Retirement Planning Tools May Not Be Dependable

According to academic researchers in personal financial planning, retirement planning tools may lack crucial inputs or subtly push individuals to buy investment products.

Retirement plan participants who turn to retirement calculators to answer the common retirement questions—Will I be able to retire? Do I have enough to retire? Will I run out of money in retirement?—might want to proceed with caution. 

Researchers at the department of personal financial planning at Texas Tech University tested and rated the 36 most widely available retirement planning tools and found some alarming gaps.

In 2000, according to “The Efficacy of Publically-Available Retirement Planning Tools,” an insurance company received a patent for a computer-based tool that performed financial planning calculations, primarily for retirement. The goal was to create graphical results for financial advisers in an understandable format for presentations to households. However, the paper says the tool was never intended for direct personal use by non-professionals. Yet, by 2003, there were at least 24 electronic tools for retirement analysis. Six of those tools were for public use, while 11 were for professionals, and at least two were proprietary tools. Five tools were unidentified. The number of publicly available tools has grown substantially since then.

The researchers point out that one of the drawbacks of using the dozens of available tools—many on well-known company websites—is that some households may think they are trustworthy because they come from third-party sources, or that they are cost-effective since they significantly reduce search cost.

The paper examined the variation of tool inputs and default settings to see which demographic, financial and economic inputs, including default settings, are necessary for retirement planning tools to provide an appropriate recommendation. Three important outcomes were assessed: the relevance of the advice provided to households using these tools; the potential for risk that households could face in using these tools; and suggestions for the information that developers should include in their tools to make them more accurate.

NEXT: What’s wrong with most tools?

The paper has a number of criticisms for the tools. Many fail to consider different types of decumulation options, such as the option to annuitize 401(k) plan assets. Most of the tools also do not recognize that some households prefer to retire gradually, rather than identifying a date that acts as a light switch that is instantly changed from “not retired” to “retired.” Many tools market themselves as sufficient to answer the most common retirement question (How much do I need to save for retirement?) but in fact lack critical data about income and other household assets.

Another issue has to do with conflicts of interest. Tool inputs and default settings are sometimes established, in some tools, to guide households into purchasing financial products or speaking to a financial professional who may be paid for selling proprietary products. Allowing tool providers to exploit this information can result in households viewing results as retirement advice, without understanding that the tools provide directed “advice” that benefits the vendor, not the investor.

Across the range of tools, the researchers spotted a lack of consistency in inputs and default settings, that make the tools questionable for planning and educational purposes for households, financial professionals, and academics. If households are to use these tools either for planning or educational purposes, it is clear that the tools need to offer appropriate and similar input options and default settings. 

To provide useful and more consistent planning information, the researchers recommend that tools include the following input selections:

Age:  Current age; age to retire.

Life Expectancy: Personal health; smoker vs non-smoker; family mortality history.

Income (and Expenses): Current and future annual income; pension income (government or private); social security; trust income; disability income; pre-retirement asset withdrawals; other sources of retirement income (e.g. part time work, alimony).

Expenses: Retirement living expenses (prioritized with time and dollar specificity).

Assets (and Debts): Accumulated savings and debts; taxable (e.g. cash, brokerage accounts); tax-deferred (e.g. 401k, traditional IRA); Tax-free (e.g. Roth 401k, Roth IRA, 529); mortgage details; windfall receipts; bequests.

Rates: Future return assumptions (stocks, bonds); inflation assumptions; tax assumptions.

Household Structure: State of residency; gender; marital status; goal specifics; and risk tolerance.

“The Efficacy of Publically-Available Retirement Planning Tools,” by Taft Dorman, Barry S. Mulholland and Harold Evensky of Texas Tech University and Qianwen Bi of Utah Valley University, can be downloaded free of charge.