Methodology & Assumptions
This calculator uses Monte Carlo simulation to project retirement portfolio survival. It generates 1,000 randomized market scenarios based on normal distribution of returns using your expected return and volatility inputs.
Key Mechanics:
- Inflation Adjustment: The initial withdrawal amount is adjusted upward by the expected inflation rate each year, regardless of market performance.
- Sequence of Returns Risk: The simulation accounts for sequence of returns risk—the danger of experiencing negative returns early in retirement while making withdrawals.
- Success Rate: The percentage of the 1,000 simulated scenarios where the portfolio balance remained above $0 at the end of the specified retirement horizon.
- Depletion: If a portfolio balance drops to zero or below in a given year, it is considered depleted.
Frequently Asked Questions
What is the 4% rule in retirement?
The 4% rule is a rule of thumb used to determine a safe withdrawal rate for retirement. It suggests you can withdraw 4% of your initial portfolio value in your first year of retirement, and then adjust that dollar amount for inflation each subsequent year, and your portfolio should last for at least 30 years.
Is the 4% rule still accurate today?
The 4% rule is still widely used as a baseline, but some experts argue it may be too aggressive given current lower bond yields and longer life expectancies. A 3.3% to 3.5% withdrawal rate is often suggested as a safer alternative for a 30-year or longer retirement.
How long will my retirement savings last?
How long your retirement savings will last depends on your starting portfolio value, your annual withdrawal rate, your investment return, and the rate of inflation. Using a retirement withdrawal calculator with Monte Carlo simulation can help you estimate the probability of success over a specific time horizon.
What is a Monte Carlo simulation in retirement planning?
A Monte Carlo simulation uses random variables to model thousands of possible market scenarios (including both good and bad returning years in random order) to calculate the probability that your retirement portfolio will last through your expected lifespan.
What happens if I withdraw 5% instead of 4%?
Withdrawing 5% instead of 4% significantly increases the risk of depleting your portfolio prematurely, especially if you experience poor market returns early in retirement (sequence of returns risk). It generally results in a much lower success probability in Monte Carlo simulations.