Beware of FaceApp for Your Retirement Portfolio

FaceApp is a cool photo-morphing application that uses artificial intelligence and neural face transformations to show how you’d look when you’re older or as the other gender.

And the results are sometimes fascinating, often kind of creepy, and usually really funny.

Ignoring the question of whether your face is now part of a Russian database that will help determine our next president, FaceApp does invite the conversation about what we might look like decades from now.

And that is a good thing – especially when you start thinking about forecasting your retirement portfolio.

Retirement Calculators and Models

The Web has loads of free retirement calculators and predictive models, and you can buy software that purports to chart how things may work out. But don’t put all of your trust in these tools.

With all of the independent variables that go into a financial plan, they just aren’t likely to play out as you hope.

The models are just that – models – and people need to be sure they don’t make awful life-changing decisions based on a flawed model.

The Pitfalls of Models

Models are only as good as the information that goes into them and too often, the models assume few deviations from the mean.

In the past decade, for example, we have seen major black swan events – things that were previously unimaginable – such as a nationwide drop in home prices followed by a remarkable 10-year bull market. Extremely unlikely, but possible contingencies are almost always excluded from models. Modeling a few worst cases along with the normal case is the least you should do when making decisions based on models.

Financial advisors see too many retirement models filled with incorrect data and bogged down by static assumptions. For example, many models assume you reliably save $6,000 into an Individual Retirement Account every year. (Most people do not.) Another claims to know what future investment returns will be. (Nobody knows.)

Mixing so many bad assumptions in one software package often leads to incorrect projections.

Flawed Assumptions

For example, most individuals’ saving is variable, not static. You might make a Roth IRA deposit this year, or perhaps not. But how you project for it makes a difference in the outcome. Are you taking Roth IRA contributions from one account and putting them into another, depleting your savings in the process? Does your modeling software know the difference?

Models can also fall short when treating business ownership and investments. Their assumptions for rates of return, interest and inflation are often flawed or horribly outdated.

A recent trend is to model Social Security strategies. One variable that many who do this on their own forget is life expectancy. Ignoring such a crucial detail could mean scaling back your lifestyle in your later years. You might live longer than the actuarial charts’ average.

Retirement models often do not take into account the complexities of individual choices that feed into your personal financial plan. Which is why it’s important to get a second opinion from a qualified financial advisor on any retirement strategy, whether you use a model or not.

A smart professional can steer you clear of bad modeling.

The Need for a Financial Advisor

Retirement models, like economic models or model trains, can show us a lot about the thing we’re modeling, but they are no substitute for ongoing personal advice and planning.

Using planning software, a good financial advisor will enter your assets, liabilities, tolerance for risk, investment strategy and income to run hundreds of different simulations that take into account market fluctuations, interest rates and dozens of other factors.

But then your financial advisor will use the models as one of many tools – to build a customized financial plan just for you and your family. And your financial plan will be reviewed often by your advisor and adjusted when your circumstances change.

Failing to plan is planning to fail, as the saying goes.