Not all retirement income planning software is alike, cautions a paper presented at the Pension Research Counsel Spring Symposium in Philadelphia.

Some programs are satisfactory for households with relatively simple finances, while others are able to handle fairly complex financial situations, the paper says.

In particular, professional software used by financial planners allows for analysis of complex financial situations encountered by wealthy individuals, the authors contend.

But financial planning software available free over the internet should be “viewed as educational tools to help users address major issues in financial planning rather than for making detailed projections,” they say.

The paper was presented by Anna Rappaport, founder and principal of Rappaport Actuarial Consulting, Chicago, and John Turner, director of the Pension Policy Center, Washington. It draws on industry research from Society of Actuaries, Schaumburg, Ill.; LIMRA International, Windsor, Conn.; InFRE, Lubbock, Texas; The Actuarial Foundation, Schaumburg, Ill.; and NAVA, Inc., Reston, Va. (now the Insured Retirement Institute, Washington, D.C.).

Increasingly, when planning for retirement, people turn to computer-based programs for assistance, the authors note.

But the programs vary in several ways, they continue. For instance, some programs provide advice on investments and portfolios, or how much to save for retirement, or how to manage retirement resources and risks, while others provide combinations of these types of advice. In addition, the programs differ in addressing household income levels and complexity of household finances.

The financial crisis of 2008-2009 exposed weaknesses in retirement planning and software used to support planning, maintain Rappaport and Turner.

For example, they say it is not clear whether the stochastic modeling that the programs use is helpful in focusing people on “tail events” or how to deal with these events. “Deterministic approaches tend to focus people on single answers unless they do multiple scenarios,” the authors explain.

Further, although the crisis has focused many people on the importance of working longer and changing the age at which they will retire, not all of this software is able to evaluate this or do it properly, they contend.

Software programs also vary in their ability to illuminate the importance to the retirement plan of housing values and variable rate mortgages, the authors say. The programs also do not help people anticipate very adverse events, they say, such as a possible 30% drop in housing prices, a stock market decline of over 50%, or the possibility that those things might happen just when the person has lost a job.

“In short,” the researchers say, existing software programs “under-represent, or fail to represent, extreme events, leaving their users poorly prepared for them. This problem relates to all types of planning, not just retirement planning software.”

As for the free web-based consumer software programs, Rappaport and Turner note that one such program assumes that everyone, even single persons, receives $24,000 in Social Security benefits. “Another determines income sufficiency based on the person’s life expectancy, rather than on living past life expectancy.”

In addition, several (web-based) programs do not allow calculations for spouses, and one only works with savings in defined contribution plans but not with defined benefit plans or other sources of retirement income, they add.

“Nonetheless, some of these programs can be useful in providing a rough idea of whether the user is on target for retirement, how much additional, if any, he would need to save, and whether he should consider postponing retirement,” they say.

By comparison, software programs used by financial planners are “far more complex” and lack the limitations found in free programs, the authors say.

Even so, the more complex programs are not capable of dealing with variable rate mortgages nor anticipating falling housing prices, job loss and foreclosures, they say.

In general, although today’s programs do analyze many features and capabilities and help estimate income, retirement needs and spending, the tools are “generally not developed to address retirement risk,” say Rappaport and Turner. “Instead the tools mainly mask risk.”

Since results do vary across programs, the authors recommend that, when possible, consumers or their financial professionals should “run multiple programs and use multiple scenarios within each one.” The authors also offer several suggestions for software improvements (see box).

Retirement planning programs are merely tools to help facilitate the retirement planning process, Rappaport and Turner conclude. “There is no accepted right answer.” Considerable advances have been made in the software, the researchers allow, but “there is lots of room for improvement.”