Online Retirement Calculators Can Be Risky

Monte Carlo simulations take into account the fact that markets are volatile, and that returns could change from year to year -- and even post strings of bad years. As a result, Monte Carlo was seen as a giant leap forward in financial planning. And that reputation grew over the years: In a 2001 BusinessWeek article charting the rising popularity of Monte Carlo simulations for financial planning, Moshe Arye Milevsky, a finance professor at York University in Toronto, noted that "in five years, all financial planning will [be] Monte Carlo."

But while Monte Carlo simulations offer a more nuanced look at financial planning than simple calculations, 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. "That's great if you're Warren Buffett, but the rest of us need to focus on the other three legs or the table will collapse," he says.

Hothersall contends that investors need to use planning tools that take into account real-life bumps in the road, from the impact of income taxes to how a part-time job in retirement will affect Social Security benefits. And what if an investor retires at age 60, years before Medicare kicks in? Answer: Thousands of dollars annually going toward health insurance premiums -- a cost that doesn't get factored in by the average retirement planning tool. "Monte Carlo is very quick and easy, but that's the problem," says Hothersall. "They're trying to fit a complex situation into a simple model."