In an article this week in the online publication TheStreet, Taylor Smith takes aim at online calculators for retirement planning. He says the problem with them is that most of them are based on Monte Carlo software, and then goes on to make some broad and inaccurate statements about the characteristics about Monte Carlo simulation and the ways it skews risk assessment.
For starters, he quotes an investment "expert," who is, coincidentally, president of concern that produces risk analysis software not driven by Monte Carlo software, to the effect that good financial planning should take into account, more than market returns–including taxes, income, and expenses. This implies the Monte Carlo simulation is not capable of factoring these elements into its predictions. Nothing, as the a recent risk analysis model offered by both the Society of Actuaries and the Casualty Society aptly demonstrates, could be farther from the truth. This model, developed by professors of finance and mathematics at Illinois State University and the University of Illinois Champaign-Urbana, helps pension and insurance planners to to forecast not only projected market returns but the effects such critical economic factors as interest rates, equity price levels, inflation and unemployment rates, and real estate prices.
My point is that a Monte Carlo simulation is what you make it. It can be very simple and limited to one or two economic factors, or it can be a complex mix of many factors. If the online retirement calculators are too simplistic to usefully account for reality, their builders have plenty of room to improve them.