By Jonathan Hall, BA, MBA, MSFS, CFP®
If someone told you they could predict exactly what the stock market would do over the next 40 years, would you believe them?
Of course not. Nobody can.
When you’re planning a retirement that could last three or four decades, the biggest danger is not usually picking the wrong stock. It is often building a plan around a single guess about the future and hoping for the best.
Evidence-based advisors (advisors who base recommendations on rigorous academic research, data, and proven strategies rather than opinions, predictions, or sales-driven products) take a completely different approach. Instead of guessing, they stress-test your plan against thousands of possible futures to see how it holds up when life does not follow the script.
Here is how that process works and why it can matter so much to anyone with a long-term horizon.
A 40-year Plan Needs More Than a Straight Line
You’ve probably seen retirement projections that look like a smooth, upward-sloping line on a chart. You save this much, earn this percentage, and end up with that number at the end. It looks clean and reassuring.
The problem is that real life does not typically move in straight lines. Markets crash. Inflation spikes. You might need a new roof or face a health scare in your fifties. A plan built on a single assumed rate of return does not account for any of that. It assumes the market goes up every year, which is not typical.
For someone retiring at 60 and potentially living into their late 90s, that is a 40-year window where just about anything can happen. An evidence-based advisor knows this, which is why they don’t rely on a single projection. They test your plan against a wide range of scenarios to find its breaking points before you ever reach them.
Monte Carlo Simulations: Testing Your Plan a Thousand Times Over
The primary tool evidence-based advisors use for stress testing is a Monte Carlo simulation. The name sounds complicated, but the concept is straightforward.
A Monte Carlo simulation runs your retirement plan through hundreds or even thousands of different market scenarios, each one using a different combination of market returns, inflation rates, and other variables drawn from historical data. Some scenarios mimic the booming 1990s. Others recreate the brutal 2008 financial crisis. Some mix in high inflation. Others feature flat markets that go nowhere for years.
Most simulations are based on historical return patterns or statistical estimates derived from them. That creates a limitation. The future may not resemble the past. Structural shifts in interest rates, inflation regimes, global growth patterns, or government policy can produce outcomes outside the historical range used in the model.
When all those scenarios are tallied, the result is a probability. You might see something like this: “Your plan has an 85% probability of success.” That means in 85 out of 100 simulated futures, you did not run out of money. In 15 of them, you did.
That number is not a guarantee. It is a realistic picture of how resilient your plan actually is. A 70% probability and a 90% probability are not simply “pass” or “fail” grades. They represent tradeoffs between spending, risk, and flexibility. A lower probability does not automatically mean a plan is broken, and a higher probability does not mean it is risk-free.
It is important to understand what a Monte Carlo simulation is doing. The results depend hugely on the assumptions built into the model. Expected returns, volatility, correlations between asset classes, inflation assumptions, and withdrawal behavior all shape the outcome. If those inputs are unrealistic or overly optimistic, the probability of success can give a false sense of security.
The Hidden Danger in the Early Years of Retirement
One of the most important things a stress test reveals is something called sequence-of-returns risk. This is the risk that you experience a market downturn right at the beginning of your retirement, which is often the absolute worst time for it to happen.
Here is why it matters so much. When you withdraw money from your portfolio during a market downturn, you lock in those losses permanently because you have fewer shares left to participate in the eventual recovery. Two people can have identical portfolios and earn the same average return over 30 years. If one of them got hit with bad returns early on, they could run out of money, while the other person would end up just fine.
This is exactly the kind of thing a Monte Carlo simulation considers. It shows your advisor where your plan is vulnerable so they can build in protections, like keeping a few years of living expenses in cash or short-term bonds, so you never have to sell stocks during a downturn.
Even here, Monte Carlo results should not be viewed as a crystal ball. The model can estimate the probability of unfavorable sequences, but it cannot predict when they will occur or how severe they will be. Real-world stress events often cluster in ways that statistical models struggle to capture.
Inflation: The Quiet Thief in a 40-year Plan
When your retirement stretches across four decades, inflation becomes one of the most dangerous threats to your financial security. It does not show up as a dramatic event. It just slowly and steadily erodes the purchasing power of every dollar you have saved.
The numbers are eye-opening. According to a December 2024 report to Congress from the U.S. Department of Labor, inflation directly erodes purchasing power, meaning more money is required during inflationary periods to buy the same goods as in prior periods. For someone on a fixed income, this can be especially damaging.
Think about it this way. If inflation averages just 3% per year, something that costs $50,000 today will cost about $163,000 in 40 years. Your retirement plan needs to account for that reality. A good stress test models inflation at different rates, not just the long-term average, to see how your plan holds up if prices rise faster than expected.
Healthcare Costs Deserve Their Own Stress Test
Healthcare is a wild card in any long retirement plan. It is expensive, unpredictable, and tends to get more costly as you get older.
According to Fidelity’s 2025 Retiree Health Care Cost Estimate, a 65-year-old retiring today may need roughly $170,000 or more to cover health care costs throughout retirement. That figure doesn’t include long-term care, which can easily add six figures to the total.
Evidence-based advisors include healthcare inflation as a separate variable in their stress tests because medical costs have historically risen faster than general inflation. When you are projecting out 40 years, even a small difference in healthcare inflation can mean hundreds of thousands of dollars. It is one of those things that looks manageable on paper today but can become overwhelming if not planned for properly.
Why Evidence-Based Advisors Trust Passive Investment Funds for the Long Haul
Stress-testing is not just about running simulations. It is also about what goes inside your portfolio in the first place. Evidence-based advisors rely on low-cost passive investment funds for a very specific reason: the data overwhelmingly supports it.
The S&P SPIVA Scorecard, which has tracked the performance of active fund managers relative to their benchmarks for over 20 years, consistently shows that most active managers underperform their benchmarks over long periods. In many categories, a large majority of U.S. equity funds have lagged their benchmarks over 15- and 20-year periods ending in 2024.
Over the past 20 years, roughly 90% of U.S. equity funds have underperformed, depending on the category.
When your retirement spans 40 years, those extra fees from active management compound into a significant drag on your returns.
An evidence-based advisor doesn’t chase hot funds or try to predict the next market winner. They should build a diversified portfolio of low-cost ETFs, keep your costs down, and let the long-term growth of global markets work in your favor.
The Plan Is Never Finished
Running a stress test once is not enough. Your life changes. Tax laws change. Markets shift. Healthcare costs go up. What worked five years ago may not work today.
Evidence-based advisors treat your plan as a living document. They revisit the simulations regularly, usually at least once a year, and adjust as needed. Maybe you can afford to spend a little more. Maybe you should pull back for a year or two after a rough market. Maybe a Roth conversion strategy makes sense now that your income has changed.
Another limitation of Monte Carlo modeling is that it assumes disciplined behavior. The model typically assumes you stick to the plan, rebalance consistently, and maintain your withdrawal strategy even during market stress. In reality, emotional decision-making can derail even a statistically sound plan. The math may work. Human behavior sometimes does not.
The value of ongoing stress-testing is not just financial. It is emotional. When the market drops 20%, and the headlines are screaming, it helps to know that your advisor already accounted for that scenario. You’ve seen it in the simulations. You know your plan can handle it. That kind of confidence is worth a lot when everyone around you is panicking.
What This Means for You
If you are in your 50s or early 60s and thinking about retirement, you are looking at a time horizon that could easily stretch 30 to 40 years. That is too long to rely on hope and rough estimates.
An evidence-based advisor will stress-test your plan across thousands of possible futures. They will account for market crashes, inflation spikes, healthcare costs, and the risk of bad timing in those critical early retirement years. They will use low-cost, broadly diversified ETFs to keep your portfolio efficient. They will revisit the plan regularly and make adjustments as your life evolves.
This is not about being pessimistic. It is about being prepared. Because the goal of retirement planning is not to predict the future. It is to build a plan that works no matter what the future throws at you.
