The limits of any projection
In brief: A single projection shows one possible path through retirement. The real world doesn't follow a single path. Scenarios let you compare different life choices. Monte Carlo simulation shows the range of outcomes when investment returns vary randomly from year to year.
A retirement projection is useful, but it's important to understand what it is — and what it isn't.
A projection takes your inputs (income, spending, assets) and your assumptions (growth rates, inflation, fees) and calculates a single path through time. If all those assumptions hold exactly, the projection shows what would happen.
But assumptions are not certainties. Investment returns vary year by year. Inflation is unpredictable. You might retire earlier or later than expected. You might spend more in some decades and less in others. Tax rules will almost certainly change over a 30-year period.
This doesn't make projections useless — far from it. But it means a single projection is a starting point, not an answer.
Assumptions are choices, not facts
Every assumption in your projection is a value you've chosen. The growth rate on your pension isn't a promise — it's your estimate of what a diversified portfolio might return over the long term. The inflation rate isn't a forecast — it's a reasonable central expectation.
Some assumptions are more impactful than others:
- Investment growth rate — even a small change (4% vs. 5%) compounds dramatically over 25 years
- Retirement age — retiring a few years earlier or later shifts the entire balance between accumulation and drawdown
- Spending level — your annual spending is the single biggest driver of how long your money lasts
- Longevity — the longer the projection runs, the more your assets need to sustain
Understanding which assumptions your projection is most sensitive to is more valuable than treating any single result as "the answer."
Scenarios: comparing different futures
One way to deal with uncertainty is to model multiple versions of your retirement. These are called scenarios.
A scenario is a complete set of inputs and assumptions. You might create:
- A base scenario with your central assumptions
- A conservative scenario with lower growth rates and higher spending
- A higher-growth scenario with higher growth and a later retirement
- A what-if variation to test a specific change — like downsizing your property or drawing your pension earlier
Comparing scenarios side by side shows you the range of outcomes for different life choices. It answers questions like: "How much difference does it make if I retire at 60 instead of 63?" or "What happens if I spend an extra five thousand pounds a year in early retirement?"
This approach turns a projection from a single line on a chart into a set of boundaries that bracket your likely range of outcomes.
Monte Carlo: what if returns are random?
A standard projection assumes your investments grow by the same percentage every year — say, 5%. In reality, returns bounce around: one year might be +15%, the next might be -8%, and over time they average out somewhere near your assumed rate.
The order of those returns matters. A sharp market fall in your first few years of retirement — when you're also withdrawing money — can permanently damage your fund in a way that a late-retirement fall does not. This is known as sequence of returns risk.
Monte Carlo simulation addresses this by running the same projection thousands of times, each with a different randomly generated sequence of annual returns. The average return across all runs matches your assumed growth rate, but the year-by-year path varies each time.
The result is a range of outcomes — often shown as a fan chart. Instead of a single line showing "your assets over time," you see a spread: the middle band shows the most common outcomes, and the outer edges show the best and worst cases.
This gives you a much richer picture than a single projection. It doesn't tell you what will happen, but it shows what could happen — and how wide the range of possibilities is.
Putting it together
One approach to retirement modelling combines all three layers:
- A base projection with your central assumptions — this gives you a reference point
- Alternative scenarios for the key decisions you're considering — retirement age, spending level, property changes
- Monte Carlo simulation on the scenarios that matter most — to see how sensitive they are to the randomness of investment returns
No single number from any of these is "the answer." The value is in the shape of the results, the comparisons between scenarios, and the clearer picture you get from seeing how your finances perform across a range of conditions.
These projections are for modelling purposes only. They do not constitute financial advice. Tax rules are subject to change. Please consult a qualified financial adviser before making financial decisions.