Monte Carlo instructional reference?
Can someone refer me to an instructional guide as to how to use and read Monte Carlo data, particularly in ESP? I understand the concept. I'm just not certain how to prepare the data and interpret the results.
That need for information includes how to build and implement different portfolios. If I surmise correctly, the large number of portfolio options applies more to people younger than myself. I'm about 5 years out from retirement, so my need to change allocations over time is less than if I were 20 years out, right?
I got my model working pretty well using economic planning. In fact, I used it to model a potential job change by my wife, with a significant decrease in income and retirement account investment. The results were comforting in that, while we both would have to work an additional year, it wouldn't be too dramatic a change in retirement lifestyle.
Now that that's working, I want to apply more realistic MC tests, assuming MC is, in fact, more realistic.
Thanks for your time.
Chris
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jpridder
Wed, 05/28/2014 - 08:30
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Just a user like you, but the
Just a user like you, but the only instructional guide I'm aware of is the help manual under the "Learn More" menu. I think there are also some helpful videos there as well. My opinion (it is only that) regarding your questions:
Regarding the need to change allocations over time, it really depends on your retirement income strategy -- e.g., "safe" withdrawal rates? floor (e.g., annuities for core expenses) plus upside (e.g., stocks for growth)? asset dedication? time segmentation? Once you've answered that you'll have some idea how your allocations should change over time.
Interpreting MC results is a matter of assessing the probability of a successful outcome. The help manual and videos here do a decent job of explaining how to interpret. As you might expect, the more you have in "unsafe" investments (stocks), the wider the range of outcomes you can expect. Obviously, MC does nothing for you if all of your income is coming from pensions and annuities.
Upside investing is also interesting and a bit different. Also a bit difficult to interpret. It encourages a lifecycle investing approach where you keep enough in safe investments to build a floor, and then let the rest ride in stocks to assess growth via MC. I interpret upside investing to be most applicable for floor plus upside strategies.
None of these 3 approaches are necessarily more accurate than the others. They each provide a different view into your finances with a different set of assumptions. Which analysis approach makes the most sense for you and how you use it really depends on your income strategy. If the income strategies I listed are foreign to you, then I'd suggest some books -- Dana Anspach's "Controlling Your Retirement" is excellent for starters. Also check out the blogs of Wade Pfau and Dirk Cotton (Retirement Cafe).