142 | Abstraction At It’s Finest

Monte Carlo simulation is a tool used to run thousands of scenarios of the future to predict whether someone’s assets can last a lifetime regardless of future investment returns.

There are plenty of downfalls to the tool and one is its ability to abstract our real life experience with money.

In a particular instance with a client, every scenario we showed - good returns and horrible returns - confirmed a near 100% chance that the client would not run out of assets from age 65 to age 95.

As we turned to questions and comments, the first reflection was the following…

And I can’t make this up…

“Well, we’ve got to do something because we’re going to run out of money in July.”

I can’t fault the client.

The problem is a direct result of trying to summarize how well we are generating income, spending, saving, and investing to a single number that ends in a percentage sign.

And in this particular case, the client’s bank account was going to run out in a few months if it didn’t figure out which investment account to tap first for funds to replenish it.

A 99+% chance of success in the long run means nothing when we don’t know the first action step for the problem in front of us.

In fact, it often compounds the issue by suggesting everything is OK, when absolutely nothing feels OK.