How likely is it that your money lasts through retirement? A single return projection cannot answer that question — the future is uncertain. A Monte Carlo simulation runs thousands of possible scenarios and shows you the probability that your plan succeeds. Use our free Monte Carlo calculator to test your own withdrawal strategy instantly.
What Is a Monte Carlo Simulation?
A Monte Carlo simulation is a mathematical method that uses random numbers to model uncertain outcomes. Instead of a single forecast, it generates thousands of random scenarios — each with its own sequence of returns, crashes and recoveries.
The name comes from the Monte Carlo casino: like roulette, the method relies on randomness. In finance, it simulates random market paths that match the historical volatility of real markets.
Simply Explained
Imagine flipping a coin 10,000 times to decide whether the market goes up or down each year. Each flip produces a different path for your wealth. At the end, you count: in how many cases does your money last — and in how many does it run out?
Why a Fixed Return Projection Falls Short
Many financial calculators use a fixed return: "7% per year over 30 years." The problem: in reality, returns fluctuate wildly. The MSCI World delivered between −40% and +30% per year over the past 50 years. The sequence of returns determines whether your money lasts — not just the average.
Sequence-of-Returns Risk
Two investors with an identical average return of 7% can end up with completely different outcomes:
| Scenario | Return Sequence (simplified) | End Value with 4% Withdrawal |
|---|---|---|
| Good years first | +20%, +15%, +10%, −5%, −10% | Money lasts 30+ years |
| Bad years first | −10%, −5%, +10%, +15%, +20% | Money lasts only 22 years |
Both have the same average. But an investor who experiences a crash early while withdrawing loses a disproportionate amount of capital. The Monte Carlo simulation captures exactly this risk.
Test Your Scenario
Enter starting capital, monthly withdrawal and investment horizon — the calculator shows your success probability.
Open Monte Carlo CalculatorHow Does a Monte Carlo Simulation Work for Investing?
The process in five steps:
- Set parameters: Starting capital, expected return, volatility, investment horizon, monthly withdrawal.
- Generate random returns: For each year, a random return is drawn from a normal distribution — based on the expected return and volatility.
- Calculate wealth path: Year by year, the portfolio is updated: add return, subtract withdrawal.
- Run thousands of trials: Steps 2–3 are repeated 10,000 times. Each trial produces a different wealth path.
- Evaluate results: How many trials end with positive wealth? That is the success probability.
Example: $500,000 Starting Capital, $1,500 Monthly Withdrawal
Expected return: 7% · Volatility: 15% · Horizon: 30 years
Result: In 87% of simulations the money lasts. In 13% it runs out early.
Monte Carlo Simulation for Retirement Planning
The most common use case: will my savings last through retirement? The classic 4% rule says: withdrawing 4% of your starting capital each year gives you a high chance of lasting 30 years. But "high chance" is not a guarantee.
The Monte Carlo simulation shows the exact probability:
| Withdrawal Rate | Success Probability (30 years) | Assessment |
|---|---|---|
| 3.0% | 98% | Very safe |
| 3.5% | 95% | Conservative |
| 4.0% | 87% | Classic (Trinity Study) |
| 4.5% | 76% | Risky |
| 5.0% | 62% | Dangerous |
The table shows: just half a percentage point more withdrawal significantly reduces the success probability. Use the FIRE calculator to determine your required FIRE number before testing your withdrawal strategy with a Monte Carlo simulation.
Monte Carlo Simulation for ETF Savings Plans
Monte Carlo simulation is also useful during the accumulation phase. Instead of "at 7% return you'll have $100,000 in 20 years," it shows a range:
Example: $300/month, 20 years, MSCI World
Pessimistic (10th percentile): $95,000
Median (50th percentile): $145,000
Optimistic (90th percentile): $220,000
The range shows: your outcome depends heavily on market performance. Knowing the spread helps you plan better. Use the savings plan calculator for the expected average, and the Monte Carlo simulation for the realistic range.
Limitations of Monte Carlo Simulation
The method is powerful but has limits:
- Normal distribution underestimates extreme events: The simulation often assumes a normal distribution. Real markets have "fat tails" — extreme crashes like 2008 occur more frequently than the normal distribution predicts.
- Past ≠ future: The parameters (return, volatility) are based on historical data. Structural changes (demographics, climate crisis) are not captured.
- Inflation is variable: Many simulations use constant inflation. In reality, inflation fluctuates significantly — affecting how much you need to withdraw.
- Behavioral risk is missing: The simulation cannot model investors panic-selling or abandoning their strategy during downturns.
Despite these limitations, Monte Carlo simulation is the best available tool for quantifying the uncertainty in financial plans. It does not replace a crystal ball — but it shows how robust your plan is across different market scenarios.
Tips for Better Simulation Results
1. Use Conservative Parameters
Set your expected return at 5–6% rather than 8–9%. Planning pessimistically and being pleasantly surprised is better than the reverse.
2. Don't Underestimate Volatility
The MSCI World has a historical volatility of about 15%. Using only 10% underestimates the risk.
3. Build in a Buffer
If the simulation shows 90% success probability, that is not a free pass. A 10–20% buffer on your starting capital significantly improves safety.
4. Re-simulate Regularly
Market conditions change. Run the simulation annually with updated values.
Run Your Monte Carlo Simulation
Enter starting capital, withdrawal, return and volatility — the calculator shows success probability and wealth path.
Open Monte Carlo CalculatorConclusion
Monte Carlo simulation replaces the dangerous certainty of a fixed return projection with honest probabilities. It does not show what will happen — but what can happen. Testing your retirement plan or withdrawal strategy this way leads to informed decisions instead of wishful thinking.
The fastest way: enter your starting capital and monthly withdrawal and read off the success probability.
Calculate Your Scenarios Now
Starting capital, withdrawal and investment horizon — the calculator shows the success probability of your strategy.
Open Monte Carlo CalculatorMore useful calculators: Compound Interest Calculator · Savings Plan Calculator · FIRE Calculator