In many instances I think that financial planning software gives clients a false sense of security. The problem with this software is that you will always have to make assumptions about the future, and many of them will be wrong.
For example, the other day a relatively young person asked me to run a projection to see if he could retire in fifteen years. Despite my misgivings, I started to input his information into the planning software.
One of the first things it asked for was an assumption of future inflation for the time period, which covered fifty years. Most economists have a pretty poor track record guessing what inflation was last quarter, let alone what it will be next year, or for the next fifty years. I think it is a mistake to make guesses that you know will be wrong.
After inputting that somewhat dubious information, the software provides reams of data and projections based on earning some average estimated return over a long period of time, and we really have no idea what his real return is going to be. It could be much higher than the software assumed, but that wouldn’t be a problem.
What if it was much lower? What if he saved less than he could have because he figured that he didn’t need to save much have because the financial planning software told him his retirement was already secure? That would be a real problem and one he might not realize until it is too late to do much about it.
I’m not saying you can’t use software or that you can’t make estimates about the future in financial planning. I’m saying that the further out you go, the more likely your estimates will be wrong and you need to realize that.
