Using Monte Carlo Simulation in Retirement Planning
Two Quants and a Financial PlannerApril 24, 202300:29:35

Using Monte Carlo Simulation in Retirement Planning

In this episode of the Education of a Financial Planner, we take a detailed look at Monte Carlo simulation and how it is used in retirement planning. The look at the inputs that are used, how the simulation works and how to interpret the results. We also discuss some of the limitations of the process, how to calculate expected market returns to use in the simulation, the importance of properly framing the results and a lot more.

00:57 - What is Monte Carlo simulation?
01:40 - Bad singing by Justin
05:13 - The major uses of Monte Carlo simulation in financial planning
06:07 - Matt has a story for everything
07:09 - What variables are changed in a Monte Carlo simulation?
09:10 - What is success defined as?
11:17 - Dying with zero is harder than you think
12:23 - What probability of success do financial planners target?
16:11 - How do you figure out what market returns to use in a Monte Carlo simulation
17:32 - How do valuations and inflation impact expected returns?
18:30 - Does it make sense to force the bad years to the beginning of the simulation every time?
20:32 - Don't leave your convertible open in the rain.
20:45 - Is a 50% chance of success actually good enough?
23:10 - What role do taxes play in a Monte Carlo simulation?
24:39 - Probability of adjustment vs. probability of failure
27:24 - Episode summary

ABOUT THE PODCAST
Learning how to be a financial planner is one thing. Doing it is another. Follow along with new financial planners Jack Forehand (@practicalquant) and Justin Carbonneau (@jjcarbonneau) as experienced veteran Matt Zeigler (@cultishcreative) helps them navigate the complex world of financial planning and learn about the most important topics that impact all of our financial futures. From investments to retirement to college planning to estate planning to insurance and beyond, we will cover the major financial planning issues that impact all of our lives and will provide a framework to help investors tackle them. We hope you will join us on our learning journey.

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