Modeling Monte Carlo simulations for retirement savings accumulations in Iceland

This thesis examines the effectiveness of the investment strategies recommended by Frjálsi lífeyrissjóðurinn by comparing them with internationally recognized lifecycle-based strategies using Monte Carlo simulations. The goal is to evaluate whether the conservative allocations embedded in the Icelandic pension system are likely to deliver better or worse retirement outcomes than more equity-oriented glide paths common in global asset management. Simulations were based on 45-year accumulation periods, applying historical return data across a thousand randomly generated investment paths. Asset allocations were modeled according to both Frjálsi’s recommended glide paths and a self-directed alternative based on international benchmarks, with results adjusted for inflation and currency fluctuations to reflect real purchasing power in Icelandic krona. The analysis also incorporated structural constraints specific to the Icelandic system, including regulatory limits on foreign investment and the limited availability of hedging tools. These factors were found to meaningfully shape feasible investment options and may explain why Icelandic strategies differ from global norms. Results show that while traditional international strategies exhibit higher mean returns, they also involve significantly higher volatility and a greater likelihood of falling short of an adequate retirement amount. Frjálsi’s recommended strategy, by contrast, delivered more consistent outcomes, largely due to the unusually strong historical performance of Icelandic bonds. The third test strategy revealed that even modest equity exposure, combined with a high allocation to domestic bonds, could achieve near-perfect success rates under historical conditions. These findings suggest that Iceland’s conservative pension approach may be well suited to its specific economic context. However, questions remain regarding the sustainability of past bond performance and the long-term consequences of low equity exposure. The study concludes by proposing avenues for further research, including regulatory reforms, behavioral dynamics, and advanced econometric modeling.

Authors dc:creator

• Ólöf María Steinarsdóttir 2004-
• Magnús Hólm Freysson 2000-

Contributors dc:contributor

• Háskólinn í Reykjavík

• Viðskiptafræði
• Lífeyrismál
• Fjárfestingar

Language dc:language.iso

en

Handle dc:identifier.uri

https://hdl.handle.net/1946/50705

OAI identifier oai:identifier

oai:skemman.is:1946/50705