While planning for retirement, we encounter several rates:
- rate of return before and after retirement
- rate of inflation before and after retirement
While calculating the corpus required and the monthly investment required, we assume these rates are constant for each year before retirement and during retirement.
In reality, all these rates can vary quite a bit. This means, the actual corpus required and therefore, the monthly investment required can also vary.
A Monte Carlo retirement calculator is one in which the above mentioned rates are varied randomly (but in accordance with a statistical distribution) several times, and the probability of financial independence of a given number of years is calculated.
In the previous version of the Monte Carlo calculator, I had presented answers in terms of the monthly investment instead of a probability. This was confusing and as pointed out by Paresh Girdhar, gave some confusing and erroneous results.
Therefore, I have replaced the confusing section with the probability of financial independence for a given number of years in retirement. Hopefully, the sheet is now simpler to use.
The probability of financial independence is determined by randomly varying the above-mentioned rates, 50,000 times in each trial as shown below (click for full size). The user can either use a normal distribution or an uniform distribution. If you are not comfortable about this, simply use the normal distribution for all quantities.
Thanks to Rajesh for pointing out a bug.