Page 76 - Ready Set Retire

Stephen J. Kelley

This is not how the financial world works. The simulations rely
on random events based on things that have happened in the
past, usually connected to market swings. Often, these events
come out of the blue, with no way to anticipate them. For
example, who could ever have anticipated two major market
crashes of over 40% twice in a single decade? No one would
have believed it, and it’s entirely likely the Monte Carlo
simulation would not pick it up. Likewise, how could anyone
anticipate the responses to these events? For example, the
artificially low interest rates of the past eight years and the
impact they have had on driving up markets and destabilizing
savings. Or the legislative activity around healthcare over the
past several years. Or even something as obscure as the turmoil
caused by Cypress during its banking crisis a few years ago.

At the core is the randomness and unpredictability of the
market, and the reality that broad swings can create lasting
damage. Timing is also important. For example, the decade of
the 2000s would have had a much bigger and more devastating
impact on someone newly retired than someone coming to the
end. There is no way to predict when such events will happen,
if they will happen, and how many will happen in any given
timeframe. Finally, most Monte Carlo simulations don’t
measure the most important thing: length of time. What
happens, for example, to a couple with a life only pension on

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