In among the year-end statements now arriving in your mailboxes from financial-services firms are invitations to use their retirement-planning calculators. You’d be wise to ignore that offer.
Or, if you do, use them with this caveat in mind: Most tools neglect one or more significant retirement risks, according to a report in December by the Society of Actuaries and Actuarial Foundation.
“Financial-planning software makes more in-depth planning possible,” according to the report, Retirement Planning Software and Post-Retirement Risks. “But the majority of available tools are still not effectively addressing the wide range of individual issues related to retirement.”
The SOA analyzed 12 financial-planning software programs most commonly used by individuals and financial advisers. The tools were either available to individuals over the Internet or were designed for use by financial planners for their clients.
After crunching the numbers in these 12 programs, the number-crunchers found that planning software needs to better address key planning issues, including the following:
Longevity. The handling of longevity risk varies considerably among the programs with some apparent inconsistencies. This is an important planning factor because the range of lifetimes between users can be significant with different probabilities of living beyond a given age. (Last August, the Centers for Disease Control and Prevention reported that U.S. life expectancy reached almost 78 years in 2007.)
Unexpected events and risks. Financial-planning software under-represents extreme events, such as the current financial crisis. The examined retirement programs generally were unable to analyze the risks of variable-rate mortgages or large declines in housing prices. The majority of software surveyed did not consider the possibility of a large stock market and housing market decline occurring at the same time that a person nearing retirement has lost a job.
Housing: There is inconsistent treatment of housing as an asset for use in financing retirement. Some programs allow users to specify whether they are willing to sell their home to meet retirement expenses.
Social Security: Software programs inadequately estimated the level of Social Security benefits users are entitled to, and did not direct consumers to the Social Security Administration Web site to obtain an accurate benefit estimate at no charge.
Annuities: Software programs usually did not evaluate the possibility of annuitization—converting assets into lifetime income annuities—as an option to reduce risk. There was also a lack of consideration of different options for timing of payouts.
Not all agree with the SOA’s assessment. For consumers, any software is better than no software, said Joel Bruckenstein, a certified financial planner and publisher of “T3: The Newsletter” and author of the 2009 Software and Technology Survey.
The problem, according to Bruckenstein, is that the firms and organizations that offer free software programs are between a rock and hard place. Consumers won’t use anything that takes longer than five minutes to complete, but any software that takes less than five minutes can’t address all the factors that need addressing—such as the timing of Social Security benefits, the use of home equity in retirement, or life expectancy.
“For consumers, these types of software programs are a good start,” Bruckenstein said. “Some help is better than no help.”
As for the financial-planning software programs used by financial professionals, such as EISI’s NaviPlan, Money Tree and PIEtech’s MoneyGuidePro, Bruckenstein said much of the SOA’s criticism is somewhat unfair. For instance, the SOA report criticized the default longevity settings used in the professional programs. But to Bruckenstein’s way of thinking, any professional worth his or her salt wouldn’t use the default — they’d override that setting and plug in more personalized data. “The defaults are starting points,” he said.
Bruckenstein said it’s somewhat true that software programs used by financial professionals don’t take into account unexpected risks and events. But that’s a function of which professional is using which software and which entity is regulating that professional. In some cases, for compliance reasons, an adviser might not be able to factor in unexpected risk and events.
As for the criticism that housing is not considered in most retirement-income planning programs, Bruckenstein said it’s near impossible to get the industry to agree on whether such an asset should be included. “There’s no right answer,” he said. Some include it, some don’t. In the main, however, he said clients of professionals typically don’t need to tap the equity in their home in retirement. So there’s typically no need to include it in software programs used by professionals, he said.
Bruckenstein agreed that very few, if any, software programs used by professionals or consumers help users optimize Social Security benefits. Some do have links to Social Security’s Web site, but he said adding this functionality could be difficult. “Some programs cannot give you every scenario,” he said.
As for annuities, there’s no industry agreement on the use and value of such products in a retirement-income plan, he said. Insurers tend to want such solutions included in software programs while other entities don’t.
Now, whether these programs have flaws and whether those flaws are significant might not matter one whit in the hearts, souls and wallets of average Americans. According to the SOA, which also conducted a survey of consumers, 55 percent of individuals “are skeptical about retirement computer software and online tools, saying they have little to no trust that the tools provide an adequate assessment for retirement planning.”
What’s more, the SOA asked Americans which types of tools, resources or services they or their spouses used to prepare for retirement. The result? Just one in 10 surveyed used retirement planning software, while 36 percent relied on advice from friends and family. Here’s hoping their family and friends know a thing or two about longevity, Social Security and behavioral finance.
SOURCE: MarketWatch (c) 2010 Distributed by McClatchy-Tribune Information Services.