When you make a financial plan/calculation you usually assume some inflation rate and interest rate. However, there is no guarantee that these rates will be the same as the ones you assumed. If actual inflation was lower and actual interest rates higher, great! Well you know that is a pretty rare scenario. What is likely to happen is inflation could be higher and interest rates lower, maybe because of the economy, markets falling etc. etc.
There is nothing you can do about it … except perhaps mentally prepare for it. The Monte Carlo calculator does just that.
Monte Carlo is famous for gambling and the calculator does the same. It gambles with inflation and interest rates. By gamble I mean it randomly varies these rates a large number of times (I have used 50,000 trials) and calculates the most probable number of years a retirement corpus will last by using a ‘amount which one can save’ as input. It also gives the ‘amount which one should save’ to increase the chances of the retirement corpus lasting your lifetime.
The calculator is easy enough to use. The instructions are reasonably clear.
New version: Stress Test Your Retirement Plan (Aug. 2014)
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