How to Stress Test Your Retirement Portfolio Using Monte Carlo Simulation

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Viewers recently asked me about using Monte Carlo simulation to test a retirement portfolio. In this video we'll use Portfolio Visualizer to do just that and discuss how to interpret the results.
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While still working as a trial attorney in the securities field, I started writing about personal finance and investing In 2007. In 2013 I started the Doughroller Money Podcast, which has been downloaded millions of times. Today I'm the Deputy Editor of Forbes Advisor, managing a growing team of editors and writers that produce content to help readers make the most of their money.
I'm also the author of Retire Before Mom and Dad--The Simple Numbers Behind a Lifetime of Financial Freedom (amzn.to/3by10EE)
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Опубликовано:

3 май 2022

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Комментарии : 51

@mervynmackie6360 2 года назад

Rob, I hope you know how informative and invaluable your videos are to us mere mortals. Thank You

@tophermiller 2 года назад

Hi Rob, I'm the Chris that asked the second of the two viewer questions you cited. Thank You! You confirmed my beliefs that looking at probability of success regularly along with a willingness to adjust in the future is the absolute best way to approach retirement (IMHO). I didn't know portfoliovisualizer could do this, so I've built my own Monte Carlo in Excel and customized it for my situation. Now I'm gonna go compare the results.

@CalKidWilly 2 года назад

"Man plans. God laughs." I'm reminded of this old saw whenever I try to predict the future. Helpful analysis Rob, thank you. The 50% probability comparison I've never heard before. Thanks also for linking the articles you reference, that's helpful for a deeper dive. - Bill

@davidandrews9914 2 года назад

Other considerations are social security as well as reduction in spending as you age. Nice analysis!

@fototx66 2 года назад

Good point regarding ones ability to adjust spending (or pull the retirement trigger) when ALL or most expenses as NON-discretionary! 15:50 I think pre-retirees should ensure that a large portion (or all) of their non-discretionary expenses are at least covered by guaranteed income such as pensions or social security. In retirement, this gives the flexibility to throttle the discretionary side of the expense budget and that makes the 50%+ chance of success more digestible!!! Always excellent content. Thanks for doing this!

@ianwhitehead7247 2 года назад

Sober and competent advice, based on sound research. Easy to follow. You are doing great work. Thanks so much.

@SolarSerpent 2 года назад

I prefer the Financial Goals section in Portfolio Visualizer. Same as Monte Carlo but with multiple withdrawal and contribution sections that can start at different times, have different growth patterns, etc... Easily the most flexible free retirement planner available.

@danceoutnow 2 года назад

The only issue I've run into with that section is it assumes a glide path approach, similar to a target date fund. This can cause the simulation results to be lower because your bonds keep going up each year. But if it can include auto rebalances in the financial goals section I'd go with that as well.

@joeburns3302 2 года назад

Thank you Rob. Another high quality video. Your videos lately have been perfectly targeted to us old farts who think about retirement and worry about going broke in 25 years and moving in with the kids. Thanks for providing tools and logic to help us.

@rob_berger 2 года назад

From one old fart to another, you're welcome.

@scorpjitsu 2 года назад

@Rob Berger - you may need a studio mic closer to you when doing these. The audio is a bit "hollow" and muffled sounding. Just FYI...

@claudiap3742 2 года назад

Thank you Rob! Your videos & information are very helpful. Portfolio Visualizer is a great tool to use to at least have a comfort level that we're on track for retirement.

@rjb7260 2 года назад

VERY awesome information. Thanks for sharing the links and articles!

@andrewharmon8321 2 года назад

Great video as always Rob. I appreciate how you present the data and your insight into what you are showing.

@johnbeeck2540 2 года назад

Thanks Rob - great discussion and needed in the coming uncertain financial times... Love the concept of using the MC analysis to adjust one's plan...

@StanHasselback 2 года назад

Very well done. Your explanations of the outcomes gives the tool a much better context. Thank you.

@philruehlen 2 года назад

Wow, another great video. I was a math and computer science major in college so this video is right up my alley! There is a lot of common sense in the video. Thanks as always Rob!

@rob9990 2 года назад

Excellent video! Thanks for sharing it!

@Mr.Comment. 2 года назад

Great in-depth video Rob. Appreciate it

@moregolfx Год назад

That was an awesome breakdown of the Monte Carlo Simulation..... much appreciated!

@ralphparker 2 года назад

For someone strapped and needs every penny (no flexibility) may be a good candidate for an SPIA. Wade Pfau did some work in the benefit of fixed income streams in retirement. Personally I think annuities are too expensive, but I also have a bit of flexibility. My Stress test is to take an immediate 50% hit on retirement funds and see if the new 99% POS spending rate is something I could live with - given that we have a small pension and SS. In reality, If you are at the worst of times, at the bottom after a bad market drop, a 50% POS may not be a bad place to be. My personal studies have shown that small immediate spending habit changes when the market drops saves the day in that it almost eliminates the chance of portfolio failure but you want to be careful about increases if the market rises.

@over40nfab 4 месяца назад

Great information- thx !

@fallenpumpkinhead Год назад

An older guy with a cool keyboard and a secretlab chair. I love it, you're cool man.

@buyerclub2 2 года назад

Thanks for making me aware of this online tool. It was a great tutorial, to what looks like a great tool. (What I learned is that I need to increase my planned expenditures)

@marshallhosel1247 2 года назад

Thanks for another informative video.

@danceoutnow 2 года назад

Thank you so much for this video Rob! I'm the Jeremy who submitted the first question, and this was very, very helpful. A quick background if anyone was curious about my question. I'm a worst case planner type. I truly live by hope for best, plan for worst. So when I run models, I look for will my portfolio survive everything short of a 1929 or 1987 event. I use statistical returns rather than historical returns because the statistical amounts were lower than the historical returns models. The "problem" I found with some of the worst yr adjustments was if you put say the worst 5 years first, the simulation would add the equivalents of bull market returns later, and I would end up with even more money than not adjusting at all. For planning purposes, I typically go by the 25th percentile number results. That way I plan for low and it helps me create more realistic budgets and spending patterns. I'm a numbers nut, so while I know numbers aren't a guarantee they help me feel more comfortable with a 90/10 portfolio, which I need inorder to have the returns be high enough to retire on. Thanks again so much Rob for all the work you put into your videos!

@garysauer2653 Год назад

Great video and well explained

@bennyw.9716 2 года назад

Thanks for your great video content. It is unique and well suited for DIY planning. Would you consider a video consolidating your favorite free tools for DIY retirement planning and retirement income decumulation?

@RealTechSkills Год назад

Great content. I just found your channel and subscribed.

@krehbein 2 года назад

I’ve been learning a lot about HECM (reverse) mortgages lately to help my mother in law. One appealing thing is an approach where you tap into them instead of your retirement account for bad return years. Then your not compounding a bad year with your cost of living withdrawal. It would be a good topic to explore for future videos. Now that I’ve said that I’ll check your library in case you have.

@timothyflannery594 2 года назад

Enjoy your videos and podcast. I have 3 kids ages 19 to 23. Was thinking of a good book to buy them to pique their interest in personal finance. Picked your book.

@rickgonzalez6345 Год назад

Thanks for the video Rob, really got a lot out of this one. By the way have you done one on the different Monte Carlo tools that are available even at a cost ? Any of them that you can use with Excel? Thanks Rick

@bradlashua5401 2 года назад

I like the idea about the yearly 50% Monte Carlo simulation, at least at the beginning of retirement, near the end of life I'm not sure I'm a big enough gambler to risk having a 50% chance of running out of money in my final days. I might add 1% to the simulation every year to lower the risk. BTW - I just started watching your videos in the last month and I really enjoy them.

@Mike-123 2 года назад

The other side of that, too, is what does "failure" mean? If you go completely broke, hopefully there is family to fall back on. I know we don't want to burden others, but that's the reality. Also, not to get into the political side of it, we do have safety nets in this country. There are multiple social programs that exist to help out folks who have fallen on hard times. Granted, we probably don't want to plan on that, and I'm sure it's not ideal, but we are talking about worst-case scenarios here. Failure does not mean they take you out in a field and shoot you.

@neilh.5950 2 года назад

Great video at a perfect time. I just retired and plan on running a new Monte Carlo Simulation each year and adjust my spending up or down according to the results. Will this plan fully mitigate the sequence of return risk? I’m currently using “Worst 5 Years First” and am thinking that I can change it to “No Adjustments”. What are your thoughts?

@ionutputinei1466 2 года назад

Hello Rob, In Romania we have a private pension system that is mandatory and is using these commissions(from AUM) : 0.24 if does not beat inflation 0.36 if beats inflation by less then 1% 0.48 if beats inflation by up to 2% 0.60 if beats inflation by up to 3% 0.72 if beats inflation by up to 4% 0.84 if beats inflation by more then 4%. Then the retirement age comes.. there is option to receive monthly pension for 15 years of withdraw all money at once. Is it better to withdraw all money and buy government bonds or to receive monthly pension?

@dmsoundcollective6746 2 года назад

Rob I have a question. Remember I'm pretty inexperienced at this but it seems to me it would be awsome if there was a program set took into account all the variables you just talked about and spit out a percentage for you that you can take out every month. I have to keep this as simple as I can because a lot of this goes over my head. If I had to sit down and calculate this every month it would be like doing my taxes LOL. I'm using personal Capital right now and it says 99% chance of success after the inputs from Social Security but I don't see anywhere where it says what percentage is being taken out at the time of retirement. I'm going to go back and watch this video a few times when I get off of work see if I can wrap my head around it better

@alessandrodubaldo7254 Год назад

Portfolio visualizer interface has slightly changed since the video. Would it be possible to make an updated vide?

@fabiGBOtown 2 года назад

Hi Rob, me again, sorry. Should my plan be to fund my sep ira and then use those funds to invest in a 3 fund portfolio? Trying to get this started but soo many questions.

@Samanvayy 2 года назад

Hello Rob, could you help share some insights on short term investment with a time horizon of 3-5years? Thanks for your help

@jeffb.2469 2 года назад

There is a lot of talk about I-bonds these days that you may want to consider.

@beeinvestnotes Год назад

It didn't show portfolio success plot after I run simulation. Do you know what the problem is? Thank you.

@CM-zs5qs 2 года назад

Been using that tool for some time. Do you see any entry field to take into account SS? That should be calculated into the equation, right?

@DevinSmith1486 2 года назад

I wish i had chris' spreadsheet, I have the std deviation, return % and max drawdown of my strategy but it cant be put in to portfolio visualizer

@PH-dm8ew Год назад

Ben Felix (pwl capital Canada) states on a event RU-vid video that the 4% rule should really be more of a 2.3 to 2.7 % draw rate. What is your opinion on that?

@michaelnitake2534 Месяц назад

Is the free version of portfolio visualizer only a 2 week subscription? Or Can you use this version for a longer period of time?

@andrewulrich6612 2 года назад

Curious how I can stress test my portfolio when 5 of my mutual funds ( approximately 25 % of current allocation) have less than a 10 year history. Portfolio analyzer wouldn't do Monte Carlo when this happens. I'd like to be back checking what my advisor has set up. Frustrating to say the least.

@Azel247 2 месяца назад

Am I weird for being excited learning about this stuff?

@QuadTap 9 месяцев назад

This video came out one year ago and I am from the future. You're really going to want to sell everything and buy Nvidia stock.

@anantgarg7839 2 года назад

Rob, Instead of doing all this circus for estimating 4% rule accuracy or some simulation using PE etc., is it not better to follow bucket streategy, where in worst case (market down), we at least know and can reduce withdrawing money from buckets if money not required that much in that period ? You are presuming that everybody is having highly technical skill in this subject. Solution should be for masses and should be simple. Your videos look too good and show your knolwledge also, but kindly give simple solution which common person can understand and digest.