Ever wonder if you are saving enough for retirement? Do you question what would happen to your portfolio if inflation was higher? It is difficult to plan for retirement. However, retirement calculators are a good way to get a ballpark figure of how your plan is doing. One very good type of calculator is a Monte Carlo Simulator. This calculator simulates how your portfolio will do under a range of real world market conditions.
Most retirement calculators calculate based on a set rate of return. Often, you are asked to choose a risk level with its corresponding percent of return. This is then used to calculate your future retirement results. However, there is a disadvantage to this method.
The stock market does not move in predictable ways. Returns on stocks can vary greatly from year to year. This can result in very different returns. Fixed-calculation calculators assume that an all-stock portfolio will average a set return overall. This is fine for a ballpark retirement calculation.
However, the volatility of the stock market can return much less or much more than the average over time. Your retirement funds could be a lot less if your investments hit a stretch of time when the market is doing poorly. This is where Monte Carlo Simulation comes into play.
A Monte Carlo Simulation factors in these underperforming and overperforming years. The results give you a more thorough view of your portfolio's success. This kind of calculator does a better job of factoring in the risk that is involved in the stock market.
A range of possible outcomes is factored in the calculations. The calculator considers the probability that your retirement plan will succeed based on past stock market performance. Obviously, as all the ads disclaim, the past doesn't mean the future will be the same. But the calculator does do a better job by including the past performance.
You can adjust the inflation rate and your spending patterns. A calculator allows you to “play” with the numbers to see where you can make changes. It lets you see how a change in spending or taking on a part-time job can help you reach your retirement.
This kind of calculator will likely show a lower probability of your retirement plans working. Don't get upset if it shows a low probability of success. This often occurs simply because the worst runs of market returns are included. Besides, any calculator is only good as a guide to give you ideas for improving your retirement plan.