Thursday, November 11, 2010

How Reliable is Retirement Planning Software?

We are living in the High Tech computerized New World. And it is natural to seek personal assistance in the retirement financial planning from the handy tools, like online financial tools and services, or stand-alone financial calculators, presented in this category on our site. However, can you totally trust the obtained outcomes? That is a very important project, and you want to be sure, that in general case you will not outlive your money, and your money will not outlive you. Review the list of the potential problems associated with Retirement Planning Software, reviewed by Emily Brandon on USNews.


Financial planning software can be a useful tool to create a retirement savings plan. But many computer programs fail to adequately account for several major retirement risks, according to a new review of 12 financial planning computer programs commonly used by consumers and financial professionals by the Society of Actuaries and the Actuarial Foundation. “The results from any program should not be used as the sole input for decision making for retirees or prospective retirees,” the study concludes. Here’s a look at the major problems with retirement planning software the study identified.

Unrealistic rates of return

Many programs use rates of return that are optimistic, either due to program defaults or allowing individuals to overestimate their investing savvy, the review of the five free Internet calculators for consumers, one paid calculator, and six programs designed for use by financial planners for their clients found. Estimated stock market returns varied widely among the computer programs. For example, one calculator uses a 10 percent rate of return for equities, while another software package has a 5 percent default rate for equities and a maximum allowable rate of 7 percent. The programs also failed to account for common errors that inexperienced investors tend to make, such as trying to time the market or selling low and buying high, which causes many people to underperform the market.

Failing to account for fees, taxes, and inflation

Many of the software packages didn’t factor investment and administrative fees into retirement calculations, which causes the programs to overstate net investment returns. The programs also differ in their treatment of taxes, with some consumer programs understating taxes. The default inflation rate varied across the examined retirement calculators from 2.3 percent to 4.6 percent.

Underestimating life expectancy

The computer programs had vastly different ways of determining the length of retirement that needs to get financed. One program had all users plan for a 30-year retirement. Another calculator specified that retirement would last until age 95. And a third software package had users estimate their own life expectancy. All these approaches can be problematic if you live significantly longer or shorter than expected. The Society of Actuaries recommends using a calculator that takes into account age, gender, and health risks when attempting to calculate how long you are likely to live. “The software should provide results for living to various ages beyond average life expectancy, which an individual has a 50 percent chance of outliving,” says Kirk Kreikemeier, a financial planner who oversaw the study.

Social Security benefits not factored in

The Social Security benefits workers are entitled to were often not adequately accounted for in the computer programs. Some software packages calculated Social Security benefits based on the person’s birth year, expected retirement age, and a single year’s pay. This method doesn’t account for fluctuations in earnings over the 35 working years the Social Security Administration uses to calculate your payout. Workers can obtain a more accurate Social Security benefit estimate at

Home equity treatment varies

Most retirees have at least some equity built up in their homes. The retirement calculator's treatment of home values ranged from assuming that the house is illiquid to assuming that home equity will be used to help finance retirement expenses. Pick a computer program that allows you to specify whether you are willing to sell or borrow against your home to meet retirement expenses.

Life events are difficult to account for

There are a variety of other retirement risks that are difficult to incorporate into a computer program. For example, you could end up retiring earlier than expected due to a layoff or business closure. Or you could develop a health problem that renders you unable to work and necessitates expensive medical care. Typically one spouse also passes away before the other, but the retirement planning software programs differed in assessing how much income a surviving spouse needs. One computer program calculated that a couple needs 1.6 times as much as a single person due to economies of scale, but most of the others assumed that a surviving spouse could get by on half as much income as the couple needed.

Most investors are skeptical about retirement calculators. A related telephone survey by the Society of Actuaries found that 55 percent of current workers say they have little or no trust that these tools provide an adequate assessment for retirement planning. Only 10 percent of the employees have ever used financial planning software.


Retirement Planning Software represent a good way prepare you for the future. However, you have to be more than conservative, making your estimates, serving as input for financial calculations. Prepare several scenarios and review best and worst cases, and choose a “golden path” between too optimistic and too pessimistic predictions. Check your results through the multiple programs to ensure your results are reliable, as they can be. And, finally, discuss the financial planning with advisors and see, if their assessment is different from what you got.   


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