Monte Carlo planning is useful when one “average” number hides risk. Instead of betting on a single future, you run thousands of plausible futures and study the range.
DCSimulator uses Monte Carlo for a specific dividend question: how much capital is required to generate your desired after-tax monthly dividend income at a chosen horizon, accounting for inflation, taxes, fees, and uncertainty.
What the simulation is actually doing
Each simulation path repeats the same steps for every year in your horizon:
- Inflation-adjusts your income target so purchasing power stays constant.
- Converts gross yield into net yield after taxes and fees: net yield = gross yield × (1 − tax rate) − expense ratio.
- Computes the required capital as: required capital = annual income target ÷ net yield.
- Evolves dividend yield over time using your annual growth assumption plus growth volatility (year-to-year variability).
The output is a distribution of required capital at your final year (the “horizon”). Lower required capital is better; higher required capital is safer and more conservative.
Why P10 is “very favorable” and P90 is “safety”
Many people learn percentiles on performance charts (where higher is better). Here the metric is required capital, so the interpretation flips:
How to use the percentile cards
P10 (Very favorable): only ~10% of simulations require less capital than this. Treat it as an optimistic “tailwind” case, not a plan.
P25 (Favorable): still optimistic, but closer to a realistic best-case environment.
P50 (Central): the median requirement. Useful context, but not conservative enough on its own for retirement planning.
P75 (Prudent): a stronger baseline for most users. If you plan around P75, you’re building in downside protection without over-allocating.
P90 (Safety planning): the “sleep at night” stress test. Planning to this level means most simulated paths require the same or less capital.
What moves the conservative number most (P75/P90)
- Lower net yield (because of lower dividend yield, higher taxes, or higher fees).
- Higher inflation (your income target rises every year).
- Higher growth volatility (widens the range; P90 typically rises).
- Shorter horizons (less time for dividend growth to offset inflation).
A 60-second workflow
- Set your after-tax monthly income target.
- Pick a horizon that matches your plan (e.g., “income needed in 10 years”).
- Set realistic tax and expense ratio values (these directly lower net yield).
- Run two passes: one with “best estimate” yield/growth, then a stress test with lower yield or higher inflation.
- Use P75 as your baseline number and check P90 for resilience.
Common interpretation mistakes
- Planning off gross yield and ignoring taxes/fees (net yield is what funds spending).
- Anchoring to P10 because it “looks achievable” (it’s the favorable tail).
- Forgetting the horizon is a future capital requirement (it’s the number you’re trying to reach by that year).