What a Monte Carlo simulation does, is to define a lot of rules about how much inflation might happen, how the markets might perform, and so forth. Expert analysis is used to insure that the range of such values is realistic. Then they roll the dice many times to create many possible future sets of market conditions, inflation, and so forth, all applied to your portfolio and withdrawal plans. They are using their theory about what is possible, and then rolling the dice to see how different combinations of years might impact you. Presumably they are limiting the possible market returns in a single year to some range that they believe is within reason. They would also limit inflation to some range, and probably tie interest rates to inflation somehow. Using these hypothetical situations allows them to roll the dice many hundreds of times for each portfolio.

An example is shown here:

As stated in the planning assumptions: The projections or other information generated by the Retirement Income Calculator regarding the likelihood of various outcomes are hypothetical in nature, do not reflect actual investment results and are not guarantees of future results. There can be no assurance that the projected or simulated results will be achieved or sustained. The charts only present a range of possible outcomes. Actual results will vary, and such results may be better or worse than the simulated scenarios. And while the T. Rowe Price Retirement Income Calculator cannot predict future investment performance, by simulating 500 hypothetical future economic scenarios. it can help you realistically assess whether your retirement assets will last throughout your lifetime.

Monte Carlo simulations is a great tool but it has its limitations.

The general consensus is that portfolio survival depends on the initial safe withdrawal rate of 3-4% dollar-adjusted for annual inflation (assumed at 3%).

An even safer alternative approach is the percentage-withdrawal method to withdraw the same percentage annually from the available portfolio balance. Annual withdrawals aren’t increased for inflation. Also because the value of the portfolio will change based on the ups and downs of the financial markets, the dollar amount you withdraw will fluctuate from year to year.

However, as the 3-4% inflation-adjusted portfolio withdrawal rate was largely derived based on the US market retuns in the 1980-2000 bull years, there are some who argue that the actual safe withdrawal rate should be lowered by 1-2% since future market returns are projected to fall.