Monte Carlo simulations are used to show how variations in rates of return each year can
affect your results. A Monte Carlo simulation calculates the results of your Plan by running
it many times, each time using a different sequence of returns. Some sequences of returns
will give you better results, and some will give you worse results. These multiple trials
provide a range of possible results, some successful (you would have met all your goals) and
some unsuccessful (you would not have met all your goals).
The Monte Carlo Probability of Success is the percentage of trials of your Plan that were
successful. If a Monte Carlo simulation runs your Plan 10,000 times, and if 6,000 of those
runs are successful (i.e., all your goals are funded and you have at least $1 of Safety
Margin), then the Probability of Success for that Plan, with all its underlying assumptions,
would be 60%, and the Probability of Failure would be 40%.
The Monte Carlo Confidence Zone is the range of probabilities that you and we have selected as your target range for the Monte Carlo Probability of Success in
your Plan. The Confidence Zone reflects the Monte Carlo Probabilities of Success with
which you would be comfortable, based upon your Plan, your specific time horizon, risk
profile, and other factors unique to you. |
