Pacific Coast Society of Orthodontists Bulletin Spring 2021 - 55

Corners of the PCSO

Practice Management

Monte Carlo Simulation: Retirement
Planning by Any Other Name

Mr. J. Haden Werhan
Walnut Creek, CA
PCSO Bulletin Contributor

How did a perfectly good technique for objectively assessing one's retirement planning needs end
up being called something as freewheeling as
Monte Carlo simulation? Nobody I know equates
his or her life savings with a Las Vegas card game,
real or virtual. If someone-say, the Great and
Powerful Oz-put me in charge of naming financial planning techniques, I think I would have
instead named it a retirement reality check.
Call it what you will, Monte Carlo simulation is a
tool we use to help our dental wealth management clients confidently address among the most
pressing questions they face: " How financially
confident am I that I'll be able to retire-when I
want, and on my own terms? "
In the right hands with the right Monte Carlo
simulation software, you have a fighting chance
at answering that pivotal question by gaining a
better sense of just where you stand. At a broad
stroke, here's how it works:

▫▫ Input: Your dental certified public accountant

▫▫

▫▫

(CPA) or wealth advisor inputs key information such as your and your spouse's ages and
similar demographics, your current and future
expected incomes, existing accumulated
wealth, and current and desired spending.
Crunch: As only a computer can do, the
software generates thousands of outcomes,
based on your own numbers and a variety of
possible market conditions. For example, if you
head into retirement right in the middle of a
bear market, how will that reduce your odds
of success? If you enjoy a soaring bull market
for the next decade, how greatly will that help
your cause? Now multiply these two what-if
scenarios by thousands of other possibilities.
Report: Based on the mound of computer--
generated results, we compile a comprehensive but comprehensible chart that looks
something like Figure 1.

The left bar tells this particular client she has
about a 93% chance of having at least $1 to her
name when she goes knocking at the Pearly
Gates. The middle bar tells her she also has a 77%
chance of leaving a $9 million legacy; the bar at

Spring 2021    PCSO Bulletin	

right indicates about a 55% chance of leaving
behind $18 million.
Is that confidence enough . . . or perhaps it's too
much? Maybe she'd rather work longer and be
more certain or tolerate greater uncertainty for
the chance to retire faster or build more wealth.
To consider these possibilities, we can rerun the
simulation with different pieces of input to see
how they play out.
Of course, the " right answer " will differ for each
orthodontist, based on his or her unique ability,
willingness, and need to stomach life's risks in
pursuit of desired goals. However, it gives you and
your advisor some good, relatively solid information to get started. Now you can roll up your
sleeves and really get to work figuring out key
questions such as:

▫▫ If things don't turn out as hoped for: How will

you plan to make up the difference? Would you
be willing to work longer than planned and/or
spend less than desired in retirement? Do you
have the stomach to increase your investment portfolio's exposure to market risk and
expected higher returns to try to make up any
unexpected losses? Because taking on higher
investment risk may need to happen when the
markets are at their riskiest (i.e., in the middle
of a bear market), this strategy is certainly not
for everyone. If none of these options seem
palatable so far, then you may want to make
adjustments right away, such as reducing
current spending and increasing current saving
to better safeguard your future goals.

Figure 1. Analysis results: odds of achieving various portfolio values in 2047

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Pacific Coast Society of Orthodontists Bulletin Spring 2021

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