Lloyd Lowe Sr. – Founder & CEO of LD Lowe Wealth Advisory
Professionals play an important role in your life. After all, you rely on professionals to evaluate your health, sell your home, provide legal advice, calculate your taxes and educate your children. That’s because these experts are knowledgeable, experienced and trained to provide the results you need.
For those same reasons, many people choose to work with a comprehensive wealth advisor to help them achieve the dream they have for independence and their vision of retirement. Everyone has an idea of what they want their retirement to look like, and the answers are as varied as the individuals.
The idea of “retirement” has changed quite a bit over the past 20+ years since I founded my practice. Rather than dreaming of spending the days relaxing at a beach villa, many people no longer assume they will fully retire at age 65. Many still plan to continue working in their full-time job. Others go into consulting, work part time, or convert a hobby into a business.
Whatever your goal, your financial plan is the bridge designed to get you there. And just as the notion of retirement has evolved over the past couple of decades, so has the financial planning profession. While no one has invented a crystal ball to predict your financial future, the financial planning profession has matured to include tools that help us normalize some of the unknowns.
The use of financial planning software and Monte Carlo Calculation Method planning tools are widely used by financial planners. The Monte Carlo method involves a statistical simulation of 10,000 scenarios, best and worst case, that provides an average scenario and lets the planner estimate what percent chance the client has to meet the goal placed in the plan. Unlike our former method of assuming a certain standard percentage return on assets over time without accounting for variability, the Monte Carlo scenarios account for the randomness inherent in forecasting future returns.
Looking at returns over time with variability assumed is a powerful notion, but it is not without flaw. And that flaw is human error, which is often led by wishful thinking. It is quite easy, unfortunately, to take an aggressive investment return number and run it through the simulation, only to arrive at an inflated chance of success.
Why would someone use an aggressive assumption? It may be a matter of telling the client what he wants to hear in order to win his business.