As we discussed in the “What is a Monte Carlo Analysis” article, Monte Carlo analysis does not give precise results - it gives probabilities, and rough ones at that. Always take the results of a Monte Carlo Analysis with a grain of salt, and if something looks “off” you need to look at it more closely to understand just what the numbers are telling you. (We’re always happy to help you understand just what’s happening behind the scenes.)
There are four sets of numbers to look at:
- The Probability of Success
- The Cumulative Wealth
- The Wealth Over Time
- The Cash Flow Analysis
Let’s take them in turn.
The Probability of Success
This is the main number that comes out of the analysis. Simply put, it is the percent of the simulated paths that were able to meet all of the goals in the plan. In other words, if 100 out of the 1,000 paths ran out of money before the end of the simulation, the plan would have a 90% probability of success.
This is a good starting point, but it doesn’t tell you how extreme the outcomes are going to be. It’s one thing if your retirement plan is running out of money at the age of 105. It’s a very different thing if that plan is running out of money at the age of 75.
The probability of success is the starting point. If a plan doesn’t have a high enough probability of success, then a deeper dive might be necessary to ensure that you have a solid plan.
The Cumulative Wealth
The plan’s cumulative wealth shows you just how big the range of return is in your plan, adjusted back at a constant 3% inflation rate. We show you three outcomes - the 90th percentile (an optimistic outcome), the median (50th percentile), and the 10th percentile (a pessimistic outcome).
The way to read these numbers is that 90% of the time you will have less money than the 90th percentile, half the time you will have less than the 50th percentile, and 10% of the time you will have less than the 10th percentile. 80% of the simulations had between the 90th and 10th percentiles. It’s important to remember the other side of that point - 20% of the time the ending value was outside of those numbers.
The cumulative wealth will give you an idea of what the spread of results are, but only at the terminal point. To get a better picture of the dispersion within your plan take a look at the Wealth Over Time report.
Wealth Over Time
The Wealth Over Time report is basically an expanded Cumulative Wealth chart. We use the same 90th, 50th, and 10th percentiles, but we show them throughout the plan. This should give you an idea of just what path the plan is taking, in aggregate.
The Cash Flow Report
This is the nitty gritty section of the analysis. Using the path with the median ending value, we break down the cash flow for each year. inStream offers two different versions of the cash flow summary depending on your preferences and if you want to delve into the details of the inputs, we offer additional information in the inflow, outflow and accounts tables reports for your reference.