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The Purpose of Monte Carlo Simulations in Financial Planning
Traditional retirement calculators use a fixed annual return rate (e.g., a flat 7% return every year). While simple, this does not match reality. Market returns are highly volatile, and sequence-of-returns risk can destroy a portfolio if poor returns occur early in retirement.
A Monte Carlo simulation models this uncertainty by running 1,000 trials of a retirement timeline. For each year of each trial, the model draws a random return from a normal distribution based on the portfolio's expected average return and standard deviation, showing the full spectrum of potential outcomes.