CHAPTER 13

COMPUTER SIMULATION WITH CRYSTAL BALL

SOLUTION TO SOLVED PROBLEMS
13.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
Money Market
Domestic Stock
Global Stock
Aggressive Growth

Distribution
Uniform (Minimum = 2%, Maximum = 5%)
Normal (Mean = 6%, Standard Deviation = 5%)
Normal (Mean = 8%, Standard Deviation = 10%)
Normal (Mean = 11%, Standard Deviation = 16%)

Assume that the initial nest egg ($100,000) and the first years 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.

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 Patricks final nest egg. This cell is
defined as a forecast cell in Crystal Ball.
A

1 Saving for Retirement

2
3
Investments
4
Money Market Fund
5
Income Fund
6
Growth & Income
7
Aggressive Growth Fund
8
9
10
Money Market Investment
11
Money Market Start
12
Money Market Return (%)
13
Money Market End
14
15
Income Fund Investment
16
Income Fund Start
17
Income Fund Return (%)
18
Income Fund End
19
20
Growth & Income Investment
21
Growth & Income Start
22
Growth & Income Return (%)
23
Growth & Income End
24
25
Aggressive Growth Investment
26
Aggressive Growth Start
27
Aggressive Growth Return (%)
28
Aggressive Growth End
29
30

B
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
29
30

Initial
$25,000
$25,000
$25,000
$25,000

Annual
$2,500
$2,500
$2,500
$2,500

Year 0
$27,500
$27,500
3.5%
$28,463

Year 1
$2,500
$30,963
3.5%
$32,046

$27,500
$27,500
6.0%
$29,150

FGHIJ

Year 2Year
Year
Year
Year
Year
34567Year 8
$2,500
$2,500
$34,546
$58,841
3.5%
3.5%
$35,755
$60,901

Year 9
$2,500
$63,401
3.5%
$65,620

Year 10

$2,500
$31,650
6.0%
$33,549

$2,500
$36,049
6.0%
$38,212

$2,500
$68,574
6.0%
$72,689

$2,500
$75,189
6.0%
$79,700

$27,500
$27,500
8.0%
$29,700

$2,500
$32,200
8.0%
$34,776

$2,500
$37,276
8.0%
$40,258

$2,500
$77,492
8.0%
$83,692

$2,500
$86,192
8.0%
$93,087

$27,500
$27,500
11.0%
$30,525

$2,500
$33,025
11.0%
$36,658

$2,500
$39,158
11.0%
$43,465

$2,500
$93,023
11.0%
$103,256

$2,500
$105,756
11.0%
$117,389

5% (Min, Max)

Normal 6%

5% (Mean, St. Dev.)

Normal 8%

10% (Mean, St. Dev.)

$79,700

$93,087

$117,389
Normal 11% 16% (Mean, St. Dev.)

$355,796

D
Annual
2500
2500
2500
2500

Money Market Investment

Money Market Start
Money Market Return (%)
Money Market End

Year 0
=C4+D4
=C10
0.035
=C11*(1+C12)

Year 1
=$D$4
=C13+D10
0.035
=D11*(1+D12)

Year 2 Year
Year
Year
Year
3
Year
4567 Year 8
=$D$4
=$D$4
=$D$4
=$D$4
=$D$4
=$D$4
=$D$4
=D13+E10
=E13+F10
=F13+G10
=G13+H10
=H13+I10
=I13+J10
=J13+K10
0.035
0.035
0.035
0.035
0.035
0.035
0.035
=E11*(1+E12) =F11*(1+F12)
=G11*(1+G12)
=H11*(1+H12)
=I11*(1+I12)
=J11*(1+J12)
=K11*(1+K12)

Year 9
=$D$4
=K13+L10
0.035
=L11*(1+L12)

Income Fund Investment

Income Fund Start
Income Fund Return (%)
Income Fund End

=C5+D5
=C15
0.06
=C16*(1+C17)

=$D$5
=C18+D15
0.06
=D16*(1+D17)

=$D$5
=D18+E15
0.06
=E16*(1+E17)

=$D$5
=$D$5
=$D$5
=$D$5
=$D$5
=$D$5
=E18+F15
=F18+G15
=G18+H15
=H18+I15
=I18+J15
=J18+K15
0.06
0.06
0.06
0.06
0.06
0.06
=F16*(1+F17)
=G16*(1+G17)
=H16*(1+H17)
=I16*(1+I17)
=J16*(1+J17)
=K16*(1+K17)

=$D$5
=K18+L15
0.06
=L16*(1+L17)

Growth & Income Investment

Growth & Income Start
Growth & Income Return (%)
Growth & Income End

=C6+D6
=C20
0.08
=C21*(1+C22)

=$D$6
=C23+D20
0.08
=D21*(1+D22)

=$D$6
=D23+E20
0.08
=E21*(1+E22)

=$D$6
=$D$6
=$D$6
=$D$6
=$D$6
=$D$6
=E23+F20
=F23+G20
=G23+H20
=H23+I20
=I23+J20
=J23+K20
0.08
0.08
0.08
0.08
0.08
0.08
=F21*(1+F22)
=G21*(1+G22)
=H21*(1+H22)
=I21*(1+I22)
=J21*(1+J22)
=K21*(1+K22)

=$D$6
=K23+L20
0.08
=L21*(1+L22)

Aggressive Growth Investment

Aggressive Growth Start
Aggressive Growth Return (%)
Aggressive Growth End

=C7+D7
=C25
0.11
=C26*(1+C27)

=$D$7
=C28+D25
0.11
=D26*(1+D27)

=$D$7
=D28+E25
0.11
=E26*(1+E27)

=$D$7
=$D$7
=$D$7
=$D$7
=$D$7
=$D$7
=E28+F25
=F28+G25
=G28+H25
=H28+I25
=I28+J25
=J28+K25
0.11
0.11
0.11
0.11
0.11
0.11
=F26*(1+F27)
=G26*(1+G27)
=H26*(1+H27)
=I26*(1+I27)
=J26*(1+J27)
=K26*(1+K27)

=$D$7
=K28+L25
0.11
=L26*(1+L27)

Total

Uniform 2%

C
Initial
25000
25000
25000
25000

Investments
Money Market Fund
Income Fund
Growth & Income
Aggressive Growth Fund

FGHI J

$65,620

Total

Year 10
=L13+M10

=L18+M15

=L23+M20

=L28+M25

=M11+M16+M21+M26

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

a. What will be the expected value (mean) of Patricks 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 Patricks nest egg at year 10?
The standard deviation of Patricks 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.