Results From Financial Calculators Don't Always Add Up
Published Wednesday, December 18, 2013 at: 7:00 AM EST
These days, you can find out virtually anything online. You no longer have to worry about “doing the math” on complex financial calculations. If you want to know how much interest you’ll earn on an investment over a specified period or project how much you’ll need to squirrel away for retirement, there’s an app for that online. But be aware that these calculator apps aren’t foolproof, as illustrated by the following real-life situation.
Someone just two years from retirement used an online calculator employing “Monte Carlo simulation,” which tests many different variables to calculate the odds of funding your retirement successfully. In this case, one app based on an aggressive investment approach weighted heavily toward stocks revealed a 94% chance of achieving retirement goals. A second app, which used a more conservative allocation emphasizing bonds, indicated exactly the same 94% success rate. How could that be? It had to do with the way the app was programmed.
Don’t assume that just because a calculator is online, it will provide you with the right answer. These apps can be black boxes, providing answers based on assumptions you can’t check. When it comes to finance, you need answers you can trust. While online tools may be slick, having a professional calculate the numbers is best in all but the simplest situations. We’re here to help.
This article was written by a professional financial journalist for Advisor Products and is not intended as legal or investment advice.