How Effective is Your Financial Advisor’s Monte Carlo Analysis as a Retirement Planning Tool?

Thanks to Mark Chamberlain, Co-Founder of The Open Architecture 2020 Group, for pointing us to an interesting Retirement Management Journal paper by James B. Sandidge entitled, “Odds Are Retirees Don’t Care about the Odds.” Mr. Sandidge’s well-expressed reservations about Monte Carlo Analyses typically used by Financial Advisors struck a chord with us as we have expressed our own misgivings in many of our prior posts. In fact, in our most recent post of January 10, 2021, we said,

How Conservative is Your Financial Advisor’s Calculated Spending Budget?

It always fun for us to review budget calculations done by others. In this post we will review example calculations done for Hank and Marie in Michael Kitces’ and Derek Tharp’s January 6 post, Why 50% Probability Of Success Is Actually A Viable Monte Carlo Retirement Projection. We briefly discuss Hank and Marie’s data below, the assumptions we made and compare results using our Actuarial Budget Calculator (ABC) with results from the Kitces’ Monte Carlo model to gauge how conservative their model results are. In summary, their model is less conservative (more aggressive) than the ABC with default assumptions, in that it produces higher initial total spending budgets. 

Time to Perform Your January 1, 2021 Actuarial Valuation

Congratulations.  You made it through 2020!  

In our ongoing effort to turn you all into actuaries, this post will recommend that you perform an “actuarial valuation” based on your personal data as of January 1, 2021.  As part of this process, we will also encourage you to  prepare an “actuarial report” to document your thought-process and any planning decisions you make for this year.