CHAPTER 20

COMPUTER SIMULATION WITH CRYSTAL BALL

SOLUTION TO SOLVED PROBLEMS

20.S1 Saving for Retirement

Patrick Gordon is ten years away from retirement. He has accumulated a $100,000 nest egg that
he would like to invest for his golden years. Furthermore, he is confident that he can invest
$10,000 more each year until retirement. He is curious about what kind of nest egg he can
expect to have accumulated at retirement ten years from now.
Patrick plans to split his investments evenly among four investments: a Money Market Fund, a
Domestic Stock Fund, a Global Stock Fund, and an Aggressive Growth Fund. Based on past
performance, Patrick expects each of these funds to earn a return in each of the upcoming ten
years according to the distributions shown in the following table.
Fund Distribution
Money Market Uniform (Minimum = 2%, Maximum = 5%)
Domestic Stock Normal (Mean = 6%, Standard Deviation = 5%)
Global Stock Normal (Mean = 8%, Standard Deviation = 10%)
Aggressive Growth Normal (Mean = 11%, Standard Deviation = 16%)

Assume that the initial nest egg ($100,000) and the first year’s investment ($10,000) are made
right now (year 0) and are split evenly among the four funds (i.e., $27,500 in each fund). The
returns of each fund are allowed to accumulate (i.e., are re-invested) in the same fund and no
redistribution will be done before retirement. Furthermore, nine additional investments of
$10,000 will be made and split evenly among the four funds ($2,500 each) at year 1, year 2, ...,
year 9.
A financial advisor has told Patrick that he can retire comfortably if he can accumulate
$300,000 by year 10 to supplement his other sources of retirement income. Use a 2000-trial
Crystal Ball simulation to estimate each of the following.
The uncertain elements in this problem are the annual return of each investment over the next 10
years (Year 0 through Year 9). To simulate this, we define an assumption cell for the annual
return of each investment in each year. These assumption cells are defined in rows 12, 17, 22,
and 27 of the spreadsheet below.
To track the investments, we calculate their balances in each year. Row 10, 15, 20, and 25 show
the investment made by Patrick in each year.
Rows 11, 16, 21, and 26 calculate the balance in each fund at the start of the year. For Year 0 in
each fund, this will simply be the initial investment ($25,000) plus the annual investment
($2,500). For each future year, it will be the balance at the end of the preceding year plus the
annual investment. For example, for Year 1 of the money market fund, the starting balance is
D11 = C13 + D10.

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Rows 13, 18, 23, and 28 calculate the year-end balance for each fund. This will be the starting
balance times the net return. For example, for the money market fund in Year 0 this will be C13
= C11*(1+C12).
Finally, the Year 10 totals are added up in M30 to calculate Patrick’s final nest egg. This cell is
defined as a forecast cell in Crystal Ball.
A B C D E FGHIJ K L M N O P Q
1 Saving for Retirement
2
3 Investments Initial Annual
4 Money Market Fund $25,000 $2,500
5 Income Fund $25,000 $2,500
6 Growth & Income $25,000 $2,500
7 Aggressive Growth Fund $25,000 $2,500
8
9 Year 0 Year 1 Year 2Year
Year
Year
Year
Year
34567Year 8 Year 9 Year 10
10 Money Market Investment $27,500 $2,500 $2,500 $2,500 $2,500
11 Money Market Start $27,500 $30,963 $34,546 $58,841 $63,401 $65,620
12 Money Market Return (%) 3.5% 3.5% 3.5% 3.5% 3.5% Uniform 2% 5% (Min, Max)
13 Money Market End $28,463 $32,046 $35,755 $60,901 $65,620
14
15 Income Fund Investment $27,500 $2,500 $2,500 $2,500 $2,500
16 Income Fund Start $27,500 $31,650 $36,049 $68,574 $75,189 $79,700
17 Income Fund Return (%) 6.0% 6.0% 6.0% 6.0% 6.0% Normal 6% 5% (Mean, St. Dev.)
18 Income Fund End $29,150 $33,549 $38,212 $72,689 $79,700
19
20 Growth & Income Investment $27,500 $2,500 $2,500 $2,500 $2,500
21 Growth & Income Start $27,500 $32,200 $37,276 $77,492 $86,192 $93,087
22 Growth & Income Return (%) 8.0% 8.0% 8.0% 8.0% 8.0% Normal 8% 10% (Mean, St. Dev.)
23 Growth & Income End $29,700 $34,776 $40,258 $83,692 $93,087
24
25 Aggressive Growth Investment $27,500 $2,500 $2,500 $2,500 $2,500
26 Aggressive Growth Start $27,500 $33,025 $39,158 $93,023 $105,756 $117,389
27 Aggressive Growth Return (%) 11.0% 11.0% 11.0% 11.0% 11.0% Normal 11% 16% (Mean, St. Dev.)
28 Aggressive Growth End $30,525 $36,658 $43,465 $103,256 $117,389
29
30 Total $355,796

B C D E FGHI J K L M
3 Investments Initial Annual
4 Money Market Fund 25000 2500
5 Income Fund 25000 2500
6 Growth & Income 25000 2500
7 Aggressive Growth Fund 25000 2500
8
9 Year 0 Year 1 Year 2 Year
Year
Year
Year
Year
34567 Year 8 Year 9 Year 10
10 Money Market Investment =C4+D4 =$D$4 =$D$4 =$D$4
=$D$4
=$D$4
=$D$4
=$D$4
=$D$4 =$D$4
11 Money Market Start =C10 =C13+D10 =D13+E10 =E13+F10
=F13+G10
=G13+H10
=H13+I10
=I13+J10
=J13+K10 =K13+L10 =L13+M10
12 Money Market Return (%) 0.035 0.035 0.035 0.035
0.035
0.035
0.035
0.035
0.035 0.035
13 Money Market End =C11*(1+C12) =D11*(1+D12) =E11*(1+E12) =F11*(1+F12)
=G11*(1+G12)
=H11*(1+H12)
=I11*(1+I12)
=J11*(1+J12)
=K11*(1+K12) =L11*(1+L12)
14
15 Income Fund Investment =C5+D5 =$D$5 =$D$5 =$D$5
=$D$5
=$D$5
=$D$5
=$D$5
=$D$5 =$D$5
16 Income Fund Start =C15 =C18+D15 =D18+E15 =E18+F15
=F18+G15
=G18+H15
=H18+I15
=I18+J15
=J18+K15 =K18+L15 =L18+M15
17 Income Fund Return (%) 0.06 0.06 0.06 0.06
0.06
0.06
0.06
0.06
0.06 0.06
18 Income Fund End =C16*(1+C17) =D16*(1+D17) =E16*(1+E17) =F16*(1+F17)
=G16*(1+G17)
=H16*(1+H17)
=I16*(1+I17)
=J16*(1+J17)
=K16*(1+K17) =L16*(1+L17)
19
20 Growth & Income Investment =C6+D6 =$D$6 =$D$6 =$D$6
=$D$6
=$D$6
=$D$6
=$D$6
=$D$6 =$D$6
21 Growth & Income Start =C20 =C23+D20 =D23+E20 =E23+F20
=F23+G20
=G23+H20
=H23+I20
=I23+J20
=J23+K20 =K23+L20 =L23+M20
22 Growth & Income Return (%) 0.08 0.08 0.08 0.08
0.08
0.08
0.08
0.08
0.08 0.08
23 Growth & Income End =C21*(1+C22) =D21*(1+D22) =E21*(1+E22) =F21*(1+F22)
=G21*(1+G22)
=H21*(1+H22)
=I21*(1+I22)
=J21*(1+J22)
=K21*(1+K22) =L21*(1+L22)
24
25 Aggressive Growth Investment =C7+D7 =$D$7 =$D$7 =$D$7
=$D$7
=$D$7
=$D$7
=$D$7
=$D$7 =$D$7
26 Aggressive Growth Start =C25 =C28+D25 =D28+E25 =E28+F25
=F28+G25
=G28+H25
=H28+I25
=I28+J25
=J28+K25 =K28+L25 =L28+M25
27 Aggressive Growth Return (%) 0.11 0.11 0.11 0.11
0.11
0.11
0.11
0.11
0.11 0.11
28 Aggressive Growth End =C26*(1+C27) =D26*(1+D27) =E26*(1+E27) =F26*(1+F27)
=G26*(1+G27)
=H26*(1+H27)
=I26*(1+I27)
=J26*(1+J27)
=K26*(1+K27) =L26*(1+L27)
29
30 Total =M11+M16+M21+M26

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 The results of a 2000-trial simulation run are shown below.

a. What will be the expected value (mean) of Patrick’s nest egg at year 10?
The mean of the nest egg at year 10 is nearly $356 thousand.
b. What will be the standard deviation of Patrick’s nest egg at year 10?
The standard deviation of Patrick’s nest egg at year 10 is nearly $54 thousand.
c. What is the probability that the total nest egg at year 10 will be at least $300,000?
There is nearly an 87% chance that the total nest egg at year 10 will be at least $300,000.