Data & ResearchDecember 29, 2009

Report Identifies Gaps in Retirement Planning Software

A new report suggests the majority of available financial planning tools are still not effectively addressing the wide range of individual issues related to retirement.

Reported by Ellie Behling

The Society of Actuaries (SOA) and Actuarial Foundation analyzed 12 financial planning software programs most commonly used by individuals and financial advisers—either available to individuals over the Internet or designed for use by financial planners for their clients—and found that consideration of the retirement planning period and the handling of longevity risk vary considerably among the programs with some apparent inconsistencies.

The report also claims financial planning software under-represent extreme events, such as the current financial crisis. “The examined retirement programs generally were unable to analyze the risks of variable rate mortgages or large declines in housing prices,” a press release about the report said. “The majority of software surveyed did not consider the possibility of a large stock market and housing market decline occurring at the same time that a person nearing retirement has lost a job.”

The software programs inadequately estimated the level of Social Security benefits users are entitled to, and did not direct consumers to the Social Security Administration Web site to obtain an accurate benefit estimate at no charge. They also usually did not evaluate the possibility of annuitization, converting assets into lifetime income annuities as an option to reduce risk, and there was a lack of consideration of different options for timing of payouts, the report said.

Finally, the groups claimed there is inconsistent treatment of housing as an asset for use in financing retirement. Some programs allow users to specify whether they are willing to sell their home to meet retirement expenses.

Tying in with the report, the SOA hosted a nationally representative telephone survey of 1,365 individuals not retired (18 and older) to gauge their attitudes and behaviors with retirement calculators and related tools and found 39% surveyed neither actively planned for retirement nor sought any type of retirement advice.

More than half (55%) of respondents indicated they are skeptical about retirement computer software and online tools, saying they have little to no trust that the tools provide an adequate assessment for retirement planning. Individuals were asked which types of tools, resources, or services they and/or their spouses used to prepare for retirement, and only 10% surveyed used retirement planning software, while 36% relied on advice from friends and family.