We recently came across a Monte Carlo modelling tool called the Retirement Probability Simulator (RPS). It is a free tool available at DIYretiree.com that our readers may find useful in their financial planning.
In this post, we will discuss the similarities and differences between our Actuarial Financial Planner (AFP) model for retirees and near retirees and the RPS (for retirees and pre-retirees) and how they can work together.
Most retirement planning tools fall into one of two camps:
- Deterministic, actuarial, present‑value–based models
- Stochastic, Monte‑Carlo–based simulations
The AFP sits firmly in the first camp. The RPS sits in the second.
We have not spent much time vetting the RPS but it does appear to produce reasonable results. It doesn’t appear to have the same level of functionality with respect to reflecting all sources of spending liabilities and income/assets as the AFP, but you may be able to work around its minor shortcomings. Like the AFP, it is free, and just like with our website, the person who created the DIYRetiree.com website is a nice guy who is genuinely interested in helping households make better financial decisions in or near retirement.
What the RPS Measures
The Retirement Probability Simulator estimates the probability of success for a given retirement plan. In this context, “success” means:
The portfolio does not deplete before the end of the planning horizon.
To estimate this, the RPS runs thousands of simulated investment return paths. Each path represents a possible sequence of future market returns. Your spending pattern is applied to each path, and the tool tracks how often the portfolio survives.
The output is a percentage — for example, “82% probability of success.”
This is a path‑dependent measure. It reflects the fact that the order of returns matters, not just the average.
What the RPS Does Well
The RPS is particularly good at illustrating:
- Sequence‑of‑returns risk — the danger of poor early returns
- Portfolio volatility — how bumpy the ride may be
- Distribution of outcomes — not just a single number
- Comparisons across asset allocations
- Stress‑testing a spending plan
If you want to understand how your plan behaves under a wide range of market conditions, the RPS is the right tool.
What the RPS Does Not Do
The RPS does not:
- Value lifetime spending liabilities
- Apply risk‑appropriate discount rates
- Produce a funded ratio
- Determine a sustainable spending level
- Model survivor‑phase spending actuarially
- Provide a clear “overfunded / underfunded” interpretation
In other words, the RPS does not replace the actuarial framework. It complements it.
How the RPS Differs from the AFP
The AFP answers a fundamentally different question:
“Are we fully funded for our lifetime spending liabilities?”
It does this by valuing future spending using present‑value techniques, applying risk‑appropriate discount rates, and comparing the result to current assets.
The AFP provides:
- A funded ratio
- A sustainable spending level
- A year‑by‑year actuarial balance sheet
- A clear, interpretable measure of financial adequacy
The RPS, by contrast, answers:
“Given a spending plan, how often does the portfolio survive under simulated return paths?”
Both perspectives matter. But they are not interchangeable.
How to Use the AFP and RPS Together
The most effective approach is sequential:
- Use the AFP to determine your sustainable spending plan.
This ensures your plan is grounded in a liability‑driven, actuarially sound framework.
- Use the RPS to stress‑test that spending plan.
This shows how return volatility affects the funded path.
This is the same two‑step process used by actuaries for pension plans:
- Actuarial valuation for funding
- Stochastic modeling for risk assessment
Retirees can benefit from the same discipline.
Why We are Including the RPS in the “Other Calculators & Tools” Section of our Website
The RPS is not a replacement for the Actuarial Financial Planner. But it is a valuable secondary tool for understanding investment risk and sequence‑of‑returns variability.
Including it in the “Other Calculators & Tools” section helps readers:
- See how Monte Carlo modeling fits into a broader actuarial framework
- Understand the strengths and limitations of probability‑of‑success metrics
- See how your funded status translates to a probability of success
- Use stochastic modeling appropriately — not as a spending‑decision engine, but as a risk‑diagnostic tool
Our goal is to help retirees make better decisions by understanding both the actuarial and stochastic perspectives.
Closing Thoughts
The Retirement Probability Simulator provides insight into the volatility and uncertainty inherent in investment returns. The Actuarial Financial Planner provides a disciplined, liability‑driven foundation for determining sustainable spending.
Used together, they offer a more complete picture of retirement readiness than either tool can provide alone. Our new team member, Copilot, can also help explain the advantages and disadvantages of these complementary tools to you.
