Can I Trust Retirement Planning Software?

What is the state of retirement and retirement income software? Can I trust what I get from my adviser? What do I need to know about underlying assumptions and the like?

Those are the questions posed to Jeffrey Levine, director of advanced planning at Buckingham Wealth Partners, in this episode of Ask the Hammer.

And the answer: “The state of software today is infinitely better than it was in previous years,” says Levine. It can do so much more than it did five or six years ago and it’s iterating quickly. “It’s really incredible to see the pace at which things are changing,” he says.

But while retirement planning software is “infinitely better” than what it was it’s still light years away from where Levine thinks it needs to be. “There’s still a lot of gaps,” he says.

Levine also says it’s important to get a list of the assumptions – inflation rates, investment returns, life expectancy, tax rates, etc. – being used in retirement planning software programs. “The old expression garbage in, garbage out truly applies here,” says Levine. 

And you really can’t trust the software’s output until you understand the underlying assumptions and assess whether the assumptions are realistic, he notes. 

A good way to determine if the assumptions are correct, Levine says, is to ask what they are based on. The wrong answer, he says, is “that’s what the software has as its default. That is not a good answer. It doesn’t mean the software is wrong, but that is not a good answer.”

What you want to hear is: The assumptions are based on research or academic studies and not guesswork or the defaults.

In addition, Levine says it’s wise to adjust assumptions and conduct what-if scenarios. What if inflation is 4% instead of 2%? What if investment returns are 4% instead of 6%? And so on. Some refer to this as stress testing the retirement plan.

Levine also notes that a retirement plan is not a static document; It’s out of date the moment you receive it. “It doesn’t mean it’s useless,” he says.

But it does mean you need to monitor and revise it accordingly. “This is something that needs to be kept up with on a regular basis,” says Levine.

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