Online investment calculators are a little addictive.
Just plug in a couple of numbers and voila! -- the screen tells you if your retirement savings will actually last through retirement. Skip to the next calculator and you can find out in less than a minute just how long it will take to pay off your credit card, and how much interest it will cost you.
But while online calculators are a nice, little diversion for Web-savvy investors, can they really be trusted? Monty Hothersall doesn't think so.
Hothersall is the co-founder of Financial Modeling Solutions, an Atlanta-based company that makes Financial Fate tracking software. When Hothersall and co-founder Aydren Simmons were building Financial Fate in 2004, they opted against using the same kind of mathematical engine, called a Monte Carlo simulation, that drives many online retirement calculators. "What we found out is that there are a few big problems with Monte Carlo," says Hothersall. "The first problem is that it's planning with the autopilot turned on, and that's not a good way to plan."Monte Carlo simulations came in vogue in the 1960s as computers gained enough power to compute complex mathematical series. These simulations were quite different from simple calculations, which were derided for being one-dimensional, offering just a static view of, say, retirement savings. Monte Carlo simulations, on the other hand, run thousands or even millions of scenarios to determine the probabilities for a particular outcome, such as whether your retirement savings will last through retirement.