Last week’s post about Monte Carlo simulations in financial planning sparked some interesting comments, so I thought a case study would help readers see how they work. Our real-life example comes from a past client of PWL Capital’s DIY Investor Service: the details were supplied by Justin Bender with the client’s permission.
Laura is 57 years old, single, and earning about $68,000 a year with expenses of $37,500. She socks away about $14,000 annually and has accumulated $330,000 in her RRSP and TFSA, as well as a rental property worth about $250,000. She has a defined benefit pension through her employer, though it is not indexed to inflation, and she’s eligible to receive full Canada Pension Plan and Old Age Security benefits in retirement.
Her investment portfolio was not very efficient: about a quarter of it was sitting in cash, and much of the rest was in narrow sector ETFs, individual stocks and corporate bonds. Some of the ETFs were in the wrong account types, resulting in unnecessary taxes.
Before Justin could rebuild her portfolio, however, he needed to make sure it was aligned with her financial goals. Laura’s primary objective was to determine whether she could retire before age 65—perhaps as early as 60—so she needed to know whether her investments would be able to generate enough cash flow after she quit work.