My only compelling reason for messing with financial planning is to deal with my fear of running out of money; the rest is just for curiosity's sake. To that end, I'd really like to see the worst case in the Monte Carlo simulations. It's helpful to know everything works out in 90% of cases; it's the .2% of cases that I want to account for when making discretionary spending decisions like how much to budget for travel and whether to give money to some relative's 529 plan. The tables that show the odds of success in the last 10 years aren't that comforting to me because my threshold for success is a lot higher than dying with $1 to my name. I would suffere extreme stress if my net worth went below $100,000 unless I knew death was imminent.
@wmchbaker I think you make a good point and we'll give this a serious look for the 2024 web version.
Stuart
Thanks for your consideration.
William
Might want to be careful using the extreme ends (tails) of Monte Carlo simulations. There is a whole Forum topic under Frequently Asked Questions - Historical VS Monte Carlo that discusses the weak points of Monte Carlo simulations. One being the Monte Carlo simulations are bad at worst case scenarios:
For instance, when comparing a Monte Carlo analysis of 10,000 scenarios based on historical 60/40 annual return parameters to historical returns, it turns out that 6.5% of Monte Carlo scenarios are actually worse than even the worst case historical scenario has ever been! Or viewed another way, a 93.5% probability of success in Monte Carlo is actually akin to a 100% success rate using actual historical scenarios! And if the advisor assumes lower-return assumptions instead, given today's high market valuation and low yields, a whopping 50% to 82% of Monte Carlo scenarios were worse than any actual historically-bad sequence has ever been! As a result, despite the common criticism that Monte Carlo understates the risk of fat tails and volatility relative to using rolling historical scenarios, the reality seems to be the opposite – that Monte Carlo projections show more long-term volatility, resulting in faster and more catastrophic failures (to the downside), and more excess wealth in good scenarios (to the upside)! https://www.kitces.com/blog/monte-carlo-analysis-risk-fat-tails-vs-safe-withdrawal-rates-rolling-historical-returns/
Monte Carlo software has a lot on buttons and knobs (variables) that can be adjusted, so unless you can see those adjustments, it kind of a black box spitting out results. Here is a very nice overview of Monte Carlo simulations: https://www.investopedia.com/terms/m/montecarlosimulation.asp?hid=cf7663b321b1ba4c06f591c0f273ce622b2a3d21&did=9670526-20230716
So if you are looking for realistic worst case scenarios, I would recommend using PRC's historical simulations.
