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
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.