Monte Carlo and Conservative Spending

Submitted by pbronsteen on Fri, 04/15/2016 - 11:33

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I am not clear on what the Monte Carlo simulations are estimating when I use the Conservative Spending option. Can someone explain, perhaps by taking one simulation for one year, and indicating what assumptions are used to generate the living standard and real asset income? For example, is asset income generated assuming the real rate of return (which appears to be the case) or a zero real rate (which is used in the non-Monte Carlo portion of the PDF report)? Similarly, if spending is based on a zero rate of return on assets, how is this determined when the actual simulation uses real rates of return?

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Laurence Kotlikoff

Mon, 04/18/2016 - 16:28

The assumption is solely

The assumption is solely about spending, namely that at every point in time you choose to spend as if your future returns will all be zero. The we take actual draws and show you that, in general, you will have upside surprises, i.e., you'll have more income and thus more assets after each period than you expected. This is why this assumption tilts the percentile distribution of living standard curves northward. best, Larry

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