Origins of Computerized Financial Planning

• Professional financial planners have used planning methodologies best executed with a computer program before the general availability of commercial software programs. In 1969, Paul Samuelson, writing in the "Review of Economics and Statistics," proposed a long-term portfolio selection method using "Dynamic Stochastic Programming." Stochastic programming includes random variables in the field of analysis. A portfolio selected with this methodology would include alternative selections that a changed tax law might make advisable. Someone skilled in accountancy could execute such a program manually, with some difficulty, but it becomes more feasible as a computer program. Commercial financial planning software soon followed, at first aimed at professional financial planners.
  
  

Backward Analysis

• Some professional financial planning software accepts inputs of the client's present financial particulars, then accepts inputs of the financial condition the client wants to achieve at some future time. Using "deterministic dynamic analysis," the program works from that goal backward to the present, dividing the analysis into several intermediate conditions. This allows for considerable intermediate variation, but has one limitation. Our goals change over time. Once the goal has changed, none of the intermediate conditions remain valid.
  
  

Dynamic Financial Planning Software

• Other financial planning software goes beyond a static analysis of a specific financial situation, to a broader dynamic analysis, including simulation techniques. These programs also divide one large financial problem into intermediate segments, then solve each segment individually, often working from the desired conclusion backward to the present financial condition, but they use both "deterministic dynamic programming" (for known intermediate conditions) and "stochastic dynamic programming" (for uncertain intermediate conditions and a range of goals).
  
  

Mainframe Professional Software

• Other professional financial planning software uses even more extensive stochastic analysis to take into account multiple varying goals, changing tax law and the many other factors that may change over the course of the client's career. Stochastic analysis software suitable for mainframe computers sets up multiple ranges of conditions, without determining that a particular condition will apply, and provides hundreds, even many thousands, of possible outcomes. These programs, large by contemporary computer standards, lend themselves to "parallel and distributed optimization algorithms," beyond the scope of individual investors. Their complexity comes at a price that only wealthy individuals or large organizations can afford.
  
  

Personal Financial Planning Software

• Widely available and inexpensive personal financial planning software provides extensive accounting and reporting functions, tax and retirement planning, bill paying and connectivity to banking and other online accounts. These programs generally cannot work with multiple variable inputs, and cannot generate a range of outcomes that depend on unknown intermediate conditions--essentially they provide the kind of financial planning employed by professional financial planners before the advent of professional financial software programs.