Checking Out Retirement Planners

Whether you are nearing retirement, or retirement is still some time in the future, developing a financial plan is essential. A simple starting point is a list of income sources, such as Social Security, pensions or IRAs, and expected expenses. This is easily accomplished using a spreadsheet. One of the biggest concerns is whether your retirement income will not only provide a certain standard of living, but whether it is sustainable throughout your retirement years.

Financial forecasting is not an exact science given the uncertainty of key variables. While it is possible to make predictions of things like inflation, stock market performance and longevity, assumptions regarding these and other factors introduce risk given that past performance is no guarantee of the future.

Those who have retirement accounts with firms such as Schwab, Voya, Fidelity or others generally have access to a retirement calculator that attempts to answer the question; “how long will my money last”. I have an account with Fidelity and the retirement calculator they provide is easy to use and provides useful information. It allows you to develop a planning profile which includes information about you and your spouse which includes:

· Current ages and retirement ages

· A planning horizon for each individual

· Estimated retirement expenses

· Social Security benefits

· Additional income sources such as pensions or annuities

· Financial accounts which includes your Fidelity account balances, but allows input of non-Fidelity accounts

· Tax filing status for federal, state and local taxes along with an option for to select an effective tax rate

While it runs 250 simulations to arrive at a projection of annual balances, the assumptions that are used are not transparent to the user. The output predicts income and expenses on an annual basis and makes those predictions based on three market conditions; average, below average, and significantly below average. The output is shown graphically and is also available as a table. In addition, the results can be view in current dollars or future dollars.

There are many retirement calculators and I have been evaluating three of them recently. As I am getting closer to retirement, I am focusing more on effective IRA withdrawal strategies and tax planning. I will provide a high-level overview, but they all have trial periods which allow for an opportunity see if they meet your specific retirement planning needs. The three that I will review are:

· NewRetirement

· OnTrajectory

· MaxiFi Planner

NewRetirement

Entering data about income, expenses and investments is easy. It allows you to set timeframes which allows you to make adjustments over time and to model the impact of financial decisions. For example, you may want to buy a boat and add the 5-years of monthly payments to see how that decision would impact your long-term plan.

Assumptions about variables such as investment returns and inflation allow you to enter a range from optimistic to pessimistic. It also allows for modeling of home and mortgage in order to project changes in equity over time.

The output tends to show the two extremes results; optimistic and pessimistic. The graphical representations are limited. While you can see detail by hovering over a point on a graph the information cannot be shown in a table or downloaded into Excel.

Currently the application cannot provide Monte Carlo simulation or the ability to model drawdown strategies. There is also no facility to develop strategies to minimize taxes and understand the impact of Required Minimum Distributions (RMDs). However, it appears to be on their product development roadmap.

NewRetirement is a useful tool for basic projections to help you plan for retirement and make key decisions during retirement. It will be interesting to see how it develops over time, but for me this is too basic even though it is free. There is an option to upgrade to PlannerPlus for $6 per month, but the additional functionality does not appear to be strong.

OnTrajectory

This is a much more robust solution which is more user friendly, has a great user interface and sophisticated analytical capabilities. The main screen has tabs for entry of income, expenses accounts & taxes, as well as sections to set goals and track progress. Entry of data is easy, and items are entered using boundaries of start age and end age. The top of the page is the timeline of output results over the timeline you establish for analysis.

One of the features that I like most is that any change you make to the data automatically reflected in the trajectory timeline. You can also enter and item such as the boat purchase mentioned above and there is a box that allows you to turn it on or off to see the impact visually.

You are able to set an overall inflation rate, but also override it on certain elements such as Social Security income. Expenses can also be “grouped”. For example, rather than having separate lines for electricity, gas and water, you can create a group and name it “Utilities”. You can open the group and see each of the expense items and change them based on your current estimate.

There are many “information” icons that allow you to open separate windows that describe the different functions. Another nice feature is the ability to have multiple plans or scenarios. Scenarios can be copied to allow you to easily begin a new scenario where much of the information remains the same.

The output can be displayed in a data output table. The table has multiple tabs that show the data separately for income, expenses and assets. There is also a tab that provides a Grand Total that displays all of the data. Each of these can be printed or exported to Excel or CVS formats.

OnTrajectory also provides the ability to run Monte Carlo Simulations and allow for the model to consider past market performance that you want to consider. You can model from 1928 to the present or chose any specific date range. While I find this useful, it can be a bit too much for those who do not have a basic understanding of statistical analysis.

There is a 14-day trial that does not require a credit card to set up. The $7/month cost has recently been reduced to $4.99/month which will not increase should you renew. For me this retirement calculator is a great value.

MaxiFi Planner

This calculator takes a different approach. It calculates the highest spending level your household’s income and assets can support and provide a plan to sustain and protect it for life. Like other calculators you enter information about income and assets, but other than a mortgage payment it does not have you enter expenses.

You can directly link to your Social Security account at www.ssa.gov and it will load your past covered earnings and update your expected benefit. The program will also provide the lifetime impact of various options for claiming your benefit. Tracking and verifying your earnings is an important step in making sure that you receive your appropriate benefit.

You can enter information about your mortgage and home value that allows the program to forecast equity in the future and include it in calculations of net worth.

The calculator uses Monte Carlo simulation, but the assumptions that are used are not transparent. It forecasts your Medicare Plan B premiums and adds that to the expenses. The output shows your Lifetime Income and Lifetime Expenses. After deducting housing costs, insurance and taxes it shows the amount of “Discretionary Income” over your lifetime.

The results of outputs such as Income and Spending, Annual Savings and Net Worth are provided both graphically and in tables. You have the ability to view the output on a year by year basis.

The primary result is the “Per Adult Standard of Living”. The Monte Carlo Simulation allows you to set a Base Strategy, Safe Strategy and Risky Strategy and input expected rates of return on each of your asset categories. The result is shown as both a graph and data that forecasts results based upon varying confidence levels. If you are not well versed in statistics, this can be a bit overwhelming.

You do have the ability to develop multiple plans. You are able to create a copy of the Base Plan and make changes to develop alternate scenarios.

While I think that there is a lot “going on under the hood” with this calculator, I have trouble get my head wrapped around the output drawing conclusions about different strategies.

Conclusion

A good retirement calculator can provide you with valuable insights whether you are just beginning your savings plan or have begun retirement and are wanting to make sure that your nest egg will provide security throughout your retirement years.

OnTrajectory is the retirement calculator that meets my needs. It has a lot of flexibility and I find the feature of being able to turn on/off an expense such as purchasing a boat very useful to see how decisions effect your long-term plan. It also tracks well with Fidelity’s retirement calculator and provides more what-if capability to model a variety of strategies.

Fewer people work for employers who provide pension programs and Social Security is not sufficient to support a comfortable retirement. My advice is to begin saving for retirement as early as possible. If your employer offers a 401(k) plan, sign up. It is easy to save when it is routinely deducted from your regular paycheck. In addition, most employers match your contribution to some level which is additional income. If you can manage, I would also suggest making contributions to a Roth IRA. When you get to retirement, having a stream of income sources which are not subject to income tax provides a shelter for tax obligations in your retirement years.