Monte Carlo's Role in Retirement Planning

This statistical method is designed to help improve your odds of meeting your financial goals but is not without its flaws

Adam Zoll 23 April, 2013 | 6:38PM
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Question

I've seen some online retirement calculators mention that they use a Monte Carlo simulation. What is that?

Answer

A Monte Carlo simulation might sound like a ride you'd find at Disneyworld, but it's actually a statistical method used to determine probability and assess risk. At its most basic, a Monte Carlo simulation allows the user to determine the likelihood of different outcomes based on a set of assumptions and how those assumptions respond to random variables.

Origin in A-Bomb Research

The name Monte Carlo naturally brings to mind the gambling mecca located in Monaco, and its use in this case is no coincidence. Scientists working on the Manhattan Project during World War II applied the name to the simulation method used to develop the atomic bomb because of the method's use of random chance.

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About Author

Adam Zoll  is an assistant site editor with Morningstar.com, the sister site of Morningstar.co.uk.

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