Author Topic: Need help understanding Monte Carlo simulation percentiles  (Read 210 times)

LiseE

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Need help understanding Monte Carlo simulation percentiles
« on: January 22, 2021, 10:23:36 AM »
Hello all .. I'm trying to understand these percentiles from a monte carlo simulation.  I'm taking an educated guess by looking at the end balances.  With that in mind, is my guess correct in assuming that based on the table in the attached image, I have a 10% chance of having the Ending Balances listed under the 90th percentile column?  And I have 90% chance of having the ending balance listed under the 10th percentile column?

*image attached

Malcat

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Re: Need help understanding Monte Carlo simulation percentiles
« Reply #1 on: January 22, 2021, 12:44:46 PM »
No, a simulation cannot predict the future.

What it shows is that in X% of versions of reality based on the past, a certain outcome would have occured given a set of inputs and assumptions.

For predicting your particular outcome, it's little more than a shrug and a "maybe".

MustacheAndaHalf

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Re: Need help understanding Monte Carlo simulation percentiles
« Reply #2 on: January 22, 2021, 07:31:08 PM »
I'm not sure what the simulation used to determine performance, but a 90% chance for a withdrawal rate of 5%/year seems rather high.  Is that simulation using high performing stocks - like tech stocks?  I doubt those numbers will match other simulators.

Vanguard only considers 3 asset classes (stocks, bonds, cash), and if you enter 100% stocks for 30 years, a 5%/year withdrawal rate only works 77% of the time.  Note with Vanguard, that's assuming $50,000 withdrawal from a $1,000,000 starting portfolio - the annual spending is not varied over time.
https://www.vanguard.com/nesteggcalculator