Can I Afford to Retire? Here Is How the Math Actually Works

Why the 4% Rule Gives You the Wrong Answer

After spending years as a practicing CFP, the question I heard most was some version of 'am I OK?' The 4% rule — save 25 times your annual expenses — was always the first thing people had read about. It's a reasonable starting point, but it was designed for a 30-year retirement with a simple 60/40 portfolio and no other income sources.

The moment you add Social Security, a pension, variable spending, or a retirement date before 65, the 4% rule starts giving meaningless answers. I've seen people with $400,000 who were financially fine because of a pension plus Social Security. I've seen people with $1.2 million who weren't, because of early retirement, high spending, and no guaranteed income.

The number that actually matters is your success rate: out of 10,000 simulated futures with randomized markets and inflation, in what percentage does your money last through your target age?

How Monte Carlo Simulation Actually Works

A Monte Carlo simulation does not predict the future. It generates thousands of possible futures based on historical return distributions and asks: how many of them work out for you?

Each of the 10,000 scenarios draws a unique sequence of annual stock returns (historical mean: 10.6%, standard deviation: 18.8%), bond returns (mean: 5.4%, standard deviation: 7.7%), and inflation rates. For each scenario, the engine projects your portfolio year by year — adding pension income and Social Security, subtracting inflation-adjusted spending, applying that year's return based on your asset allocation.

The result is a success rate: the percentage of scenarios where your balance stays positive through age 90 (or whatever target age you specify). Above 90%? Strong. Between 80-90%? Moderate — worth stress-testing your spending. Below 80%? The analysis indicates meaningful adjustments are needed.

What Actually Moves the Needle on Your Success Rate

The three variables with the biggest impact, in order:

1. Spending level. This is the dominant factor. A 10% spending reduction can swing success rates by 8-15 percentage points in many scenarios. The analysis on spending sensitivity shows your success rate at current spending, +25%, +50%, and +100% — that table tells you how much margin you have.

2. Social Security claiming age. Delaying from 62 to 70 increases monthly benefits by roughly 76% (for those born 1960 or later). That guaranteed, inflation-adjusted income floor dramatically reduces what your portfolio has to carry. In my experience, this is the most underutilized lever for middle-income households.

3. Retirement date. Each additional working year adds contributions, eliminates a withdrawal year, and allows the portfolio to compound. A two-year delay in retirement date can increase success rates by 15-25 percentage points in many analyses.

How to Actually Use Your Success Rate Number

A success rate of 73% doesn't mean you'll run out of money. It means that in 73% of 10,000 simulated futures, your money lasts. The question is whether 73% feels acceptable given the other context — what happens in the failing scenarios, how bad the shortfall is, and what adjustments are available.

The spending sensitivity table is the most actionable output. If your baseline scenario shows 78% and reducing spending by 15% pushes it to 92%, you know exactly what trade-off you're looking at. That's a much more useful framing than 'you need $X.'

One pattern I observed repeatedly as a CFP: the clients who were most financially secure weren't always the ones with the highest balances. They were the ones who had modeled multiple scenarios and understood their actual margins.