In my last few posts (My Wish List for Redtail and eMoney, Viewing Financial Planning Software From a Client’s Perspective) I’ve been discussing some new software I’ve adopted this year. In this writing, I’ll continue with some of the functionality of eMoney.
As you know, I’ve been using eMoney for a number of months now and have had nothing but good things to say. After getting into the details of the program, I have found a few shortfalls. For instance, with residential rental property, the net rental income is calculated on IRS Form 1040, Schedule E. This schedule begins with the gross rental income which is reduced by the expenses associated with the property. Then there is a deduction for depreciation. If there is a mortgage on it, the interest is part of the deductible expenses.
In eMoney, the interest is also included in the client’s rental property expenses, but so is the entire mortgage payment. Therefore, the total expenses are overstated by the amount of the interest. The program should differentiate between rental real estate and a personal residence.
I have also found another curious issue. At the end of one plan I created (age 100) the client has over $30 million in financial assets using a linear forecast. At age 100, the probability of success (defined as the probability of not running out of money) using Monte Carlo simulation (MCS) is only around 64%. This is highly unlikely. The longer you project into the future the more uncertain the outcome. This is measured by the cone of uncertainty. However, when the slope of the financial assets continues to rise on a linear basis, especially when it reaches such a high level ($30 million in this case), the success rate should be much higher. Why would it forecast a 64% success rate? Here’s what I suspect may be occurring.