskGlossary.com. I saw just enough to realize that I didn’t want to read any more! Also, there is a Wikipedia for Monte Carlo Analysis that might be worth checking out.
Since this is a relatively new topic on this blog, I will probably be talking more about it in the future. Meanwhile, if you have any questions for Martin, please leave a comment and we’ll see if we can get him to stop by and answer them.