Risk
Monte Carlo simulation
Running thousands of randomised return paths to see the range of outcomes a plan could produce.
How it works
Rather than assuming one average return, a Monte Carlo draws returns randomly from a distribution many thousands of times and reports the spread of results — including how often the money runs out.
It is most useful for retirement planning, where sequence risk means the order of returns matters as much as the average.
Where it misleads people
The output inherits every assumption in the input. A simulation drawing from a normal distribution will systematically understate the frequency of the disasters that actually end plans.
Related terms
- Sequence-of-returns riskThe risk that poor returns early in retirement do lasting damage, even if average returns are fine.
- Fat tailsThe tendency of extreme market moves to happen far more often than standard statistics predict.
- Safe withdrawal rateThe percentage of a portfolio you can take each year with a high chance of it lasting your lifetime.
- Scenario analysisExamining portfolio outcomes across several plausible futures rather than forecasting one.
More in Risk
Educational reference only. Nothing here is investment advice or a recommendation to buy or sell anything, and tax treatment depends on your own circumstances and the country you are in.