Ep. 402: What’s Missing from Monte Carlo Simulations?

The Pete the Planner® Show

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This week on the Pete the Planner Show, Pete and Damian do a lightning round review of industries to see how they might fare in the recovery of our economy!

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No time to listen? BUMMER. Here’s some of what happened and when:

Show Notes:

TALKING COSTS OF LONG-TERM CARE (WITH LISA WHITLEY): [3:00]

• “Why does general public policy ignore our long term care need costs?”
  
  • Lisa: Probably because they’re a little scared of it. Studies show that 7/10 of us will need some kind of Long-term Care (LTC). And those costs can be enormous. We haven’t come to grips with this as a country.
  • We found that the average caregiver is a 49-year old woman. They may leave the workforce and not contribute to their own retirement and perhaps even draw down what they do have.
  • Public policy is woefully behind on addressing this under-investigated, growing, national problem.

WHERE THE MONTE CARLO SIMULATION FALLS APART: [13:50]

• There is a concept that financial advisors often use, it’s called a Monte Carlo simulation. It helps a person determine (based on a variety of variables) how much successful their retirement income strategy will be. But where does this fall apart?
  • Damian: Some Financial Planners may have missed this because it leans so heavily into chances of success; that one dimension.
  • If we talk about boarding a plane and you had an 80% chance of making it to your destination, would you get on?
  • If there was an 8% chance of rain, you might not take an umbrella with you.
  • But if there’s an 8% chance of failure with a Monte Carlo sim, why are you okay with that?
  • We need to discuss the magnitude of the failure in the industry for a more accurate depiction of the entire retirement scenario.
  • Studies show there is a natural decrease in spending further into old age, but the sim tends to model the opposite: an increase in spending.

There’s so much more in the full show, including the laughs! — click PLAY below for the full show.

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