Consumers who rely on free Web calculators to help them prepare for retirement should understand how many issues the calculators may fail to address.
John Turner and Hazel Witte make that argument in a new research paper released by the Society of Actuaries, Schaumburg, Ill., and the Actuarial Foundation, Schaumburg.
Turner and Witte reviewed the performance of 5 free "retirement income calculators," one fee-based consumer system, and 6 systems aimed at financial services professionals.
The consumer programs tend to handle Social Security benefits and anticipated rates of return poorly, Turner and Witte write.
"Most of the free, web-based programs could do a better job of limiting the range of inputs on rates of return," the authors write. "Studies have documented that workers tend to earn less than stock market averages. In addition, rates of return in the future may be lower than in the past. It appears that many programs or users may use overly optimistic assumptions on rates of return."
Only 2 of the free consumer software programs give consumers the ability to enter rates of return, inflation rates or expected life expectancy, and none permit the user to incorporate expected salary increases, or expected tax rates, Turner and Witte write.
Most of the professional programs permit users to enter those parameters, but even some of the professional programs fail to reflect the size of the estate that the consumer client might want to leave, Turner and Witte write.
Turner and Witte found that the consumer programs analyzed give little or no advice about changing investment strategies during retirement; using life insurance, long term care insurance or health insurance; or deciding which funds to draw down first
The professional programs give advice about possible investment strategy changes and use of life, health and LTC insurance, but they only rare suggest the purchase of annuities, and they only sometimes suggest that users advise clients to consider postponing retirement, Turner and Witte write.
Turner and Witte give list of things that consumers should know when using retirement planning software.
Some of the points:
- Programs are designed for different target markets, and they are focused on answering different questions.
2. Different programs (that look similar to the user and ask for similar input) may give very different results.
3. Consumers should allow an extra cushion of savings, to reflect the reality that many people retire earlier than they had planned because they were laid off, their health declined, or they needed to retire to take care of family members.
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