A Complement to the Actuarial Financial Planner

We recently came across a Monte Carlo modelling tool called the Retirement Probability Simulator (RPS). It is a free tool available at DIYretiree.com that our readers may find useful in their financial planning.In this post, we will discuss the similarities and differences between our Actuarial Financial Planner (AFP) model for retirees and near retirees and the RPS (for retirees and pre-retirees) and how they can work together.Most retirement planning tools fall into one of two camps:Deterministic, actuarial, present‑value–based modelsStochastic, Monte‑Carlo–based simulationsThe AFP sits firmly in the first camp. The RPS sits in the second.We
have not spent much time vetting the RPS but it does appear to produce
reasonable results. It doesn’t appear to have the same level of
functionality with respect to reflecting all sources of spending
liabilities and income/assets as the AFP, but you may be able to work
around its minor shortcomings. Like the AFP, it is free, and just like
with our website, the person who created the DIYRetiree.com website is a
nice guy who is genuinely interested in helping households make better
financial decisions in or near retirement.What the RPS MeasuresThe Retirement Probability Simulator estimates the probability of success for a given retirement plan. In this context, “success” means:The portfolio does not deplete before the end of the planning horizon.To
estimate this, the RPS runs thousands of simulated investment return
paths. Each path represents a possible sequence of future market
returns. Your spending pattern is applied to each path, and the tool
tracks how often the portfolio survives.The output is a percentage — for example, “82% probability of success.”This is a path‑dependent measure. It reflects the fact that the order of returns matters, not just the average.What the RPS Does WellThe RPS is particularly good at illustrating:Sequence‑of‑returns risk — the danger of poor early returnsPortfolio volatility — how bumpy the ride may beDistribution of outcomes — not just a single numberComparisons across asset allocationsStress‑testing a spending planIf you want to understand how your plan behaves under a wide range of market conditions, the RPS is the right tool.What the RPS Does Not DoThe RPS does not:Value lifetime spending liabilitiesApply risk‑appropriate discount ratesProduce a funded ratioDetermine a sustainable spending levelModel survivor‑phase spending actuariallyProvide a clear “overfunded / underfunded” interpretationIn other words, the RPS does not replace the actuarial framework. It complements it.How the RPS Differs from the AFPThe AFP answers a fundamentally different question:“Are we fully funded for our lifetime spending liabilities?”It
does this by valuing future spending using present‑value techniques,
applying risk‑appropriate discount rates, and comparing the result to
current assets.The AFP provides:A funded ratioA sustainable spending levelA year‑by‑year actuarial balance sheetA clear, interpretable measure of financial adequacyThe RPS, by contrast, answers:“Given a spending plan, how often does the portfolio survive under simulated return paths?”Both perspectives matter. But they are not interchangeable.How to Use the AFP and RPS TogetherThe most effective approach is sequential: Use the AFP to determine your sustainable spending plan.This ensures your plan is grounded in a liability‑driven, actuarially sound framework. Use the RPS to stress‑test that spending plan.This shows how return volatility affects the funded path.This is the same two‑step process used by actuaries for pension plans:Actuarial valuation for fundingStochastic modeling for risk assessmentRetirees can benefit from the same discipline.Why We are Including the RPS in the “Other Calculators & Tools” Section of our WebsiteThe RPS is not a replacement for the Actuarial Financial Planner. But it is a valuable secondary tool for understanding investment risk and sequence‑of‑returns variability.Including it in the “Other Calculators & Tools” section helps readers:See how Monte Carlo modeling fits into a broader actuarial frameworkUnderstand the strengths and limitations of probability‑of‑success metricsSee how your funded status translates to a probability of successUse stochastic modeling appropriately — not as a spending‑decision engine, but as a risk‑diagnostic toolOur goal is to help retirees make better decisions by understanding both the actuarial and stochastic perspectives.Closing ThoughtsThe
Retirement Probability Simulator provides insight into the volatility
and uncertainty inherent in investment returns. The Actuarial Financial
Planner provides a disciplined, liability‑driven foundation for
determining sustainable spending.Used together, they offer a more
complete picture of retirement readiness than either tool can provide
alone. Our new team member, Copilot, can also help explain the
advantages and disadvantages of these complementary tools to you.