In a previous post, I wrote about a fictional retirement plan for someone making a 100K USD annually, looking at 2% growth in salary, and targeting to retire at 65 with 5 Million USD. You can read the story here on this post: Fictional Retirement Plan - 5 Million USD at 65 years.

In this post, I want to see a risk analysis for the what-if scenarios of the previous plan using Monte Carlo simulation. A Monte Carlo simulation is a computational technique that uses repeated random sampling to predict the probability of various outcomes in complex systems or processes where uncertainty is present.

In order to do that, I have updated the retirement calculator in the post I had linked earlier. The calculator now offers an intuitive interface for retirement planning and risk assessment. The calculator accepts standard financial inputs including current age, salary, savings, and employer match rates. You can fine-tune your risk analysis parameters in the Risk Analysis tab by adjusting market volatility and simulation count.

To get started, simply review the pre-populated default values in the Basic Information section and adjust them to match your situation. The Risk Analysis section lets you modify the market volatility (5-25%) and choose how many simulations to run for accuracy. Click "Recalculate" after making changes.

The results are presented through an interactive chart showing three trajectory lines: an optimistic scenario (90th percentile), the most likely outcome (median), and a conservative estimate (10th percentile). Below the chart, you'll find probability-based interpretations of your retirement outcomes. For example, if the conservative case shows $1 million, you have a 90% chance of accumulating at least that amount by retirement.

The calculator uses simplified assumptions and doesn't include factors like taxes, Social Security benefits, or inflation adjustments. However, it provides valuable insights into potential retirement scenarios and helps visualize the impact of different saving strategies. The Monte Carlo simulation accounts for market volatility, giving you a realistic range of possible outcomes rather than a single prediction.

Summary

Even though the story is fictional, the most clear thing to notice from the simulations is how the graphs shoot after every decade. So starting early on investments has advantages, as well as staying long enough so you can enjoy the fruits of compounding becomes very obvious.