Ask anyone who has been to Las Vegas or Atlantic City, and they'll tell you, "It's about the odds." The odds of winning at the tables, the odds of getting upgraded on your hotel room, the odds of getting "comped" for a free dinner or show...the odds of just about anything. Some calculate the odds with a system or specific technique, some just hope the odds are in their favor. Either way you look at it, it's about the odds.
Is there another system? How about luck? The luck of the draw, good luck vs. bad luck; The Doors sang "if it weren't for bad luck, I wouldn't have no luck at all." What if luck could be applied to other avenues of our life? Work? Play? Love? Financial and retirement planning? I'm thinking you're getting where I'm going with this...
I have had and have the good fortune (not luck!) to meet new people every week at all stages of their financial journey to fulfillness and success, many in their quest for wealth. While the definition of wealth will vary greatly from person to person, most are on their personal search for financial security. The journey is different for everybody, with an innumerable number of paths and directions, each pointing hopefully to the right path, constantly changing and constantly evolving. The journey is different for every single one of us, but the ultimate destination may be similar for most: financial security to last for their own and their loved one's lifetime.
The road trip involves some skill, some knowledge, certainly hard work for most, and for the majority a great amount of luck. Some may define luck in this context as winning the lottery, hitting it big in Vegas (but remember- unless you are willing to bet big and lose big, the chances of winning big are slim). Some are fortunate to inherit from another being that had foresight or luck for themselves and were kind enough to pass it along.
Either way, most fortunes attained included some sort of luck (and/or hard work) along the way. The problem, as I see it, is while you are standing around waiting for the "luck fairy" to come and tap you on the shoulder, you may become old and grey, and life may have passed you by. And, as luck may have it, you may leave this earth long before the doorbell rings and that pixie has magically decided to bop you on the noggin.
In retirement planning, we can't depend on luck to retire on. It's a pretty big bet, with the consequences of the luck being bad, or the good not arriving on time resulting in the outcome being completely and utterly disastrous. Once we have reached our golden years and our wage earning years are all but gone, we can't go back in time to make contributions to our retirement plan that we passed up on to use the money for current needs or frivolities. While I would never advise a client to sacrifice living today for later, a balance of saving and spending is a delicate dance from the time we start working to the time we retire. Along the way, the universe throws potholes onto our path: school debt, marriage, raising children (including the ultimate expense of sending them to college), a home purchase...potholes. And with all the potholes in life, we scrimp and try to save for retirement. The big question is "am I saving enough to make my retirement goal?"
A Monte Carlo Simulation is a computer program used to analyze the chances of attaining your retirement goals after all data has been accumulated and analyzed. The first component and basis is an analysis of your current annual expenses, with the reasoning that if we don't know what it costs you to live today, how can we project your future expenses in retirement? It adds into the equation all assets, liabilities, savings patterns, amortizations on loans and mortgages, interim expenses like the potholes noted above and those that are indicative of your personal situation, as well as inflation, taxation...you get the picture.
It then will run anywhere from 2000-10,000 different scenarios varying the before mentioned components to give you an average chance of success taking all of your information into account. Experience shows that anything below an 80% projection of success means you should seriously re-evaluate your retirement plan and planning to have a better chance of achieving your retirement goals. We include a Monte Carlo simulation for all of our clients with whom we do a full retirement plan.
Results are never guaranteed: it's a snapshot in time and you can be sure things will change over time, but it can at least give you an indication if your retirement planning is on the right track. Always remember: you can get in the car and drive all day- if you don't know where you are going, you will never get there. There is an old saying in my profession: "those that fail to plan are those that plan to fail."