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Will This Work?
Old 04-10-2004, 08:20 PM   #1
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Will This Work?

I have a question for anyone who has an understanding of Monte Carlo simulators. The simulator I'm using is called Portfolio Survival Simulator and I like it because it enables me to input as many income streams and expense changes as I want. I don't really buy the whole Monte Carlo thing, so I'm using the program this way, and I want to be sure I'm using it correctly:

First, I input all the income streams and annual expenses which looks something like this (these numbers aren't mine - I just threw some in quickly to show what it looks like):

Since I do not want to use monte carlo simulations to project worst case scenarios, I input what I expect to spend from my portfolio (3%) as an income stream instead of entering it as a portfolio of stocks and bonds (see the last line in the photo above). The $22,500 represents an income of 3% from a portfolio of $750,000. However, since I must withdraw a little more in the early years, I run into cash flow problems, so I do this:

-- First, I reduced a $790,000 portfolio by $40,000 (to $750,000) and multiply that by 3%, and that produces the $22,500 income stream in the last line.
-- Next I tell the simulator that I'm starting with $40,000 cash, which solves the cash flow problems in those early years.

Then I run 10,000 iterations and get a 100% survival rate. In other words, the $40,000 cash I start out with never goes to zero, and the income streams I input allow me to spend $50,000 (inflation protected) for 40 years. The only portfolio the simulator "sees" is $40,000 in cash.

Do you see any problems using the program this way? I'm thinking this may enable me to use FIRECalc to determine an initial withdrawal rate I'm comfortable with, but use this program to accommodate as many changes in spending and income as I want (FIRECalc only accommodates SS, pension, and one other income stream). Thanks.
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