Retirement calculators online can be risky

 

Wednesday, Mar 11,2009, 3:44:58 PM   Click:

Copyright 2009 TheStreet.com, Inc.All Rights Reserved
TheStreet.com

9 March 2009 Monday 09:59 AM EST

SECTION: PERSONAL FINANCE: 10 Days of cutting your tax bill

LENGTH: 748 words

TITLE: Online Retirement Calculators may be risky

Signature: Taylor Smith, Special to TheStreet.com

The investment calculators online are a bit addictive.

Simply connect to a couple of numbers and voila! - The screen tells you if your retirement savings will actually last through retirement. Proceed to the next calculator and you can find in less than a minute, just how long it will take to repay your credit card, and how much interest it will cost you.

But while the online calculators are a little diversion of Web-savvy investors can they really be trusted? Monty Hothersall think not.

Hothersall is co-founder of the financial modeling Solutions, a company based in Atlanta, which released a financial tracking software. When Hothersall and co-founder Simmons Aydren have been the construction of becoming, in 2004, they chose not to use the same type of mathematical engine, called a Monte Carlo simulation, which led many computers in line retreat. "What we found is that there are some big problems with Monte-Carlo," said Hothersall. "The first problem is that it is planning with the autopilot on, and it ' is not a good way to plan. "

Monte Carlo simulations has come in vogue in the 1960s that computers acquired enough power complex mathematical series. These simulations were quite different from simple calculations, which are derided for being one-dimensional, providing only a static view, for example, savings for retirement. Monte Carlo simulations, but also for thousands or even millions of scenarios to determine the probability of a particular outcome, such as whether your retirement savings through a period of retirement.

Monte Carlo simulations take into account the fact that markets are volatile, and that yields may change from year to year - and even send strings of bad years. Consequently, the Monte Carlo was considered a giant step in financial planning. And that reputation has grown over the years: In 2001, a BusinessWeek article traces the growing popularity of Monte Carlo simulations for financial planning, Moshe Arye Milevsky, a professor of finance at York University in Toronto, noted that " in five years, the planning of all [be] Monte Carlo. "

But while Monte Carlo simulations provide a more nuanced look at financial planning as simple calculations, critics such as simulations Hothersall say not to give investors the whole image. For example, financial planning Hothersall said should include a four-legged stool of income, expenses, taxes and investments. Monte Carlo, he argues, focuses only on market returns and ignores the rest. "It's great if you are Warren Buffett, but the rest of the need to focus on the three other legs or the table will collapse," he said.

Hothersall argues that investors need to use planning tools that take into account real-life bumps of the road, the impact of income tax at how a part-time employment to retirement will affect social security. And if an investor retires at age 60, years before kicking in the disease? Answer: Thousands of dollars each year toward health insurance premiums - a cost that is not taken into account by means of a planning tool for retirement. "Monte Carlo is very quick and easy, but it is the problem," said Hothersall. "They are trying to function in a complex situation in a simple model."

Despite the preponderance of Monte Carlo-based online calculators for retirement, there are many critics who agree with the simulations that Hothersall leave important information on their equations. David Nawrocki, a professor of finance at Villanova University in Pennsylvania in 2001, published its case against Monte Carlo simulations in the Journal of Financial Planning, noting that the simulations, at worst, can lead to decisions " by investors. He argues that the Monte Carlo simulations are useful in situations where data is difficult or impossible to obtain. "This is not the case in investment decisions typically faced by financial planners "he writes. "The data on the financial market is abundant and cheap."

So, except for Monte Carlo simulations, where the typical investor tour to get a good handle on planning for retirement? Hothersall said that there are alternatives to handymen, including software such as the Financial Fate. And according to Nawrocki, there are many analytical models that can be used to give investors a more realistic picture of their retirement plans. But unless you're a whiz mathématique, best May to allow the calculation of the experts and get in touch with a financial planner trustworthy.

LOAD-DATE: 10 March 2009

Copyright © 2009 LexisNexis, a division of Reed Elsevier Inc.. All rights reserved
Terms and Conditions Privacy Policy