The Retirement Income Industry Association is trying to civilize the wild wild world of retirement income projections.
The RIIA, Boston, has introduced a statement of principles for creating industry standards for the development of retirement income calculators, tools and illustrations that promote retirement income products and strategies, according to Richard Fullmer, chair of the group’s methodologies committee.
In recent months, some critics have accused some models of being too optimistic, and others have accused models of being too pessimistic and encouraging consumers to contribute too much to retirement savings accounts.
Moreover, “the output of various projections differs widely even with consistent input,” Fullmer says in a statement. “This may lead to confusion among the public which threatens a loss of confidence in the financial services industry.”
In the future, the RIIA methodologies committee intends to create a set of guidelines to help users apply the RIIA principles and a set of calibration points to help model developers compare their assumptions and results.
If a model does not produce certain expected values under the calibration conditions, then the model creators should explain why the results of their model differ from the calibration point results, RIIA officials say.
The following is a condensed version of the RIIA statement of principles:
1. Regardless of an individual’s asset allocation and/or retirement spending, the future is inherently random and unpredictable.
Probabilities and statistics are the natural language for explaining this randomness and uncertainty.
We strongly endorse and promote the use of stochastic methods for any demonstrations.
2. Any retirement income projection illustration should disclose its assumptions such that readers can gauge its reasonableness for a particular purpose.
That is, two varying sets of assumptions and corresponding outcomes may both be valid since the purpose of the illustration may be different in each case.
3. Various mortality tables and longevity forecasts may be suitable for retirement income demonstrations, although others may not be suitable.
The relevant methodology used should be clearly disclosed along with an explanation of the suitability of the selected method.
4. Inflation is neither a universalyl constant nor uniformly measurable.