I recently had the opportunity to revisit retirement
modeling software. As one of my jobs, I teach a economics
course, and one of the things I tell my students and financial
advising clients is that models can provide us with ideas of
how things may work, but with all of the independent variables
that exist in the world, they aren't likely to play out like we
I was revisiting modeling software in part due to a recent
critic of those that do not use "advanced" software to project
hypothetical outcomes for clients. I used to. I've since given
it up for many reasons. Mostly because I've seen life-changing
decisions being made based on a model. "Mr. & Mrs. Client,
you can take $50,000 out of your portfolio to buy that RV, and
still feel secure in your retirement."
That was 2007's annual review of the model. After the market
drop, the model was quite different, but the investor at least
had a 2nd mobile home now.
Retirement models, like economic models or model trains, can
show us a lot about the thing we're modeling, but it is no
substitute for ongoing advice and planning. And, modeling a few
worst cases along with the normal case is the least you should
do when making decisions based on models.
Of utmost importance however is that you understand the
assumptions and factors being used. I can not begin to describe
the number of retirement models I've seen that were so flawed
with incorrect data and bogged down by assumptions. There are
often static assumptions (I save $6,000 to my IRA every year),
and variable assumptions (rate of investment return).
In my opinion the mixing of so many assumptions in one
software package most often leads to incorrect projections. For
example, most individuals savings can be variable. You may make
a Roth IRA deposit this year, you may not. But, how you project
for it makes a difference in the outcome. Are you taking Roth
IRA contributions from one account and putting it into another,
depleting your savings in order to do so? Does your modeling
software know the difference? If you know enough to tell it
Do you own a business? How is that being treated?
Investments? What assumptions are being used for rates of
return, interest, inflation…?
A recent tread is to model various social security
strategies that couples may be able to benefit from. One
variable that many who do this on their own may forget is the
life expectancy. If you just ran the model without thinking
beyond the various scenarios, would it give you the right
answer, or is this just a case of garbage in, garbage out?
For that reason I strongly recommend a second opinion on any
retirement strategy. Retirement models do not take into account
the complexities that exist with the individual choices that
feed into your personal financial plan. FPA's PlannerSearch
tool can help you find local financial advisors to give
feedback on your financial plans, and advice on the strengths,
or weaknesses, of your retirement projections and plan.
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