Retirement planning software is available for free on several major investment and retirement websites. But according to a recent analysis sponsored by the Pension Research Council, these programs do an inconsistent and often poor job. Anna M. Rappaport and John A. Turner, long-term pension and retirement experts, looked at both free and fee-based products. They found that many fundamental realities of retirement planning often were ignored in the tools. Consumers, however, aren't likely to possess the knowledge to spot these flaws.
[See 6 Steps to a Better Retirement.] The researchers found the five free online programs they tested "can provide a rough idea of whether the user is on track for retirement," but suggested they are not reliable sources for more detailed decisions. One program, for example, assumes everyone receives the same Social Security benefit. Another bases financial needs on average life expectancy, although by definition half the people live longer than the average. Several programs did not permit inclusion of a spouse in their calculations. Even the more sophisticated tools used by financial-planning experts fail to fully capture the real-world financial decisions that people face. "On the whole, the tools do not highlight nor address retirement risk particularly well," the authors say. "Rather, they mainly mask risk."
The free planning tools tested were:
The researchers did not identify the specific tools that had problems. But they did provide helpful tips on the things that consumers should look for when evaluating their retirement needs. Keeping these tips in mind will help you interpret the results of any online tools you may use, while identifying their shortcomings as well.
Longevity. People tend to underestimate how long they will live and, thus, how long their retirements will be. How well does the tool you use handle longevity and retirement time-frame issues?
Inflation. While inflation has been at least temporarily checked by the recession, it needs to be factored into any long-term planning process. Many people underestimate future rates of inflation or don't fully understand how badly inflation can erode purchasing power. Most tools simply assume a constant rate of future inflation or let you plug in a constant rate. Real-world inflation rates are much more volatile, and even financial experts can't accurately predict these patterns. Run the tools using some differing rates of inflation and give yourself a good idea of the range of outcomes and how they would affect your finances and your preparations for retirement.
[See Is Retirement Really a Fading Goal?] Medical expenses. These are major unknowns for most retirees. And while we know that the average retired couple might need to spend $250,000 or so for out-of-pocket healthcare during retirement, these averages can be very misleading in terms of what an individual will face. "It has been estimated that 10 percent of the population each year accounts for 60 percent of spending on health services," the researchers say, "and the half of the population with the lowest health spending accounts for only three percent of health costs." Again, if the planning tool includes a healthcare component, or even a spending field that you can change, run the tool with varying amounts of healthcare spending.
Social Security. This is a big weakness in financial-planning software. Each year, the Social Security Administration sends every qualifying person a printed record of their lifetime earnings record and projected Social Security benefits. These are the amounts you should enter in an online retirement planning tool. If the software doesn't permit this personalization, look for one that does, or at least adjust the results you receive to reflect your own Social Security situation.
What is retirement success? How much money will you leave to your heirs? What percentage of your pre-retirement income will you need to have a "successful" retirement? Who knows, right? It depends on so many real-world variables. Yet, most planning tools use some explicit yardstick against which to measure your success. Make sure you understand that yardstick and can test its assumptions against your own situation.