What do detonating atomic bombs and financial planning have in common? Both require that we test our assumptions and run the numbers before making big decisions. That’s the topic of the show today: find out how Monte Carlo simulations can help you figure out if your current investments will help you reach your financial goals.When it comes to knocking down buildings, we use a lot of complex math called Monte Carlo testing to make the implosion predictable and controlled. The same principles apply to our financial planning.

• The history of Monte Carlo testing came from the Manhattan Project. You can’t set off a nuke to test every assumption, so they used complex math to simulate different outcomes. You can do the same thing to test inflation, salary rates, longevity, or social security inflation rates.
• You want to assess the probability of success given the parameters, and move them around to hopefully find the best results. Since we have a lot of computing power available to us these days, we can test thousands of scenarios where the variables can be randomized based on historical performance.
• This kind of testing can predict whether you will be able to retire at 65 or that your money will last for your lifetime. You can then decide if that is enough of a confidence level for you to proceed or to take actions to increase the probability.
• Many clients feel a tremendous amount of relief when they are shown the results of this kind of testing. Either they get the relief of knowing they can be confident they will make it work, or they have a plan to improve their odds.
• You can adjust all those variables to help achieve the retirement and investment goals you’re aiming for.
• Sometimes it’s about getting the “what ifs?” out of your head and putting everything down on paper, so you can go through the testing process and move forward based on the results.
• One example is secondary education for your children. You can put variables like tuition increases and completion time into the system and see if you’re on track to be able to pay for your kid’s college education.
• Sometimes people will say “this time is different,” but chances are the situation you’re looking at has probably happened in some way already. All the issues that we are confronting have happened in some way in the past.
• You have to accept that there is uncertainty in life. There are things we can’t control and we all make regrettable choices, you have to accept that as part of the process. Just don’t let uncertainty paralyze you from making a choice and moving forward.

  

To explore working with Wayne Firebaugh to fireproof your money, please call 855-WAYNE KNOWS or check out at fireproofyourmoney.com.