Dazed and Confused by Portfolio Analysis Sites

I spent last weekend thinking about how long I had to live and whether I'd spend my final years eating from dented cat food cans. This was not brought on by any kind of late-winter gloom. Rather, I was test-driving several online retirement planning tools, namely Financial Engines, Morningstar's ClearFuture, Financial Plan Auditors and Quicken.com's 401k Advisor.

Each of these applications helps you take a hard look at your savings rates, and in some cases your investment style, or lack thereof. Using statistical analysis software, they forecast what kind of income to expect in retirement. In other words, you'll find out whether you can spend those years in a home on Kauai or working at Burger King.

In fact, the kind of planning process Financial Engines and its competitors lead you through simulates the approach a financial planner, or maybe an annuity salesperson, might take. You're asked about your income goals, your spending needs and so on. The better applications let you factor in all your current investments, even specific stocks or mutual funds. Not only that, they calculate your expected Social Security income and use actuarial tables to predict when you'll depart the food chain. The most advanced planners even suggest ways you can tweak your portfolio for better results.

The software engine that drives each of these planners is something called Monte Carlo simulation. Basically, Monte Carlo simulation tests your investment plan by running it through hundreds of varying economic scenarios, all in less time than it takes to brush your teeth. (TSC contributing editor Vern Hayden's recent column on Monte Carlo simulation goes into a lot more detail.) ...