The Monte Carlo Reality Check
Why Simple Calculators Give False Hope
Enter your details into a basic pension calculator and it gives you a confident single answer: "Your pension will last until you're 87." What it doesn't tell you is that this assumes perfectly smooth 5% returns every single year — something that has never happened in reality.
The Problem with Average Returns
Investment markets don't deliver steady, average returns year after year. Some years are up 20%. Others are down 30%. The order in which these returns arrive matters enormously — and basic calculators ignore this entirely.
Sequence of Returns Risk
Two people retire with £500,000. Both achieve the same 5% average return over 30 years. But Person A has good returns early, Person B has bad returns early. Their final pots are dramatically different — because Person B was forced to sell more units when markets were down, permanently reducing their future growth.
Same Average, Very Different Outcomes
| Year | Person A Return | Person A Pot | Person B Return | Person B Pot |
|---|---|---|---|---|
| 1 | +15% | £545,000 | -15% | £405,000 |
| 2 | +12% | £581,000 | -10% | £344,500 |
| 3 | +8% | £597,000 | +8% | £352,000 |
Illustrative — assumes £30,000/year withdrawal, same average return over time.
What Monte Carlo Simulation Actually Does
Instead of using one average scenario, Monte Carlo runs hundreds or thousands of simulations. In each simulation, the annual investment return and inflation are drawn randomly from a realistic distribution. Some simulations get lucky — consistently good markets. Others get unlucky — crashes early in retirement.
The result is not "your pension lasts until 87." It's: "in 78% of our 1,000 simulations, your pension lasted until 95."That's a far more honest and useful answer.
How to Interpret "Probability of Success"
When our calculator shows a probability of success, here's how to read it:
| Probability | What It Means | Suggested Action |
|---|---|---|
| 90%+ | Very comfortable — you could probably spend more | Consider increasing income or leaving more as inheritance |
| 75–89% | Good — reasonable buffer, minor risks remain | Keep an eye on it; small spending flexibility helps |
| 60–74% | Risky — 1-in-3 chance of running short | Consider reducing withdrawals or delaying retirement |
| Below 60% | High risk — significant changes needed | Review plan urgently — lower income or delay retirement |
Setting Realistic Parameters
The quality of your Monte Carlo results depends on realistic inputs:
- Growth mean: This is a nominal return (before inflation). A balanced portfolio might be 4–6%. Entering 2% means a very conservative, near-cash portfolio.
- Growth std dev: How variable your returns are. Equity-heavy portfolios: 12–15%. Balanced: 7–10%. Bonds/cash: 3–5%.
- Inflation mean: Bank of England target is 2%. Recent history suggests 2–3% is reasonable.
- Simulations: 1,000 is a good balance of accuracy and speed.
Common Mistake
Entering 2% as a growth rate when you mean 2% real (after inflation) return. If inflation is 2.5% and your real return is 2%, your nominal growth rate should be set to approximately 4.5%. Entering 2% with 2.5% inflation gives a negative real return and will show near-zero success rates even for well-funded retirements.
Why the Scenario Buttons Matter
Our calculator shows five scenarios: Average, Best Case, 90th percentile, 10th percentile, and Worst Case. The average projection is your base plan. But the 10th percentile tells you what happens if you're unlucky — and whether you could still cope.
A good retirement plan should be comfortable even in the 10th percentile scenario, not just the average.