Podcast Episode 8 – Why Your Monte Carlo Analysis is Crap and How To Fix It!

If there is any one thing you can take away from my Youtube channel is that if you’re a divorcee, when you receive SPOUSAL benefits that has NO affect, none whatsoever, on your ex’s benefit.

Please do not forget this. Your benefits are not tied to your ex’s. Which mean that any divorce decree you signed is completely irrelevant. That letter you signed carries NO weight. Nothing.

No judge is going to say “Oh, sorry Ms. smith, you signed this letter that says you won’t get your benefits.” Nope, not going to happen.

If anything, you may be able to hold out for MORE of the total assets in the division because YOU are going to receive less benefits.

Think about it like this. Your hub has $500,000 in his 401k. You have 0. You have no Social Security benefits on your own record because you didn’t work. So, your benefit will be solely the spousal benefit, which is half of his.

The judge is going to split the 401k in half, 50/50 under the QDRO rule.

So maybe you should throw it out to the judge that because you did the work at home and made no income you essentially sacrificed your own Social Security benefits and thus should be given more of the 401k than a 50/50 split because you’re only getting $1400 when he is getting $2800.

I have NO CLUE if that would hold any water. But certainly something to think about.

Either way, just remember, your benefit will not affect your ex’s. Do not fall for the idea that a divorce decree will be held against you. It won’t.

In this episode, I share how a recently widowed friend of mine was told by a large investment firm that her money would last until she was 93 years old. She’s 61 now.

How did they figure that? Well, they ran a Monte Carlo analysis of course! And if the Monte Carlos says you are good to go, well, who’s going to argue with that?

I do! The three things that must be looked at when it comes to the Monte Carlo are:
1. Rates of returns the software is using
2. Investment fees
3. Taxes

I go into detail of all three in the podcast. But, if the software from which the Monte Carlo is based is saying cash will return you 3% and a conservative portfolio (20% stocks / 80% bonds) 6.2%, that is way overly optimistic in a world today when the 10 yr Treasury bond is paying all of 2.80%.

How about investment fees? Investment fees that run say 1% will eat approximately 25% of your total returns on a more conservative portfolio. That needs to be addressed in your Monte Carlo analysis too.

Oh, you don’t pay a money manager but instead have mutual funds? Are there NO fees on your funds?

Ever hear of taxes? Well, if you have the bulk of your assets in qualified accounts like an IRA or 401k, every penny you take out from those accounts is taxed at Ordinary Income.

My widowed friend only needs to generate $37k or so of income before she is in the 22% tax bracket!

Monte Carlo doesn’t take that into consideration either.

What am I getting at? Simple. If a call center employee at a big firm says you’re fine with your retirement projections because he or she ran a Monte Carlo and it says you have an 85% success probability, the first thing you need to do is ask “huh. interesting. What are you using for rates of returns? Are you adjusting for the investment fees you want me to pay? Are you adjusting for the taxes I will pay?”

If the answer is no, which undoubtedly it will be,  you need a second opinion.

If you are not looking at the NET, you could be in big trouble.

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