Tech View: Overly optimistic retirement calculators, says finance guru

A recent study by Northwestern Mutual Life Insurance found that 83% of people were pressured to create, review or adjust their financial plan during the pandemic. This is hardly a surprise to JR Robinson, financial software developer and founder of Honolulu-based Financial Planning Hawaii. Robinson, whose software, Nest Egg Guru, was developed for industry professionals, said there is a silver lining in today’s environment if people improve their financial discipline.

“The problem,” he said, “is that the retirement expense simulation software offered as a free service by direct-to-consumer financial institutions is universally overly optimistic.” In other words, these calculators will lead people to believe that they will have more money for retirement than is realistic.

Robinson, who has appeared in the Wall Street Journal, Forbes, USA Today and the Honolulu Star-Advertiser, recently published an article on this topic in the trade journal Advisor Perspectives titled “Be Afraid, Very Afraid, of Retiring in the 2020s. .

To test the theory, he used Vanguard’s popular “retirement egg calculator,” which is available for free. He said this software anomaly was not limited to Vanguard. “The problem,” said Robinson, “is pervasive.”

To get a third-party assessment of Robinson’s analysis, I spoke to Mike Sklarz, based in Honolulu, founder of Collateral Analytics and a nationally recognized investment professional. Sklarz said he agreed with Robinson’s premise.

“Low interest rates and high stock market valuations today create a difficult environment in the future to achieve good returns on investment,” said Sklarz. “This combination is quite different from the more typical levels that these types of calculators are based on. Retirement calculators using historical data will not reflect current reality and, therefore, will not provide an accurate assessment unless these factors are taken into account.

I recently sat down with Robinson and asked him what readers could do to better manage their retirement planning.

Question: In your article. “Be afraid, very afraid to retire in the 2020s,” you state that standard retirement planning software is inaccurate. How did you come to this conclusion?

Responnse: Return assumptions for bonds and cash tend to be based on historical experience rather than the current investment climate.

Q: What lessons can a person planning for retirement for the next decade learn from your research?

A: The most important lesson investors should learn from our work is to understand that we are in a unique historic period for retirement income planning. Investors generally viewed bonds as safe and stocks as risky. Today, consumers need to recognize that with interest rates close to historic lows, bonds can be almost as risky as stocks.

Q: Can you give an example?

A: Last week, a client asked me to check out a government bond index ETF as an alternative to its cash, which was returning 0%. The ETF he gave me has a current yield of 1.75%. To answer his question, I showed him the total return since the start of the year for the ETF. The fund lost almost 12% over the year due to a relatively minor rise in long-term interest rates. If rates were to rise more significantly, these “safe” bond funds and ETFs might not look so safe.

Q: What can people do to remedy this problem?

A: I would say stay flexible in your retirement spending strategy. If we were to experience a prolonged bear market in equities (similar to what we experienced in the 2000s) coupled with the current low interest rate environment, that would be a perfect recipe for premature portfolio exhaustion. Weathering such a storm may require cutting retirement spending if we start to see rising interest rates coupled with falling stock markets over the next several years.

Q: Is there a better retirement planning software that you recommend?

A: To be honest, I don’t think there is any consumer retirement planning software that realistically illustrates the risk recent or pending retirees face when outliving their savings.

Q: What can an investor do to correct this problem?

A: The first thing is to avoid adopting popular static spending strategies such as the “four percent rule,” which incorrectly implies that an inflation-adjusted spending rate of 4% will last indefinitely. Instead, retirees should set their initial spending at a level that meets their fixed and discretionary needs. They should be prepared to gradually adjust the amount of their spending up or down, depending on future investment conditions.

Rob Kay, a writer based in Honolulu, covers technology and sustainability for Tech View and is the creator of fijiguide.com. He can be contacted at Robertfredkay@gmail.com.