Retirement-Plan Tools Are Risky Business

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Robert Powell

Jan. 8, 2010, 12:01 a.m. EST · Recommend (2) · Post:

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BOSTON (MarketWatch) -- 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 (SOA).

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"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.

The problem with retirement planning is the assumption that someone can really put a plan out for 30 years or more. This is a false assumption. Do what you think is right, but don't think what you are doing today will actually be realized in 30 years. Corporations can't plan for more than 5 years at a time and they have people working full time in planning to accomplish this. Remember the..."

- Econ101 | 1:02 a.m. Today1:02 a.m. Jan. 8, 2010

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2:15 p.m. Jan. 7, 2010 | Comments: 12

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