How Monte Carlo Works in WealthTraceMonte Carlo analysis estimates how often a retirement plan “works” by running many possible market paths and checking whether the plan runs out of money in any of them.What WealthTrace simulatesFor each simulation, WealthTrace generates a year-by-year set of total returns for every investment in the plan. Returns vary from year to year based on: the investment’s [...]
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15 ArticlesWhy do the Dashboard and Monte Carlo projected investment values differ?
The Projected Investment Value at End of Plan shown on the Dashboard uses static annual return assumptions. uses varying investment returns across 1,000 simulations. The median is the 500th result out of 1,000 simulations, which generally will be lower than the static projected investment value seen on the Dashboard.Because Monte Carlo accounts for market variability and the timing of returns, its [...]
How do I change my spending behavior in Monte Carlo simulations based on how my portfolio is doing?
Dynamic Spending Monte Carlo GuardrailsDynamic Spending Guardrails let you model a simple, rules-based spending change inside the Monte Carlo simulation:If the portfolio value rises above an upper threshold, the simulation assumes you increase spending on living expenses in retirement by a set percentage.If the portfolio value falls below a lower threshold, the simulation assumes you decrease [...]
The median value on the Monte Carlo screen is less than the Investment Value at End of Plan number I see on the main screen. Why is that?
runs 1,000 scenarios on your investments where annual returns vary in every year. Every scenario has its own End of Plan value for investments. The median is the one in the middle of those values. The Investment Value at End of Plan on the main screen is the total value of all investments at the end of the plan using an unchanging annual return for your investments. Generally speaking, this value [...]
How is running a bear market scenario different than a scenario where the annual returns decline and doesn't Monte Carlo already capture bear markets?
The bear market scenarios allow you to run scenarios where you can control the change in the annual return by each asset class. You can also choose from recent recessions and the program will set the annual returns to the worst one year return (for stocks) during that recession. Bonds will have their annual return changed to what they experienced over that same time frame, which during recessions [...]
Where do I view and edit Monte Carlo assumptions such as volatility and the distribution used
Select your username at the top right and then go to Account. You will then be able to navigate to the Monte Carlo Assumptions section. You can change the distribution used (Normal vs. Laplace). The Laplace distribution means extreme events are more likely than the Normal distribution implies. You can also view and edit the standard deviations for asset classes and the correlations among asset [...]
Understanding Standard Deviation and Correlation in Monte Carlo
Monte Carlo analysis in WealthTrace models how your plan performs across a range of possible market conditions. Two key inputs that drive these results are standard deviation and correlation.Standard Deviation (Volatility)Standard deviation measures how much returns can vary from the average.For example, if an asset has:Average return: 8.5%Standard deviation: 17.3%Most years will fall roughly [...]
Why did my Monte Carlo results drop so dramatically?
It’s likely you have a “lockout” of funds that cannot be used when you need them. This is usually the culprit when Monte Carlo results seem to be way too low. This also can occur when Qualified Tax-Deferred accounts, such as IRAs, cannot be used before age 59.5. This is the default, but can be [...]
Where do I view or change assumptions such as the distribution type and standard deviations used for Monte Carlo simultions?
After logging in click on your username at the top right and choose 'Account'. Go to the Monte Carlo Assumptions section. From there you can view and edit the distribution type and the standard [...]
I want to create my own asset class. How do I do this?
You can create your own asset classes and assign annual returns to them in Global Settings > Asset Class Mapping. When adding custom asset classes, you will also map those asset classes to pre-defined asset classes for the purposes of running Monte Carlo simulations. This is because we will not have standard deviation and correlation data for the custom asset classes. After entering the asset [...]