In a Texas Tech University research paper, analysts found that publicly available retirement planning tools often exhibited substantial drawbacks that makes the results they provide far from optimal for individuals seeking help in planning for retirement.

While many people turn to such tools as an alternative to seeking out a financial planner, either because they don’t trust human advisors or they’re concerned over the cost involved, the results they receive are often far from the information they need.

In the paper “The Efficacy of Publically-Available Retirement Planning Tools,” the authors say “that the advice provided from a majority of these tools is extremely misleading to households.”

There are a number of reasons they say people should be wary of relying on such tools, one of which is the fact that such tools are by no means consistent in the amount of information they require users to provide.

That can call into question the validity of the planning information they provide, since if a particular tool does not ask for or receive information on a particular part of a user’s financial situation, it can hardly provide sound advice on that part of a user’s finances.

Here are five pitfalls users may encounter in the use of publicly available retirement planning tools.

1. Lack of decumulation options.

Many tools, said the study, do not offer users “efficient decumulation options, such as the option to annuitize 401k plan assets.”

Most publically-available retirement planning tools also fail to take into account that some households prefer to retire gradually, rather than “identifying a date that acts as a light switch that is instantly changed from ‘not retired’ to ‘retired,’” the study pointed out.

As a result, users are not offered options that may be the best ones for them to consider based on their unique situations.

2. Exploitation of naïve users.

Some publicly available retirement planning tools are designed to steer users into either purchasing a specific financial product or seeking advice from a financial professional who may be paid to sell proprietary products.

While such tools may market themselves as answering the question, “How much do I need to save for retirement,” instead they may suggest “advice” that benefits the vendor of products or advice instead of the user and do so without the user even realizing that the tools are doing so.

In addition, publicly available tools may harm risk-averse investors if they are biased toward equity investing.

3. Lack of precision in considering variables.

The paper said that many available tools can be problematic because they imprecisely calculate “critical retirement planning variables such as social security, investment rates of return, longevity risk and income replacement rates.”

Without accurate accounting for variables, results will not accurately reflect the user’s situation and any advice the tool offers will be inaccurate as well.

4. Inaccurate assumptions.

Another shortcoming the study mentioned is that, despite their apparent ease of use, available tools appear to suffer from inaccurate assumptions.

Those assumptions can hit a broad range of data vital to offering accurate retirement planning advice.

Those data include important variables such as inflation, longevity, investment returns, Social Security timing, marital status, tax rates, other retirement income sources and retirement spending.

5. Failure to recognize a range of important risks and factors.

The study pointed out that many tools fail to recognize a number of essential considerations.

These include household uncertainties such as life expectancy and returns on financial and human capital, and different types of post-retirement risk, such as longevity, health, investment and inflation.

See also:

Why you should use FIAs in retirement income planning

4 new (and surprising) facts about retirement security

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