Will your plan work?

        - Monte Carlo Sensitivity Analysis 

It is very difficult to project far into the future, one thing for certain whatever the rate of return you assume – it will change. The more sophisticated financial planning software provides planners with a Monte Carlo sensitivity analysis to recognize that there are indeed variables in planning.

Monte Carlo is a financial planning simulation that determines the value at risk of a portfolio. By randomly generating numbers for uncertain variables such as interest rates, investment volatility, life expectancy, and so on. The simulation calculates multiple What if...? Scenarios of a model -- the current plan data -- by repeatedly sampling values from the probability distributions for the uncertain variables.

It can be used to answer questions such as: Will there be enough money to fund my Lifestyle? Will I outlive my portfolio? It helps to match the right portfolio with the income needs and risk tolerance of the client taking into account the various risk factors not taken into account under the current methods. That is, investment returns may be higher or lower than expected, the timing of the investment may be wrong, the order in which the returns of an investment accumulate change the situation, there is always the uncertainty of death. The simulation provides a Success Rate that indicates the percentage chance that the plan will meet the needs of the client.

The sample below was prepared using NaviPlan Extended Version 7.0

 

 

Success Rate: 71 out of 100 (71%)

Assumptions

Life Expectancy Randomized	Yes		Average Rate of Return	9.000%
Accumulated Surplus/Deficit Success Tolerance	-$10,000		Standard Deviation	8.000%
Number of Projections	100		Exponent	2.00

 

For more information contact:

 

J. Paul Wilson, CFP, CLU, CH.F.C., TEP

2-33 Thorne Avenue Dartmouth, Nova Scotia, Canada, B3B 2E7

 Halifax/Dartmouth (902) 429-2696 ext. 225   Toll Free 1-877-429-2696 ext.225

Web site: www.jpw.ca  Email: paul@maritimewealth.com