Consumer: Add option for Monte Carlo Analysis
Based on the search results, there are several key reasons why it is beneficial for retirement planning software to use a Monte Carlo analysis:
Monte Carlo analysis simulates a wider range of possible market environments and investment outcomes, rather than just assuming a static rate of return.[1][2][3]
This allows the analysis to test the viability of a retirement plan against a broader set of scenarios, including potential market downturns and crashes, not just average historical returns.[1][2][4]
Monte Carlo analysis provides probabilities of success or failure for a retirement plan, rather than just a single projected outcome. This gives a clearer picture of the risks involved.[2][3]
Compared to historical simulations, Monte Carlo analysis is not as heavily weighted towards the middle portion of the historical data, which can skew the results.[1]
While Monte Carlo analysis has some limitations in fully capturing extreme events, experts suggest ways to adjust the results to account for this, such as adding a buffer to the probability of failure.[2][4]
In summary, the key advantage of Monte Carlo analysis for retirement planning is that it provides a more comprehensive, probabilistic assessment of how a retirement plan would fare across a wide range of potential market conditions, rather than relying on a single projected outcome. This allows for more informed and strategic retirement planning.[1][2][3]
Citations:
[1] https://retirementresearcher.com/advantages-monte-carlo-simulations/
[2] https://www.investopedia.com/financial-edge/0113/planning-your-retirement-using-the-monte-carlo-simulation.aspx
[3] https://www.troweprice.com/financial-intermediary/us/en/insights/articles/2023/q4/how-monte-carlo-analysis-could-improve-your-retirement-plan.html
[4] https://www.kitces.com/blog/monte-carlo-retirement-projection-probability-success-adjustment-minimum-odds/
[5] https://www.theintelligencer.com/opinion/article/Retirement-Planning-Monte-Carlo-vs-Linear-16911588.php