From the November 2007 issue of Boomer Market Advisor • Subscribe!

Planning software for the boomer future: Financial planning software

Just as boomer advisors are doing everything they can to keep up with the changes in the retirement landscape, experts that design financial planning software are working just as hard. They're listening to advisors and clients, and adding layer after layer to their software offerings. Longevity, inflation, defined contribution plans and more are taken into consideration when analyses are run. Boomer worries are advisor worries -- and software designer worries. It all adds up to innovation that goes beyond faster video games with flashy graphics.

What it should do

One of the first things good financial planning software -- and the advisors who use it -- has to recognize is that retirement isn't a single phase. Retirement is a series of phases, and a client's needs are different in each phase. Activities change, expenses shift, grandchildren are added to the litter. What a person wants and needs at age 65 is different than what that same person wants and needs at 80.

"Good software has to be able to handle a phased retirement," says Gregg Janes, vice president, product management-planning, Emerging Information Systems Inc. ( ), in Carlsbad, Calif. "Retirement needs are different for someone who is 65 to 75, 75 to 85, and 85 or older."

Janes, who runs the planning side of the Profiles product line for EISI, breaks retirement into three phases based on the age groups he highlights above, affectionately called the go-go years, the slow-go years and the no-go years. As a person advances in retirement, he will travel less, spend more money on health care and begin thinking about what kind of legacy he wants to leave. That requires flexibility in planning from the advisor and the software he chooses.

Pierre Bossaert, vice president, financial planning, AdviceAmerica ( ), in Fremont, Calif., uses four phases to describe retirement: early, middle, late and survivor. And he says software needs to account for expenses and cash flow in each phase. He says the survivor phase (something his company's Retirement Income Edition handles) is especially important because income streams change. The death of the former primary wage earner can mean cuts in Social Security income, pension payments (for those fortunate enough to have them) and annuity payments. Good software can help determine where the income for the survivor is going to come from, and how much can be expected.

Innovation is coming, Bossaert says, that will save advisors and clients time by using readily available expense information to make more accurate assumptions. The Bureau of Labor Statistics conducts regular surveys of consumer spending that it compiles into a Consumer Expenditure Survey.

"We'll be able to utilize that in software by looking at an individual client vs. the national average," Bossaert says. "It gives an indication of if they are high or low. We want to be able to use rational expense assumptions."

Distribution shuffle

Planning software has to be able to analyze the best order in which to distribute assets. Distribute them in the wrong order, Janes says, and "you can use them up [too] quickly," not to mention get killed on taxes. Quality financial planning software will eliminate the guesswork. But what if an advisor has a client who has no worries about his assets lasting 30 or 40 years?

"Good software can say, 'Hey, you're in good shape.' Then maybe you don't distribute from the qualified assets last," Janes says. "That can lead to tax problems for the kids. You should be able to switch the order of distribution."

"Up to now, software has focused on the client who wants his last check to bounce," agrees Bossaert. "Software will probably end up focusing on the wealthy client for whom retirement is no problem. They are looking at leaving a legacy -- multigenerational planning. It is going to integrate distribution planning with setting up trusts, etc."

A good phased distribution strategy, one that includes individualized asset distribution ordering, won't be able to survive alone, however.

"Software needs a phased reallocation strategy to go with the phased distribution strategy," Janes says, adding that the traditional allocation pie chart will still be valuable, but there will need to be at least three pie charts -- one to go with each retirement phase.

What are the chances?

Monte Carlo simulations, most financial advisors know, refer to the analysis software programs run on various retirement plan scenarios to measure the probability of success based on market returns, inflation and asset growth.

Janes says Monte Carlo analysis is like a stress test for the plan an advisor and his client have put together, because it will run its analysis 1,000 times using every variable it can muster.

"Monte Carlo analysis says, 'now that we've looked at a solution, let's take a look at the probability it will occur,'" Bossaert says. "It gives a lot of insight into the quality of the plan."

While the Monte Carlo analysis may provide a high probability of assets growing at a pace that allows a plan to work, which provides the advisor with a positive feeling, clients may still have questions. Software that provides answers to the "what if" inquiries -- and creates some clients haven't thought of -- brings a sense of calm that boomers can feel good about. Bossaert calls it lifestyle protection, and he says it looks at what happens during the bad times, even during the worst of times. It can look at the worst eight years the market has ever suffered and apply that to the first eight years of a client's retirement. It can take historically high inflation and apply it to the first three or four years of retirement.

"The what-ifs allow clients to make decisions that give them peace of mind," Bossaert says, adding that AdviceAmerica's software provides things people can do to meet income needs in bad times. "It shows them some things they can do to mitigate the risk."

Still to come

Janes believes all this still isn't enough. EISI's software doesn't do what he talks about next yet, but he knows it's an important component to add in the near future. He calls it a risk-to-income analysis. What are the risks to any income stream, and how are those risks (even risks to "guaranteed" income) reduced? Janes says this bit of analysis is vital because of the nature of Americans' retirement plans. According to the U.S. Department of Labor, in 1979, 62 percent of private-sector workers participated in a defined-benefit plan only; 16 percent were in defined-contribution plans only. In 2005, those numbers were nearly reversed, with only 10 percent in a DB plan only and 63 percent in a DC plan only. Workers need to make sure some of their retirement plans are annuitized so they have some guaranteed income, but how much and when?

"Monte Carlo checks the portfolio," Janes says. "But most Americans have no guaranteed side anymore. Most have choices of how much income to guarantee via annuitization, but they can't do it on their own."

He says it's easy to put $1 million into a deterministic analysis and see that it does fine, but if that money, or part of it, is taken out and put into an annuity [at or near retirement], it provides an income stream and eliminates much of the risk. He's looking for ways to illustrate when an annuity is a good idea -- and how much of the portfolio should be moved to the annuity.

"We need ways to illustrate how solid risk-free income is," he says. "You should be able to take a risk-tolerance analysis and put it into a retirement income distribution analysis that points to a percentage of the portfolio that needs to be annuitized. Anything less, you are stepping out of your tolerance level."

These are just a few of the attributes advisors should look for in financial software. The fact that the definition of retirement planning is changing should surprise no one. What may be surprising are the planning chores that can be aided by software. Baby boomer consumers, no matter how tech savvy they are, are bound to trust an advisor who can come up with financial plans that stand up to the scrutiny the latest and greatest software programs can muster. Look for the minimums -- Monte Carlo analysis, asset distribution, asset allocation, risk analysis (longevity, investment, inflation), expense assumptions, cash-flow analysis -- and make sure the program includes them. After that, each advisor must decide where his strengths and weaknesses lie, and find a software package that compliments what he does -- and what he wants to do.

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