Research Briefs Help Participants With Retirement Planning

Financial Finesse has released the latest installment in a series of retirement literacy research briefs published in partnership with the Society of Actuaries Aging & Retirement Strategic Research Program.

The first brief in the series explores retirement from a holistic perspective looking at non-financial issues. The second brief looks at retirement planning and the things to consider throughout one’s career. The third brief explores the types of expenses that may occur in the first year of retirement.

The latest brief is a resource to help individuals better understand how different retirement planning tools are used to estimate how much money they should be saving to retire comfortably with a reasonable assurance of meeting their future spending needs.

Employers may provide employees with access to the briefs; however, the briefs also can inform plan sponsors about how to approach retirement planning with retirement plan participants.

The latest brief, “Retirement Planning Tools,” explains that retirement planning tools are designed differently to be able to answer various types of retirement scenarios, and given the complexity of the variables that comprise one’s retirement income needs, it is unlikely that any single retirement planning tool will be able to do it all. Perhaps retirement plan participants should be offered more than one retirement planning tool.

In addition, the brief says tools should be user-friendly, and to avoid bias, the source of the retirement planning tool should be considered when evaluating options.

The brief discusses the difference in stochastic modeling (simulating volatility) to forecast probabilities and ranges of future values and a fixed or deterministic approach to arrive at a more specific outcome. With a deterministic approach, average values are assumed for unknown variables, like investment rate of return, in order to estimate future retirement outcomes. It is important to understand which assumptions each retirement planning tool uses.

A simple retirement calculator will typically have fewer questions and rely on more assumptions in its result, according to the brief. These calculators are meant to give a more general type of answer. Given their limited objectives, they avoid asking very detailed questions about current or future spending habits or whether individuals have any specific goals in retirement that would need funding. An intermediate level retirement calculator will go into more detail, but it may also be more difficult to use. It will ask a variety of detailed questions about current finances and future goals, and it may also allow for some variation in some of the variables, such as rates of return on investment, tax rates, longevity, etc.

Advanced retirement calculators may be geared more toward use by financial professionals or those who have a significant amount of personal finance experience. Featuring the ability to evaluate many adjustable inputs and outcomes, these tools often employ stochastic models that evaluate a variety of random outcomes, such as prolonged market downturns, higher taxes or health care costs, variations in spending patterns, and so forth. Consequently, the output from these tools often illustrates the probability of achieving various retirement goals, rather than a simple “number” in terms of how much to save, invest, or spend for retirement.

For each type of calculator, the brief suggests ideal users.