New Society of Actuaries and Actuarial Foundation Report Identifies Benefits and Gaps with Retirement Planning Software
Highlighting the need for more long-term retirement planning following the economic downturn, the Society of Actuaries (SOA) and Actuarial Foundation released the new report Retirement Planning Software and Post-Retirement Risks.
The report focused on assessing the benefits and gaps with retirement planning software and provided recommendations to refine these tools to help individuals be more prepared for the future.
The report analyzed 12 financial planning software programs most commonly used by individuals and financial advisors.
The tools were either available to individuals over the Internet or were designed for use by financial planners for their clients.
Financial planning software makes more in-depth planning possible, but according to the report, the majority of available tools are still not effectively addressing the wide range of individual issues related to retirement.
According to the research, software packages need to better address key planning drivers such as:
- Longevity: Consideration of the retirement planning period and the handling of longevity risk vary considerably among the programs with some apparent inconsistencies. This is an important planning factor because the range of lifetimes between users can be significant with different probabilities of living beyond a given age.
- Unexpected Events and Risks: Financial planning software under-represent extreme events, such as the current financial crisis. The examined retirement programs generally were unable to analyze the risks of variable rate mortgages or large declines in housing prices. The majority of software surveyed did not consider the possibility of a large stock market and housing market decline occurring at the same time that a person nearing retirement has lost a job.
- Housing: There is inconsistent treatment of housing as an asset for use in financing retirement. Some programs allow users to specify whether they are willing to sell their home to meet retirement expenses.
- Social Security: Software programs inadequately estimated the level of Social Security benefits users are entitled to, and did not direct consumers to the Social Security Administration Web site to obtain an accurate benefit estimate at no charge.
- Annuities: Software programs usually did not evaluate the possibility of annuitization, converting assets into lifetime income annuities, as an option to reduce risk. There was also a lack of consideration of different options for timing of payouts.
“In addition to quantifying investment risks, the financial planning software should provide results for different scenarios,” said Kirk Kreikemeier, FSA, CFA, a financial planner and SOA Project Oversight Group member for the report.
“For example, the software should provide results for living to various ages beyond average life expectancy, which an individual has a 50 percent chance of outliving, and the difference in after-tax retirement income based on when individuals begin to collect Social Security benefits.”
Tying in with the report, the SOA hosted a nationally representative telephone survey of 1,365 individuals not retired (18 and older) to gauge their attitudes and behaviors with retirement calculators and related tools.
Thirty-nine percent surveyed neither actively planned for retirement nor sought any type of retirement advice.
“It is a startling realization that many individuals still don’t have a retirement plan in place,” said Richard Murphy, FSA, MAAA and SOA Project Oversight Group member for the report.
The survey found that 55 percent of individuals are skeptical about retirement computer software and online tools, saying they have little to no trust that the tools provide an adequate assessment for retirement planning.
Individuals were asked which types of tools, resources or services they and/or their spouses used to prepare for retirement. Only 10 percent surveyed used retirement planning software, while 36 percent relied on advice from friends and family.
“The aftermath of the financial crisis is a wake-up call for individuals to ensure they plan for retirement and address the inevitable risks on the horizon,” said Murphy.
“Retirement Planning software tools, with their various strengths and weaknesses, are an integral part of that process.”
For the full report Retirement Planning Software and Post-Retirement Risks please visit soa.org.
About Actuaries
Actuaries bring a complex future into focus by applying unique insight to risk and opportunity. Known for their comprehensive approach, actuaries enable smart, more confident decisions.
About the Society of Actuaries
The Society of Actuaries is an educational, research and professional organization dedicated to serving the public, its members and its candidates. The SOA’s mission is to advance actuarial knowledge and to enhance the ability of actuaries to provide expert advice and relevant solutions for financial, business and societal problems.
The SOA’s vision is for actuaries to be the leading professionals in the measurement and management of risk.
To learn more, visit soa.org.
About the Actuarial Foundation
The Actuarial Foundation is a 501(c)(3) organization established in 1994 to help facilitate and broaden the profession’s contribution to society by bringing together broad partnerships of individuals and organizations to address social problems in creative ways.
The Foundation’s mission is to develop, fund and execute education and research programs that serve the public by harnessing the talents of actuaries.
MEDIA CONTACT:
Kim McKeown, 847-706-3528
Society of Actuaries
kmckeown@soa.org
Michael Nowak, 312-729-4346
GolinHarris
mnowak@golinharris.com
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I have worked for execplan express financial planning software for 15 years and have seen the “miisunderatnding” of the pupose of financial planning software over and over. Like the business of fincnacial planning, it isn’t about predicting the future, you simply cant. No advisor can do it and no software can do it, not for 3 years and surely not 30 years. Retirement Software as well as professional advisors are not for predicting the future, but for preparing for it and should instead be used to set two goals.
Long term, the software should provide a frame work of where you are headed and if you have suffecient current resources to meet that goal. Periodically you shoule review your current position with the projected one and make adjustments to continue or to return to the right track.
Secondly better software should look at short term planning that can improve your long term potential through proper managment. Software that provides and actual income tax calculation, and allows the user to controll year by year income, expenses and investing, will allow the user to “tets” or see what investment strategies, or liquidation methods are the most tax effecient. A simplistic example of Muni bonds paying 2% as opposed to corporate bond paying 3% might make sense for someone in the top income tax bracket (assuming no AMT issues, again good software will calculate this as well) where as someone in the 15% bracket would quickly see munis are a bad investment
Any focusing on retirement should also include risk managment issues such as premature death or disability. Retirement software or your financial advisor should be able to also handle risk managment issues such as estate tax exposure and life insurance needs analysis.