In his May 2016 post “Even Robust On-Line Retirement Tools Are Fraught With ‘Irregularities’,” Jason Lilly of ARQ Wealth Advisors, LLC. points to a Texas Tech University study of 36 online retirement calculators, including major firms like Vanguard Group, Fidelity Investments, T. Rowe Price Group, AARP, and the Financial Industry Regulatory Group (FINRA), when he states:
The research team, which included well-known industry veteran Harold Evensky, found only 11 of the 36 worthy of a passing grade. The team cited overly simplistic tools as one of the main reasons for its harsh assessment.
From the conclusions Mr. Lilly draws from those portions of the study that he reveals, you would think that there was no value to the robo-advisor calculators. Not so.
What does Mr. Lilly find as faults in the website calculators? They are overly simplistic and not sufficiently accurate. He then compares their output on retirement to driving:
Similar to driving direction websites like MapQuest, retirement calculators can show you how to get from one place to another, but can’t adjust for unpredictability
MapQuest is not the correct metaphor, because driving directions are used immediately, not decades from now. Furthermore, good apps do warn of traffic.
Mr. Lilly is really discussing long-range predictions. Thus, weather forecasting would be a more apt comparison. If so, then his critique of the robo-advisor calculators amounts to saying that a weather forecast had no value because it failed to warn of an earthquake two or three decades before it occurred
When forecasting retirement, the pitfalls Mr. Lilly attributes to the online calculators actually apply to nearly all calculators, including those used by professional planners, which he tacitly approves.
Any forecasting method requires setting assumptions. The more computing power, and imagination, you have, the more assumptions the forecasting can address. For example, the Center for Retirement Research at Boston College designed a retirement calculator for their website, Squared Away, that is more comprehensive than most. As Steven Saas, one of the professors from the Center, describes their retirement calculator, the forecasting for retirement assumes that an individual’s earning power follows a curve, dropping off in her late 40’s, rather than being linear as most calculators assume. The use of a curve is based on studies of earnings they conducted. Also, the website draws on spending information from the user’s geographic area so that use of funds in retirement will be more accurate. Thus, the predictions of this site are more comprehensive than many other calculators.
When he faults the robo-advisor calculators, Mr. Lilly never addresses these issues, earning capacity following a curve and spending differing by geographic location. Instead, he bases his claim that robo-planning calculators are faulty on the fact that they do not account for the rate at which healthcare costs are rising.
You can easily counter this claim by saying that spending for most people in retirement follows a curve, dropping off in later years. Thus, the linear spending assumed by a calculator creates an ample cushion for health care costs.
A more powerful and interesting counter is this: What if, like Colorado that may adopt statewide healthcare, the US goes for government funded healthcare? Then Mr. Lilly’s concern is completely alleviated. This is why any forecasting is bound to err – no one can predict the future.
And yet, for those without the knowledge of the future that Merlin the Wizard in T.H. White’s Once and Future King, or without tremendous resources for computations and research, these calculators “fraught with irregularities” are still quite useful. Why? As any sophisticated planner knows, be she human or robot, we only use calculators to educate and to inspire clients to act, never counting on the future to resemble their forecasts.
P.S. – as we said many months ago in “The results from retirement calculations on different websites vary. Why?”:
In the end, using any of these calculators gives you a sense of where you stand vis a vis your retirement goal. If you are far off, it gives you impetus to act so you get on track; and if you are on track, then you it gives you a sense of security.
For me, the most important result from using any calculator should be assessing and sticking to a good strategy for saving and investing with a long-term perspective.
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