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The New Savage Number: How Much Money Do You Really Need to Retire? by Terry Savage

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Chapter 7. A ROAD MAP TO MONTE CARLO

At the start of this section, you had an introduction to Monte Carlo modeling—the computer simulations that can generate a range of likely outcomes from a large number of variables. Now it's time to put that great process to work for you, combining technology with financial planning.

Mutual fund management companies, independent online financial advice firms, financial services companies, and financial planners all offer some form of Monte Carlo modeling services. The advice may differ slightly from one service to the other, but here's what they all have in common.

  • Reaching goals. You may have one significant goal—retirement. Or you may have a series of goals—college for your children, a vacation home, travel plans, or a child's wedding, for example. The best services allow you to model for reaching multiple goals and to see the impact your decisions have on each one.

  • Varying strategies. The main benefit of Monte Carlo modeling is that it allows you to see instantly what happens when you change the variables. For example, you could decide to take more risk in your investment portfolio, to increase your contributions, or to delay your retirement. Each decision has a different impact on reaching your retirement goal. When you use online simulations, you can see the impact of changing one or more of these variables with just a click of your mouse, so you can make better decisions.

  • Investment allocation. If the model knows your goals, it can forecast ...

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