If you or your financial advisor use financial planning software to help manage your portfolio, you’re almost guaranteed to fail. Let me explain. These programs seem logical. You plug in the amount of money you have now, how much you’re saving, when you want to retire, how much you expect you will spend in retirement, etc. The program then makes its calculations, based on an assumed life expectancy and an assumed average annual return.

This is the inherent problem with these software programs. The notion of a guaranteed average annual return over a number of years is simply foolish. To clearly show my point, look at the chart below. It shows two different accounts. One account has a 5% average annual return and the other has a 10% average annual return. The same amount of money is withdrawn from each account every year. It would seem logical that the 10% average annual return account would be the better account. However, this is not the case.

As you can see, the account that only earned a 5% annualized return over the last ten years is actually worth more at the end of ten years.

How could this happen? The ending portfolio holdings are based on the yearly return and when it occurred. For this reason, the simple projections in most planning software are not effective. Instead, you need a more complex tool that allows you to review many types of analysis that mix up the yearly returns, both the amount of the return (profit or loss) as well as the order in which they are received.

Contact us to make sure your portfolio is set up for success.