What Is a Monte Carlo Simulation? (And Why Your Savings Need One)

You might have heard the term "Monte Carlo simulation" and wondered what casinos have to do with your savings plan. The name comes from the Monte Carlo Casino in Monaco — a symbol of randomness and probability.

The problem with simple savings calculators

Most basic calculators assume your investments grow at a steady, fixed rate every year — say, 7% exactly. But that's not how markets work. In reality, some years your portfolio might grow 20%, other years it might fall 15%.

This matters because the order of those returns changes your outcome. Losing money in the early years of saving is much worse than losing money later. A simple calculator can't show you this.

What a Monte Carlo simulation does differently

Instead of assuming one fixed return, we run 1,000 different "what if" scenarios. Each scenario uses a different random sequence of annual returns — some good years, some bad years — drawn from real historical market data for your country.

After running all 1,000 scenarios, we look at the spread of outcomes:

• The worst 10% — what happens if markets are rough
• The middle (median) — the most likely outcome
• The best 10% — what happens if markets perform well

Why your median might be slightly below your target

You might notice that even after saving the "required" amount, the median outcome is slightly below your goal. This is because real market volatility creates a phenomenon called volatility drag — when returns are unpredictable, the median outcome tends to be a little lower than the simple average would suggest. The required savings figure is calibrated so that on average across all scenarios, you hit your goal.

The key takeaway: the probability of success shows you how robust your plan is to real-world market ups and downs — not just a theoretical steady-rate world.