Monte Carlo vs Spreadsheet

[corn18]

I have a very complex spreadsheet that models everything but in a linear fashion. I use the spreadsheet to do what ifs on taxes, deaths, SS, Roth conversions and a lot of other stuff. I always use Firecalc and Flexible Retirement Planner to do the Monte Carlo work as a second set of numbers.

What was interesting is looking at the portfolio balance by year in my spreadsheet vs. FRP. If I use a real return of 1.85% in my spreadsheet, my portfolio balance almost exactly tracks the bottom 10% portfolio values in FRP. If I put in 5.5% real return, my spreadsheet portfolio balance almost exactly tracks the median portfolio value. I looked it up and the historical average for a 60/40 portfolio is 5.8% real. Hmmmm....

I am using 1.85% real in all my calculations, so it seems that is conservative vs. Firecalc or FRP for a 60/40 portfolio. I think I'm good with conservative.

 

[Spock]

It's always great when an unexpected comparison validates your calculations.
I always wonder if my multiple ways of projecting "cat food for dinner day" are accurate or just self-confirming because of biases that creep to the point that the multiple methods really aren't that different from each other.

 

[corn18]

It's always great when an unexpected comparison validates your calculations.
I always wonder if my multiple ways of projecting "cat food for dinner day" are accurate or just self-confirming because of biases that creep to the point that the multiple methods really aren't that different from each other.

It is fascinating to me that in the thousands of cells I have in my spreadsheet, it really is so simple:

Savings + income - expenses

There is a lot that goes into these three numbers and they can change a lot based on assumptions, but in the end, as long as that is > 0, life is good.

 

[OldShooter]

It's always great when an unexpected comparison validates your calculations. ...

Yes, but IMO it is critically important to remember that we humans are prone to confirmation bias. https://en.wikipedia.org/wiki/Confirmation_bias

... There is a lot that goes into these three numbers and they can change a lot based on assumptions, but in the end, as long as that is > 0, life is good.

Yup. Charles Dickens:

"Annual income twenty pounds, annual expenditure nineteen [pounds] nineteen [shillings] and six [pence], result happiness. Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery."

 

[Spock]

Yes, but IMO it is critically important to remember that we humans are prone to confirmation bias. https://en.wikipedia.org/wiki/Confirmation_bias
...

ummm... thats exactly what I said in the very next sentence that you cut out.

 

[OldShooter]

ummm... thats exactly what I said in the very next sentence that you cut out.

Sorry, I didn't interpret your second sentence that way.

 

[BeachOrCity]

Regardless of the similarities you saw, I think you are wise to use both a linear, historical, and monte carlo modeling of your "what if" scenarios.

Helps one be more prepared and more fully understand the downside risks, as well as much more likely scenarios

I have a very complex spreadsheet that models everything but in a linear fashion. I use the spreadsheet to do what ifs on taxes, deaths, SS, Roth conversions and a lot of other stuff. I always use Firecalc and Flexible Retirement Planner to do the Monte Carlo work as a second set of numbers.

What was interesting is looking at the portfolio balance by year in my spreadsheet vs. FRP. If I use a real return of 1.85% in my spreadsheet, my portfolio balance almost exactly tracks the bottom 10% portfolio values in FRP. If I put in 5.5% real return, my spreadsheet portfolio balance almost exactly tracks the median portfolio value. I looked it up and the historical average for a 60/40 portfolio is 5.8% real. Hmmmm....

I am using 1.85% real in all my calculations, so it seems that is conservative vs. Firecalc or FRP for a 60/40 portfolio. I think I'm good with conservative.