Hey everyone, it's Tony Leonardi, your Certified Financial Planner® professional from Newtown, Connecticut. And welcome back to another episode of A Smarter Way to Retire — because there really IS a Smarter Way to Retire. Happy New Year, everyone! It’s January 9, 2026, and this is actually Episode 50 of A Smarter Way to Retire. Woohoo! Thanks to everyone who's been listening, watching, and interacting. Next stop: Episode 100. Fingers crossed.
This week we're building on last week's deep dive into Monte Carlo simulations and your Probability of Success number. Just when you thought Monte Carlo couldn't get any more exciting, we're kicking it up a notch. Today we're exploring how Monte Carlo simulations can help us find the right portfolio allocation for your unique situation — the one that gives you the highest odds of success without unnecessary risk. Isn't that exactly what we're all searching for? How to invest my hard-earned savings, my nest egg, so that I have a high probability of success — meaning I won't run out of money before running out of life — without taking unnecessary risk. Sounds magical, doesn't it? Well, it's not really magic; it's just math.
So how do we do it? Great question. By the end of this episode, you'll understand the surprising trade-off between safe and aggressive portfolios, why average return isn't the whole story, and how to spot if your current investments are efficient or inefficient. We'll also tease next week's topic: Modern Portfolio Theory and the Efficient Frontier.
The $1.6 Million "Inefficient" Portfolio Surprise
I want you to meet a client I started working with recently — let's call him David. He's 64, has about $1.6 million in his portfolio, and plans on retiring in two years. He came in with a do-it-yourself portfolio mix: mostly stocks, some bonds, a little cash. His average return projection? About 7%. Everything looked pretty great on paper.
We ran his Monte Carlo simulation, and his Probability of Success came back at 72%. Not bad, but not great — room for improvement. Of course, David thought his Probability of Success would be much higher based on his calculations. He said, "Well, I have an average return of 7%. I can take out 4% — that leaves 3% for inflation. I should never run out of money."
As you know, because you've been listening to this podcast, average return is nice. It's a nice place to start, but the world doesn't work in a straight line. The world is volatile, and you have to consider the effect of that volatility on your financial plan. Simple calculations like the one David ran don't address volatility, and that's where many of these plans fall short.
So we compared his portfolio to seven model portfolios in our planning software, ranging from Principal Stability (the most conservative, mostly bonds and low risk) all the way through Aggressive Growth (mostly stocks and high risk). David's portfolio landed in the middle, around the Moderate Growth risk category — we'll put that at about a 7 out of 10 on the risk scale.
But what was interesting is that he had a lower Probability of Success than our model for the same risk level. Why is that? His portfolio was inefficient: too concentrated in a few stocks, a few sectors (tech, the Magnificent Seven, like a lot of portfolios today), not enough diversification, and higher volatility than necessary for the return he was shooting for.
What Is Investing, Really?
Seems like a simple question, right? But if I asked you, "What is investing?" how would you answer? I'll give you a moment to think about it.
To me, investing is the intentional purchase of risk. You decide how much risk you're willing to purchase, and you hope that you're adequately compensated for that purchase of risk. Simple definition. Does that make sense to you? You're purchasing a certain amount of risk and hoping to be compensated for the risk that you're purchasing.
Now, if I asked you a follow-up question: "How much risk have you purchased in your investment portfolio? Can you quantify that for me?" How would you answer? I've asked that question to prospective investors hundreds, maybe thousands of times, and here's the answer I usually get: "Well, a moderate amount of risk, I think," or "Hopefully not too much risk, I don't like risk," or some kind of generic answer like that.
The average investor really has no idea how to quantify the risk that they've purchased. So the obvious follow-up is: "How do you measure the success of your investments if you can't quantify how much risk you've purchased?"
If you've purchased risk up here at your eyeball level, and your return is down here at chin level, is that a successful portfolio? Is that an efficient portfolio? Is that the kind of portfolio you want to take into retirement? Probably not.
Next week we'll get into all the details about how we measure risk and relate that to return to see if you have an efficient portfolio. But for today, let's just keep in mind that most portfolios we see are initially inefficient and take on more risk, more volatility than they need to.
The Surprising Trade-Off: Probability of Success vs. Safety Margin
So let's go back to David. We tweaked his portfolio slightly, making it more efficient. Same risk level, better allocation. His Probability of Success jumped from 72% to 88%. That's the power of using Monte Carlo not just to test your plan, but to find the portfolio that maximizes your odds of success.
In our financial planning software, we have a tool called the Risk/Reward module. It takes your exact plan, your assets, income, expenses, taxes, life expectancy, etc., all of your variables, and runs a Monte Carlo simulation on your current portfolio and compares that to seven model portfolios:
- Principal Stability
- Conservative Income
- Income and Growth
- Balanced Growth
- Growth and Income
- Growth
- Aggressive Growth
For each, as well as your current allocation, we calculate two key numbers:
- Probability of Success: The percent chance your money will last as long as you do, given average return over time and the volatility of that return.
- Safety Margin: How much extra money will be left in your plan projected at the end of your life if you end up with the median scenario.
So this lets us see the trade-off visually in chart format. And it's often very surprising. Here's the big "aha" most people miss: As portfolios get more aggressive (higher average return), what do you think happens? The Probability of Success often drops — and sometimes significantly — even though the long-term average return is higher.
Why? Volatility.
A conservative portfolio might have a 5–7% average return with low standard deviation (small swings). Monte Carlo shows high Probability of Success (90%+) because it's reliable — fewer bad sequences.
An aggressive portfolio? 8–10% average return, but high standard deviation (big swings). The Probability of Success drops to 70% because of the possibility of early volatility and how that can devastate your withdrawals.
But here's the flip side: Aggressive portfolios usually have a higher Safety Margin. So in the good scenarios (strong markets early on), you could end up with a lot more money at the end.
So the choice is yours. Do you want a higher Probability of Success? "I wanna be 95% sure that I don't run out of money while I'm alive." Or do you want a high Safety Margin, which is more aggressive? "If things go well, I wanna leave a bigger legacy for my family, or maybe I wanna take more trips."
Most clients tend to lean towards higher Probability of Success versus higher Safety Margin. What's the point in shooting for more money to leave to my kids if I run out of money because of bad market timing?
The Steps We Take With Every Client
Here are the steps we take with each and every client:
- We run your baseline Monte Carlo simulation based on your current portfolio to see where you stand.
- We compare your current portfolio to the seven model portfolios to see where you land on the risk-reward spectrum.
- Stress tests for sequence of returns risk. What if volatility hits early?
- Then adjust your portfolio based on your goals: high Probability of Success or high Safety Margin.
- Rerun this analysis annually. Markets change, and so does your optimal mix.
One couple came in with a 68% Probability with an aggressive portfolio. We shifted them to a more efficient moderate growth portfolio. Probability jumped to 92%. Safety Margin stayed pretty strong, and they slept better at night. Now isn't that what this is all about? Sleeping well at night.
Your Action Plan
If you're wondering, is my portfolio efficient? What's my real Probability of Success? Don't guess at it. There are two easy ways to get those numbers:
- Take my free two-minute retirement readiness quiz, and you'll get a score right away and a copy of my book instantly. You can find that on my website at LeonardiFamilyWealthcare.com/quiz.
- Or you can book a complimentary 15-minute call with me. I'll run your Monte Carlo Probability Success numbers and your risk-reward with your real numbers. You can find my calendar at LeonardiFamilyWealthcare.com. Look for my contact and Calendly sections.
Next week we'll dive into Efficient Frontier and Modern Portfolio Theory. You're going to love that. Thanks for listening. Remember to plan smart and retire happier, because there is a smarter way to retire. We'll see you next week.
Take the free 2-minute retirement readiness quiz and get Tony’s book instantly: https://www.leonardifamilywealthcare.com/quiz
Book a complimentary 15-minute call: https://calendly.com/anthony-leonardi-leonardifwc/15-minute-check-in-quick-questions-quick-answers
Plan smarter. Retire happier. Because there is a Smarter Way to Retire.
See you next week!