How to use the Monte Carlo retirement calculator:

Quick-start Guide: Using the Monte Carlo Retirement Calculator

This friendly walkthrough helps you set up, run, and interpret the simulator. You’ll choose your portfolio, pick how withdrawals adjust over time, and see your odds of success.

1) Start with your plan

- Initial portfolio: Enter your current balance (e.g., 800,000).

- Years to simulate: How long you want the plan to last (e.g., 20–30 years).

- Simulations per run: More = smoother results, slower compute. 5,000 is a solid default.

- Annual fee (%): All-in cost (fund fees + advice). If unsure, try 0.20–1.00%. Applied monthly.

2) Set inflation

- Inflation mean (%): Long-run average, commonly 2–3%.

- Inflation stdev (%): How “bouncy” inflation is year-to-year, try 1–2%.

- The tool models inflation monthly and compounds it over the year—this drives your annual withdrawal bump.

3) Pick your withdrawal timing

- Withdrawals start date: When regular withdrawals begin.

- First-year withdrawal (% of initial): The first full-year amount (e.g., 4.0–5.0% of the initial balance). Then it changes annually per your strategy.

4) Choose a withdrawal strategy

- Fixed (inflation-adjusted)

- What it does: Increases your withdrawal each year by last year’s inflation.

- Pros: Simple, helps maintain purchasing power.

- Cons: Doesn’t react to markets—could be too high after poor returns.

- Guyton–Klinger Guardrails (GK)

- What it does: Targets inflation increases but adds “guardrails” around the initial amount:

- If the inflation-adjusted withdrawal drifts 20% above the initial level → take a 10% raise instead of full inflation.

- If it drifts 20% below → take a 10% cut.

- Pros: Built-in safety brakes in bad markets and boosts in good markets.

- Cons: May require occasional spending cuts.

- Dynamic with Performance

- What it does: Raises withdrawals by inflation, then nudges them up/down based on last year’s portfolio performance versus inflation.

- Kappa (κ): Sensitivity to performance. If κ = 0.5 and your portfolio beat inflation by 6%, your withdrawal increases by about +3% (on top of inflation). Changes are capped at ±10% per year.

- Lower κ (0.2–0.4): gentler tweaks.

- Moderate κ (0.5–0.8): balanced response.

- Higher κ (1.0+): more aggressive (still capped).

- Pros: Adapts smoothly to market reality.

- Cons: Withdrawals will vary year to year.

Extra protection: The tool also keeps withdrawals within reasonable bands (about 3–6% of the initial balance) to avoid extremes.

5) Build your portfolio

- Weights: Set percentages for US stocks, International stocks, Global bonds (BNDW), and Short TIPS (VTIP).

- Allocation preset: Use 80/20, 70/30, 60/40, or 50/50 to quickly set stock/bond split while keeping your chosen stock mix.

- Show sample paths: How many example lines to draw on the chart (visual only).

6) Enter return assumptions (annualized)

- μ (mu): Expected average return.

- Typical starting points: US stocks ~_10%_, International ~_6–7%_, Bonds ~_1–3%_.

- σ (sigma): Volatility (how much returns swing).

- Stocks ~_16–20%_, Bonds ~_3–8%_, TIPS lower.

- Correlations:

- Equity–Equity corr: US vs. International stocks, often 0.7–0.9.

- Equity–Bond corr: Usually slightly negative to low positive, e.g., -0.2 to +0.2.

- Tip: If you’re unsure, use the defaults. Higher μ improves outcomes (if realistic). Higher σ widens the range (more upside and downside).

7) Run the simulation and read results

- Click Run Simulations.

- Success probability: % of paths that never run out of money. Higher is better.

- Median end balance: Middle-of-the-road outcome at the end.

- 10th / 90th percentile: Pessimistic vs. optimistic range.

- Worst 5% end balance: A harsh stress case.

- Charts:

- Sample paths: Possible journeys of your balance. Orange line = median of the displayed paths.

- Histogram: Spread of ending balances across all simulations.

- Results table: Year-by-year median, min, and max (from shown sample paths), plus drawdown vs. your initial balance.

8) Experiment smartly

- Try 3.5% vs. 4.5% vs. 5.0% first-year withdrawals; watch success probability.

- Switch strategies:

- Fixed for simplicity.

- GK to stay near guardrails.

- Dynamic to reflect markets; adjust κ to suit your comfort.

- Test 60/40 vs. 70/30, and tweak fees. Small fee changes compound meaningfully.

9) What “good” can look like

- Target a strong success rate (e.g., 85%+) if you want stable spending.

- If you’re flexible (GK or Dynamic), you might accept slightly lower success odds since spending adjusts.

- Always check the 10th/90th range and worst 5% to ensure you’re comfortable in tough markets.

Reminder: This is a planning tool, not a prediction. Use it to explore trade-offs—withdrawal level vs. success odds, portfolio risk vs. stability, and how your strategy choice shapes the ride.