The Historical Audit tool illustrates how your plan would have performed in history using a series of consecutive 30 year periods. This tool, along with the Wealth Simulator and Monte Carlo, is used in our Professional Wealth Manager to help give you an idea of the viability of your plan. This is the only tool available to trial users.
To find out more about this tool, click here.
Calculation differences:More about the tool we use to calculate trial and user plans...
Nearly all financial planning tools used today employ an expected annualized compound rate of return to forecast a portfolio's outcome. This is due in part to the belief that consistent returns and lower volatility are more attractive. However, this approach often does not yield accurate results or reflect reality.
If your financial plan presumes contributions and withdrawals, outcomes predicted using annualized returns are potentially flawed; it is critical to apply additional financial tools like historical market analysis. Otherwise the plan you create—projecting how much money you'll need at retirement, how much you'll be able to withdraw, how much you'll need to save to reach your retirement goal, and how valuable your estate will be when you die—is at risk of not meeting your financial goals.
Our historical analysis method looks at the potential outcomes that a financial plan could have experienced if it had been implemented in all historical market periods.
For example, let's imagine that you are 60 years old, have $2 million in tax deferred investments, and want a $75,000 pre-tax annual retirement distribution adjusted for 3% inflation annually. You want to make sure that this income will continue through at least age 95. Over the 36 years of this plan, what asset allocations would have resulted in the greatest chance that you would've had sufficient resources?
The answer found by using historical analysis differs from what either Annualized Returns or Monte Carlo simulations would predict. In this particular case, historical returns would recommend the following allocation to avoid running out of funds before age 95: 60% fixed income, 5% large-cap stocks, and 35% small-cap stocks.
Other methods would encourage you to increase the allocation of small-cap stocks to achieve the annualized return assumption. However, based on a historical audit, increasing the portfolio's small-cap allocation in this way could have produced results in which the investor ran out of money as young as age 75—20 years earlier than planned!
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