What this chart shows
In brief: The Monte Carlo fan chart runs thousands of simulations with randomised investment returns and shows the range of possible outcomes. The bands represent the spread from poor to favourable return environments — not a probability of a specific event, but a picture of how uncertain the future is.
A standard projection uses a single fixed growth rate and produces one line. The problem is that real investment returns are not fixed — they vary significantly year to year, and the order in which those returns occur can dramatically affect how long a retirement fund lasts.
The Monte Carlo fan chart addresses this by running thousands of simulations, each with a different randomly generated sequence of returns, and plotting the distribution of outcomes. The result is a fan shape that widens over time, showing where outcomes converge in early years and diverge in later years.
This chart is available on premium scenarios.
How the simulation works
FutureClear generates random annual returns using a log-normal distribution anchored to your growth rate assumption. This distribution is widely used in financial modelling because:
- It produces only positive return values in any given year (a fund cannot lose more than 100% of its value)
- It reflects the skewed nature of equity returns, where large positive years are more common than symmetrically large negative years
- It calibrates well to historical market return distributions over long periods
For each of the thousands of simulation runs, the engine generates a random return sequence for the full simulation period and runs the complete year-by-year projection using those returns. After all runs complete, the results are ranked by outcome at each point in time and aggregated into percentile bands.
Reading the fan chart
The horizontal axis is time (years or your age). The vertical axis is total asset value. The coloured bands on the chart represent the following percentiles:
- p10 (inner lower bound): 90% of simulated runs produced a better outcome than this at that point in time. This represents a poor return environment — consistently below-average returns.
- p25: 75% of runs produced a better outcome. Still below-average, but less severe than p10.
- p50 (median — the middle line): Half of runs were better, half were worse. This is the median outcome, not the "expected" value.
- p75: 75% of runs produced a worse outcome. An above-average return environment.
- p90 (outer upper bound): 90% of runs produced a worse outcome. A very favourable return environment.
The width of the fan at any point in time represents the spread of uncertainty. The fan typically widens over longer time horizons because small annual differences in returns compound into large differences over many years.
What percentile bands tell you (and do not tell you)
Percentile bands are a statement about the distribution of simulated outcomes, not a probability of a specific event.
The p10 band does not mean "there is a 10% probability you run out of money." It means "10% of simulated return paths produced a worse result than this line at this age."
A more useful way to read the chart:
- If the p10 band stays above zero throughout the projection period: The scenario produces positive fund values even in 90% of the poor-return simulated paths. This suggests a high degree of robustness to return variability.
- If the p25 or median band reaches zero before the projection end: Shortfalls occur in average and below-average return environments. The scenario may be fragile to normal market variability.
- If only the p10 band dips below zero: Only the poorest 10% of simulated paths produce a shortfall. You may consider whether the risk is acceptable given the assumed scenario.
Sequence of returns risk
One of the most important things the fan chart captures is sequence of returns risk — the risk that poor investment returns occur in the early years of retirement, when the portfolio is at its largest and most vulnerable.
A scenario where returns are poor in the first five years of drawdown will deplete the portfolio substantially faster than a scenario where the same average returns are distributed evenly across 30 years. This is true even if the total returns over the period are identical.
The lower percentile bands (p10, p25) on the fan chart typically represent scenarios where early retirement returns are poor. If these bands decline steeply in your first decade of retirement, your projection has meaningful sequence-of-returns sensitivity.
The fan chart is the only way to see this risk within FutureClear — the single-line projection in the asset chart assumes fixed annual returns and cannot reveal sequence risk.
Typical questions this chart answers
"What's the range of possible outcomes?" Look at the spread between p10 and p90. Wider fans indicate more sensitivity to return variability; narrower fans indicate more stability (often because stable income sources like State Pension or DB pensions cover most spending).
"How sensitive is my outcome to market returns?" Compare the p10 and p50 outcomes at your life expectancy. A large difference means your projection is highly dependent on achieving near-average returns.
"What happens in a bad sequence of returns?" Look at the p10 or p25 band. These represent paths where returns are poor, particularly in early retirement. If these bands decline steeply in the first 10 years, the projection is vulnerable to poor early returns.
"Does adding a DB pension or State Pension change the fan shape?" Guaranteed income sources reduce the portion of spending covered by market-dependent assets, which typically narrows the fan. Compare scenarios with and without guaranteed income to see the effect.
Limitations
Monte Carlo results are based on statistical assumptions about future returns calibrated to historical patterns. They do not account for correlation between asset classes or structural economic changes. The model does not predict actual future markets.
Tail risk and the log-normal model
The simulation uses a log-normal distribution to generate random returns. This is the industry standard for consumer retirement tools (used by Vanguard, ProjectionLab, Boldin, T. Rowe Price, and others) and is well-calibrated for central estimates — the p25 to p75 range matches historical return data closely.
However, log-normal returns understate the probability of extreme outcomes at both tails. Observed equity markets show heavier tails than the model predicts — extreme events beyond two to three standard deviations occur more frequently in historical data than a log-normal distribution implies. This is a known property documented by the Institute and Faculty of Actuaries (IFoA) and widely discussed in actuarial literature.
In practice, this means:
- The p10 and p90 bands may not fully capture how severe (or how favourable) the most extreme outcomes could be
- The central range of the fan chart (p25 to p75) remains reliable
- The outer bands should be read as indicative of the direction and relative magnitude of extreme outcomes, rather than precise boundaries
Professional adviser tools use more complex stochastic models (regime-switching volatility, ARCH-type processes, historical bootstrapping) that better capture tail behaviour. These models are designed for regulated financial advice and require assumptions that are difficult to validate or explain in a consumer context.
The fan chart is a diagnostic and stress-testing tool. It shows where a projection is most sensitive to return variability — it is not a guarantee of any outcome.