Calculators used by investors to gauge their probability of retirement success may not actually be good gauges of that success.
Comparing the outputs from several retirement planning programs shows a huge dispersion of results, underpinning how investors and advisers should use them as a guide rather than take them at face value.
Those conclusions come courtesy of a new study from research shop Corporate Insight, which compared results of more than 10 publicly available retirement planning calculators from big-name financial services companies such as Principal Financial Group, Prudential Financial, Vanguard Group and T. Rowe Price.
Corporate Insight found a 60% variance in monthly income projections, and an even higher 85% in the suggested retirement goals of these calculators.
Specifically, even though the same investor profile was plugged into the calculators, the projected retirement income streams ranged from $3,772 to $6,013 per month, based partly on specs such as age and current savings. The dispersion for retirement goals — or a monthly income goal based on a particular income replacement ratio — was even greater, ranging from $4,892 to $9,029 per month.
“The 12 planners we examined for this study … all provided dramatically different results in terms of intuitiveness, comprehensiveness and even overall quality. These disparate results can lead to confusion among investors, and, at worst, could encourage poor behavior,” according to the report, which is slated for release June 21.
These findings are similar to those from a study published earlier this year by researchers from Texas Tech University and Utah Valley University, who found advice provided by a majority of such tools “extremely misleading.”
Framing retirement savings around income rather than a pure accumulation picture has been a hot topic among industry players. For example, BlackRock, the world's largest asset manager, a few years ago created a series of indexes and funds meant to track changes in the cost of retirement income.
The U.S. Treasury Department also issued rules in 2014 promoting purchase of certain types of deferred-income annuities with qualified plan money; that same year, Treasury promoted the use of deferred annuities within target date funds.
NO RIGHT ANSWER
The dispersion in income projection comes primarily from differences in six underlying assumptions: taxes, inflation rates, salary growth, Social Security benefits, investment returns and ages (current, retirement and life expectancy). Investment return drives the largest discrepancies, according to the Corporate Insight report.
Variance in income goals derives from four factors: income replacement ratio, salary growth, inflation rate and taxes.
“If you're not mindful of these assumptions and how they influence your projection and your goals, they could be misleading,” said Andrew Way, senior retirement analyst at Corporate Insight.
For example, income projections between the Merrill Edge Personal Retirement calculator and WealthMSI Retirement Planner differ by about $1,000 per month, largely because the Merrill tool assumes a 4.7% post-retirement rate of return while WealthMSI's assumes 4%.
Another example of underlying differences, the MassMutual Retirement Planner and Prudential Retirement Income Calculator, shows income projections in future-dollar values, rather than present-value estimates like the other calculators.
“There are some really fundamental assumptions that have to be built into these calculators,” and even slight changes can have a big impact on outputs, according to Jeff Kletti, head of investments for Wells Fargo Institutional Retirement and Trust. “There isn't a right answer.”
In determining which calculators to analyze in the study, Corporate Insight required they be publicly available; provide an income projection, whether monthly or annual; and allow researchers to standardize some plug-ins such as years until retirement, how much an investor has in current savings and how much that investor is periodically saving.
Private calculators — or, those only available to certain plan participants — automatically import participant data and don't allow for some standardization, which is why they were not included in the study, Mr. Way said.
Although these private calculators, for use only by plan participants, are often better and more accurate than the ones providers make publicly available, the same general discrepancies hold true due to some of the same underlying assumptions driving results, Mr. Way said.
“I think the variation in the output in retirement income calculations is entirely to be expected given the different factors and weightings they each model uses to make their forecasts,” according to Neil Bathon, managing partner at FUSE Research Network.
Going forward, Mr. Bathon expects the level of customization of these calculators to reach beyond what's available today.
“Ultimately, we will have calculators that collect much more complete information on spending, savings and investing and deliver real-time updates on whether or not the investor is on track, both in the accumulation phase and throughout the drawdown phase,” Mr. Bathon said.