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Bounded Monte Carlo simulation of critical information related to retirement planning

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  • Robert K Henderson

    (Stephen F. Austin State University)

Abstract

In the process of effective retirement planning, it is necessary to make assumptions about the future behavior of several key metrics. The most notable among these are annual return rates on equity, fixed income and cash investments, as well as the annual inflation rate. The simplest form of projection is to assume a constant rate for each of these into the future time frame under consideration; however, it is a virtual certainty that such projections will be in error. As a result, other approaches that attempt to account for the uncertainty surrounding future projections of these values have been developed, of which Monte Carlo simulation is a popular technique. However, even this approach, as it is commonly practiced, can produce results that are difficult to believe will ever actually occur. This article describes one approach to more effectively use available historical information on these key retirement planning metrics to produce more realistic and believable Monte Carlo simulation results.

Suggested Citation

  • Robert K Henderson, 2013. "Bounded Monte Carlo simulation of critical information related to retirement planning," Journal of Asset Management, Palgrave Macmillan, vol. 14(4), pages 236-254, August.
    • Handle: RePEc:pal:assmgt:v:14:y:2013:i:4:d:10.1057_jam.2013.17
    DOI: 10.1057/jam.2013.17
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