Retirement planning can feel like navigating a financial minefield—one wrong step, and your nest egg might not last as long as you need it to. Today, we’ll analyze Jack and Jan’s retirement plan using Monte Carlo simulations, a powerful statistical method that tests thousands of possible market scenarios to estimate the likelihood of their savings surviving through retirement.

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Meet Jack and Jan: A Retired Couple in California

Their Financial Snapshot

• Ages: Both 66 (retired)
• Life Expectancy: 95 (29-year retirement horizon)
• Annual Living Expenses:
  • Ages 66-79: $230,000/year
  • Age 80+: Reduced to $95,000/year (due to lifestyle changes)
• Social Security:
  • Jan (current): $30,000/year
  • Jack (starting at 70): $50,000/year → Total Social Security after age 70: $80,000/year
• Investments & Savings:
  • High-Yield Savings: $100,000
  • Stock Options: $550,000
  • Jack’s Inherited IRA: $285,000
  • Jack’s Traditional IRA: $300,000
  • Jan’s Traditional IRA: $640,000
  • Total Portfolio: $1,875,000

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The Big Question: Will Their Money Last?

To answer this, we ran 100,000 Monte Carlo simulations using historical S&P 500 returns (from 1920–2020). Each simulation randomly pulls annual returns from history and applies them to Jack and Jan’s portfolio while factoring in withdrawals.

Key Findings:

✅ Success Rate: 87.3% – In most scenarios, their money lasts until 95.
❌ Failure Rate: 12.7% – In about 1 in 8 simulations, they run out of money early (worst case: depletion by age 82).
Average Ending Portfolio at 95: ~$2.45M (though median is closer to $1.98M, meaning some outliers boost the average).

Why the 12.7% Failure Risk?

• High Initial Withdrawal Rate:
  • From ages 66–70, they withdraw $200K/year ($230K expenses – $30K SS) from a $1.875M portfolio → ~10.7% withdrawal rate (very aggressive).
  • After age 70, withdrawals drop to $150K/year ($230K – $80K SS) → ~8% withdrawal rate.
  • At 80+, spending drops to $95K, but if the portfolio was already strained, it may be too late to recover.
• Sequence of Returns Risk:
  • If the market crashes early in retirement (like 2008 or 1973), their portfolio may never recover.

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How Can Jack and Jan Improve Their Odds?

1. Reduce Early Withdrawals

• The 4% Rule suggests withdrawing no more than $75K/year (4% of $1.875M) to minimize failure risk.
• Their current plan withdraws $200K+ early on—far above this threshold.

2. Keep a Cash Buffer

• Holding 2–3 years of expenses in cash (e.g., $500K in savings/bonds) can help avoid selling stocks in a downturn.

3. Flexible Spending

• If markets drop, cutting discretionary spending (e.g., travel, luxury expenses) for a few years can significantly improve longevity.

4. Consider Annuities for Guaranteed Income

• A portion of their IRA could be annuitized to provide lifetime income, reducing reliance on market returns.

5. Plan for Long-Term Care (LTC) Costs

• At 80+, expenses might increase (not decrease) if healthcare/LTC is needed. They should explore LTC insurance.

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Final Verdict: Good, But Needs Adjustments

Jack and Jan have a strong starting portfolio, but their high early withdrawals introduce unnecessary risk. By:

• Reducing spending early on (even by 10–20%),
• Holding more cash/bonds, and
• Staying flexible with expenses,

…they could push their success rate above 95%.

Would you take an 87% chance, or would you make adjustments? Let us know in the comments!

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Want us to test a different scenario? Drop your questions below, and we’ll run another simulation!

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Disclaimer: This analysis assumes historical market returns, no taxes, and no unexpected expenses. Real-world results may vary. Consult a financial advisor for personalized advice.

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