Monday, April 18, 2016

"Robo" Retirement??

There is much discussion today about “robo” or “robot” advisors (i.e. advice given by computer based on your input). Just answer a few questions, press a button, and you have the asset allocation you need for investments or you will know if you can retire.  The Saturday/Sunday February 20-21, 2016, Wall Street Journal (p. B11) also published online HERE reported an academic study of retirement calculators that warrant consideration.

Researchers at Texas Tech University and Utah Valley University evaluated 36 of the most prominent retirement planning calculators (both free and low cost). A hypothetical couple earning $50,000 each and in their early to mid-60s were used and their retirement was planned using the calculators. More than two thirds of the retirement calculators said the couple could retire with a significant degree of confidence. That significant degree of confidence was 70% or greater probability that the couple had enough money for retirement. Eleven of the 36 calculators correctly identified that the couple was in a precarious retirement position—those 11 calculators were not specifically identified. The calculators used did include ones from companies such as Fidelity Investments, Vanguard, T. Rowe Price, AARP, the Financial Industry Regulatory Authority (FINRA), and MarketWatch. MoneyGuidePro software was used by the researchers to make their own analysis.

A tradeoff exists between simplicity of input and quality of output. The more questions asked in the input phase (and the quality of those questions), the more rigorous the retirement plan output. For example, what is a reasonable life expectancy for the individual given family history? Will there be any inheritances from parents/relatives? Are there expected Social Security benefits? Will the individual have pension plan income; if so, is there a survivor benefit? A question frequently omitted is the smoking background of the individual (a factor that has significant impact on life expectancy).

In addition, there are numerous assumptions underlying each planning model. Does the model consider inflation? What rate of return is assumed on investment assets? How are those returns predicted (every year on average or by some other methodology)? These are only a few of the many planning assumptions in most retirement models.

Anyone using such a retirement calculator should look for a model that asks pertinent questions for input. Also, the model assumptions should be available for validation. Ideally, multiple calculators should be compared. Retirement is generally not difficult in the first few years; but those later years, when an individual is no longer able to work, can cause the problem.

We, at Paragon Financial Advisors, assist our clients in their retirement planning. That planning should be done well in advance and, as a process, should not be taken lightly. (By the way, we use MoneyGuidePro to assist in our retirement planning.)  Paragon Financial Advisors is a fee-only registered investment advisory company located in College Station, Texas. We offer financial planning and investment management.
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