Questions on Monte Carlo, Inputs and Assumptions report

I have a couple of specific questions about the "Monte Carlo Spending Behavior & Portfolio Characteristics" section of the PDF Reports under "Inputs and Assumptions" that I hope you can answer.

There is a heading called "Choice of Discretionary Spending Behavior: XXXX". In mine XXXX says Cautious because that's the spending behavior I chose. Under this heading it shows each Monte Carlo Portfolio with a set of columns. One of the columns is "Mean Real Rate of Return".

In ESPlanner's Monte Carlo "Implement Portfolios" tab, for 2015 I set up Portfolio 2 for my Retirement Assets to be 40% Large Cap Stocks, 10% Small Cap Stocks, and 50% Short Term Govt Bonds. In the "Build Portfolios" Monte Carlo tab, the Mean Return Column shows 8.7% for Large Cap Stocks, 13.36% for Small Cap stocks, and 0.69% for Short Term Govt Bonds.

In Assumptions, my inflation rate is set at 3%.

In my PDF report, the "Mean Real Rate of Return" for Portfolio 2 is 4.737137. I have two questions regarding this 4.737137 value.

1) Can you show how this value is calculated given the percentages for allocation shares, returns, and inflation rate I mentioned above (i.e., Can you show the formula or equation that results in 4.737137) ?

2) Is this value used in the Main reports to calculate Retirement Asset Income? It seems like it is, but I am not entirely sure. For example, if I multiply my Retirement Assets balance (in the Retirement Account report) for 2015 by .04737127 / 2, it roughly equals the Retirement Asset Income value in the report for that year. I assume I have to divide by 2 since I used Cautious Spending. Is this correct ?


Tom Vicker


Hi Tom.

Here are a few points to consider. First, there is a conversion between nominal and real for all data. A few years ago, Dick Munroe posted this formula for how they calculated these: (1 + real) * (1 + inflation) = (1 + nominal)

That doesn't fully cover your #1 question, but may help.

For #2, the MC mean real rate of return is used in the main reports (converted to nominal as appropriate). Try turning MC off and inputting that amount in RoR fields to test this. Spending "Cautiously" assumes real returns are half way between the mean return and zero. It can get confusing converting back and forth between real and nominal so be careful here.


Thanks for responding, Brian.

For question 1, I tried to figure it out, but no luck. It's not the end of the world of course. I am meeting an advisor next week and was hoping I could explain it. One thing I tried is I set up a portfolio of 100% Large Cap Stocks. In the ESPlanner GUI it says the mean return is 8.9%. But when I run the reports, the value in the "Monte Carlo Spending Behavior & Portfolio Characteristics" section of the PDF Reports under "Inputs and Assumptions" is 9.068366%. I would have thought the report would have matched the GUI since the Portfolio is 100% Large Cap Stocks, but they are about 2% off. Hopefully, its not an ESPlanner problem.

For question 2, I tried what you suggested. When I converted the mean real return from the PDF report to nominal per the formula you mentioned and entered into the Nominal RoR tab in Assumptions (after switching to straight Economics Based Planning. i.e, no Monte Carlo). the Retirement Assets balance after running reports was roughly the same as when Monte Carlo was enabled. So that confirms that those values are used in the main reports.

Thanks again for the suggestions.


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