FaceApp is a cool photo-morphing application that uses artificial intelligence and neural face transformations to show how you’d look when you’re older or as the other gender. The results are sometimes fascinating, often kind of creepy, and usually really funny. However, it does invite the conversation about what we might look like decades from now. And that is a good thing – especially when you start thinking about forecasting your financial plan.
Retirement Calculators and Models
The Web has loads of free retirement calculators and predictive models, and you can buy software that purports to chart how things may work out. But don’t put all of your trust in these tools. With all of the independent variables that go into a financial plan, they just aren’t likely to play out as you hope. The models are just that – models – and people need to be sure they don’t make awful life-changing decisions based on a flawed model.
The Pitfalls of Models
Models are only as good as the information that goes into them and too often, the models assume few deviations from the mean.
In the past decade, for example, we have seen major black swan events – things that were previously unimaginable – such as a nationwide drop in home prices followed by a remarkable 10-year bull market. Extremely unlikely, but possible contingencies are almost always excluded from models. Modeling a few worst cases along with the normal case is the least you should do when making decisions based on models.
We at Patriot see too many retirement models filled with incorrect data and bogged down by static assumptions. For example, many models assume you reliably save $6,000 into an Individual Retirement Account every year. (Most people do not.) Another claims to know what future investment returns will be. (Nobody knows.) Mixing so many bad assumptions in one software package often leads to incorrect projections.
For example, most individuals’ saving is variable, not static. You might make a Roth IRA deposit this year, or you may not. But how you project for it makes a difference in the outcome. Are you taking Roth IRA contributions from one account and putting them into another, depleting your savings in the process? Does your modeling software know the difference?
Models can also fall short when treating business ownership and investments. Their assumptions for rates of return, interest and inflation are often flawed or horribly outdated.
A recent trend is to model Social Security strategies. One variable that many who do this on their own forget is life expectancy. Ignoring such a crucial detail could mean scaling back your lifestyle in your later years. You might live longer than the actuarial charts’ average.
Retirement models often do not take into account the complexities of individual choices that feed into your personal financial plan. Which is why it’s important to get a second opinion from a qualified financial advisor on any retirement strategy, whether you use a model or not. Our advisors at Patriot can steer you clear of bad modeling.
The Need for a Financial Advisor
Retirement models, like economic models, can show us a lot about the thing we’re modeling, but they are no substitute for ongoing personal advice and planning. We at Patriot utilize one of the most sophisticated financial planning softwares in our industry. We enter assets, liabilities, tolerance for risk, investment strategy and income to run hundreds of different simulations that take into account market fluctuations, interest rates and dozens of other factors. However, this is just a tool to help us present the bigger picture and facilitate an ongoing discussion. Our ultimate goal is to build a customized financial plan for our clients. Even more important is to have your plan regularly reviewed and updated. Additionally, having a plan also gives one the confidence and ability to withstand the recent volatility in the markets.
As the saying goes, if you fail to plan, plan to fail. Contact us if you’d like to get started today.