Ah, the idea of retirement in sunny Monte Carlo…. It appeals to many people. It almost doesn’t matter if you’re referring to the place on the French Riviera or the version in Las Vegas.
Isn’t that interesting, considering the vast differences between life on the Mediterraean Sea or The Strip?
-
View of Monte Carlo
- Image via Wikipedia
So it comes as some delicious irony that the calculation used in many retirement calculators is an algorithm developed in the 1960s and called “Monte Carlo”. Monte Carlo is responsible for creating the data you get when you enter your age, expected retirement date, and current accumulated assets in any number of online calculators.
So what’s wrong with that? Well, potentially it means you could end up at what you consider the “wrong” Monte Carlo in retirement.
Explains expert Monty Hothersall in an article titled “Online Calculators Can Be Risky”, “The first problem is that it’s planning with the autopilot turned on, and that’s not a good way to plan.”
The article explains how, when Monte Carlo calcualations first came on the scene they were the first to predict market fluctuations of an investment. This was seen as a major step forward for financial planning and quickly caught on. However,
critics such as Hothersall say the simulations don’t give investors the whole picture. For example, Hothersall says financial planning should incorporate a four-legged stool of income, expenses, taxes and investments. Monte Carlo, he argues, focuses only on market returns and ignores the rest.
What lesson can be drawn from this? No matter how advanced or nuanced your retirement calculator is… it simply can’t work magic predicting the future. The best defense, then, is to build a solid plan that addresses the so-called “four-legged stool”: income, expenses, taxes, and investments. You must actively plan and act on behalf of each of these crucial financial planning areas.
