Monte Carlo Your Finances

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 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.

9 thoughts on “Monte Carlo Your Finances”

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  2. There’s another free online Monte Carlo calculator at

    This one is a little different in that it makes it easy to experiment with different scenarios to “stress test” your plan.

    For example, you can plug in a market crash of 25% in year 5 of your retirement and see how it affects the outcome. Or, you could plug in ten years worth of LTC expenses starting at age 75 and see how your plan does under that scenario.

    Also, it has support for some of the new research about dynamically changing withdrawal amounts based on market conditions.


  3. Yes, Crystal Ball from Decisioneering is a very robust Monte Carlo Simulation. You’ll find a few different versions.

    In the blink of an eye, it will run something like five thousand trials, and show you the bottom line probability that, given certain assumptions about variables you can choose for yourself, that you’ll run out of money before you die, need to send kids to college, or some sequential combination thereof, etc..

    It is not per se a direct indication that a tactic or strategy is most likely a winner or a loser. Rather, it helps you determine the chances that cetain types of things (taking more risk, putting aside more money per year, etc) will likely be conducive to reaching your intended goal, and if not, what other things, or combinations of things, are key factors?

    The best analogy I know is that it is kind of like a carpenter’s stud-finder, not an exact locating device for all situations, but helps you know if you most likely need to go more right, left, up or down, etc…..the subsequent analysis needed to implement the ideas then must be based on mathematically rigorous calcs and on fairly fresh and precise market data, and if one is smart, there is a healthy dollop of common sense and fundamental analysis, too. If you don’t know and grasp a company’s business plan, if you can’t see light shined on their operations and financial history and future strategies and plans, on what basis is one willing to invest money on the hope that it will be used responsibly and effectively to produce a justifiable return on the dollar? Do you hang your hopes on Market Slycology, the hunch that despite being a wacky business proposition, Company X will catch on like Pet Rocks? Well, some people get lucky at sheer speculation. But, is it by definition, prudent finaicial planning and investment activity?

    The Open Crystal Ball system is included in a nice financial planning software package called “Plan Builder.” It is available from Financial Planning Consultants Inc

    Interstingly, this system lets you use a quick and dirty method to weigh the relative impact of making many changes simultaneously in tactics and stratgey at the same time you cause th eunderlying assumptions to also change…all in real time, with a high impact visual presentation.

    Most people’s efforts are stymied by ill advised attempts to “time the market,” or by spreading assets too thinly with no regard to how the specific items correlate with key factors that drive the fluctuations in value that they need to capture in order to profitably sell long or short, or some combination thereof.

    People tend to get passionately excited when something is ‘going up,’ and they buy– way too high, getting insufficient shares for their outlay. They get discouraged and mad when things drop, they sell for too little per share and lose, then they fail to pick up on the bounce, or just before…

    What systems like this do best is help people see qualitatively what they’ve gotten done, assess their feelings about that and what lies ahead, and get a glimpse at how they have gotten it done…and to an extent, how come…it also helps people get introduced to Asset Allocation as a tool for strategically planning a longer term portfolio. The technical analysis side of this system provides nice support to help people better understand their personal dynamic and to compare their personal reate of return with the internal rate and sums needed to fund the goals they indicate are their priorities, and to put that all in a fairly objective context of reality based economic forces such as inflation, variable personal indebtedness, health and personal economic mishaps, federal taxes, etc..This tool has been instrumental to me in my own analysis, for me the strengths have outweighed the minor shortcomings. If enough people ask, maybe they’ll roll out a consumer version…there used to be one on the web….I am not an employee of this company, nor a paid or unpaid spokesman. I get no compensation or favors for sharing my opinion here. I am engaged in another endeavor and that requires me to not give financial advice or sell away from my principal without specific written permission.

    I am requesting the OK, as a matter of fact, to utilize this system in my work, OK?

    A fairly long time ago, I sold as a rep, a related software system for a major company who sold the core code to the present owner, that this was developed from….there are other systems out there that people may prefer better for thier own purposes…Quicken, to name one, online systems that are available at various discount or online investment advisors sites…I encourage people to look into and use these as they see best, the benefit is getting a better look at personal things while saving enough time to have sufficient time and energy to effectively do something about problems one may encounter.

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