A retirement planning model using Monte Carlo simulation

Abstract

Uncertainty exists in retirement planning. The purpose of this thesis was to develop a stochastic retirement planning model to aid military personnel and decision/policy makers in evaluating retirement planning issues from a probabilistic perspective. The stochastic model developed differs from the ubiquitous retirement planning calculators available from many financial institutions and at many finance-related websites in that it accounts for the effects of uncertainty surrounding inflation and investment rates of return during one's investing "lifetime" by using Monte Carlo simulation techniques. The major components of the model are an input/output worksheet, a fund accumulation worksheet, a fund withdrawal worksheet, a probability distribution worksheet and a pay table lookup worksheet. After completing 17 inputs and running a simulation, a user is able to determine the probability of achieving a specific amount of retirement savings as well as the probability associated with how many years the retirement savings, supplemented by military retirement benefits and Social Security, may last. The information gained by using the model allows military personnel to evaluate their current retirement plans and make necessary adjustments. Additionally, the model allows decision/policy makers to evaluate specific military retirement issues in order to determine how changes may affect service members.