More and more companies, both traditional financial services firms and robo-advisers, offer retirement calculators but finding one that inspires an effective retirement plan customized to each individual's financial situation has become challenging.
One of the most common, if least effective, 'calculators' is having clients come up with an arbitrary number on their own that they can try to reach by their desired retirement age. Interactive digital retirement-planning tools can be more effective, enabling advisers and clients to adjust a range of variables such as time horizon, portfolio allocations and inflation to gauge the impact of each one on that investor's likelihood of achieving various retirement objectives.
Personal Capital, an automated investment platform for consumers, has launched a free online retirement planner in response to this growing necessity. The planner includes a variety of customizable features for the individual, such as buying versus renting a home and managing when to claim Social Security benefits.
“If you look at robo-advisers, they don't provide advice,” said Jim Del Favero, chief product officer at Personal Capital. “The retirement calculators from others are often geared toward encouraging you to save a certain amount of money through the product they're selling.”
SINGLE NUMBER CALCULATORS
In fact, some of the more static calculators that provide individuals with the ability to toggle between options and input different financial assumptions are geared toward generating a single number, which investors are then supposed to work toward. But because the calculators are all built with different assumptions for market returns, interest rates and inflation, they provide estimations that can vary widely and could be unattainable for some investors in the event of a prolonged bear market.
“These are all forecasts with a wide range of possibilities, so saying there is a single number is a flawed approach,” said Dirk Quayle, president of NextCapital, which provides a portfolio-construction and retirement-planning software platform to advisers and investors.
Jamie Hopkins, associate director of the New York Life Center for Retirement Income at the American College, said investors don't use general retirement calculators very often. Advisers will have to engage their clients by providing a better visualization of a retirement plan.
WHAT'S THE STORY?
“When advisers really get clients engaged is when they take that number from the calculator or a different program and generate a story or plan around it,” Mr. Hopkins said. “They can explain, 'Here is how we are going to meet your needs.'”
Mr. Hopkins said there has been a strong trend toward traditional companies focusing on retirement planning as most of the clients they've had for decades shift their focus to retirement as it approaches.
“It's where a lot of the money is,” Mr. Hopkins said. “A large portion of the country is moving into retirement, so companies are moving their focus along with the market.”
Mr. Quayle said he expects to see more companies jumping into the retirement-planning business as
government regulations around retirement advice tighten.
Betterment, the second-largest robo-adviser in the industry based on assets under management, recently
released its own retirement calculator and intends to expand its business into the 401(k) market.
“It's going to be full speed ahead — not only retirement planning, but improving the precision of retirement planning, and in terms of getting the right data that is more than just the [assets from a single] account,” Mr. Quayle said.
