How Retirement Planning Tools Are Ruining American Retirements

Today I’m going to explain how retirement planning tools are ruining American retirements.

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Every year I spend hundreds of hours helping my clients interpret financial plan data so that they can get the most satisfaction out of the wealth they have accumulated.

Online Retirement planning tools like Right capital, New Retirement, and Empower play a major role in most retiree’s retirement decisions and will likely play an increasingly important role in Americans retirement planning efforts in the coming years.

Unfortunately, there are some major pitfalls to be aware of when using “probability of success” or “Monte Carlo” driven retirement tools.

These pitfalls often lead to retiree’s retiring far later than they otherwise could, as well as spending far less of their wealth than they appropriately can.

At Peak Financial Planning it is our belief that you have worked hard to save so that you can not only have a stable retirement, but also a maximally enjoyable retirement. 

In today’s post I will be exploring the pros and cons of probability of success-based retirement planning tools and ultimately explaining the place we believe they should hold in modern day retirement planning.

It’s important to start by defining financial planning tools.

These are online financial calculators that present spreadsheet data in easy to digest visual reports, typically reports that rely on a “probability of success” metric. Also known as Monte Carlo score.

What is the purported purpose of a “probability of success” based financial planning tool

• Create clarity and allow more confident retirement
• Put better tools in the hands of the consumer
• Empower individuals to do their own retirement planning if they wish to
  
  

I believe these are all admirable goals if they could be achieved responsibly.

I'd like to make 2 disclaimers

1 - I use and appreciate financial planning tools in my practice. I’ll explain how and why in this podcast. I am not saying to wholesale write them off - I am only trying to educate so that we can restore a healthy respect for a tool and a process that deserves more respect and caution than it is currently receiving.

2- There will be OBVIOUS exceptions to the claims I make in this episode. A certain subset of people will have the intuition and discipline to build more detailed models, to look beneath the surface, and have the combination of risk tolerance, wisdom, and experience to properly use retirement planning tools and obtain excellent outcomes. My claim is that this is a small subset and FAR from the majority of the retiring population.

Unfortunately, what probability of success financial planning tools actually do is:

1. Mislead with overly simplified reports that we often trust without knowing or exploring what is actually beneath the surface.

2. Create lazy plans (and lazy planners) - because the tool does the heavy lifting, we become less competent as actual planners (we meaning both professional or DIY planners)

3. Convinces consumers that they can “become their own doctors” -

There are many areas of our life where we know that we should delegate to specialists, a doctor being the best obvious example. Yes, I can go on WebMD.

I can type in symptoms that I'm having, and I can try to diagnose my own medical ailment.

The problem is, the risk and the consequence of doing that are so high that I know I should rely upon someone who has many years of schooling, education, mentorship, experience, intuition, and wisdom.

That is all kind of created through the process of becoming that doctor, to give me that medical diagnosis.

And there are many other careers that we think of this in our lives, such as being a CPA, you know, a tax accountant, a lawyer.

And in my opinion, the same thing holds true for financial planners or financial advisors.

Done properly, these are really complex matters. There's lots of nuance and the risk and consequence are high.

And financial planning tools, by making things too easy and removing too much decision-making friction can oftentimes mislead us into thinking we can become our own doctor.

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4. Probability of success generated by a retirement planning tool is useful directionally but doesn't give us the step-by-step directions, the tracking system, or the “if than” contingency plans. It also does not follow actual human behavior...

The best analogy for this would be google maps - one of the most commonly used planning tools of all time

See google maps helps you plan how to get from point A to point B.

If all google maps did was tell you WHERE point B was, it wouldn’t be a useful tool at all.

What makes google maps useful is that once you plug in point B, it will tell you 5 things

1. Where you are Now
2. Where you would like to go
3. Turn by turn directions to get there
4. It will monitor your real time driving route for any road closures, accidents, or other problems
5. It will provide you adjustments or rerouting instructions if the monitoring turns up any problems.

What makes google maps valuable as a tool are the things that happen in between point a and point b

Retirement planning is exactly the same.

A REAL retirement plan has 5 parts

1. Assessment (Point A)
2. Destination (goal) (Point B)
3. Prescription - Turn by Turn Directions
4. Real time monitoring
5. Adjustments - Rerouting options

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5. To compensate for not having a clear understanding of contingency plans and priority of action items, we Delay retiring in pursuit of higher prob of success often time because we don’t actually understand what the prob of success indicates

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The central premise I’m making is that with clear understanding and documentation of robust contingency plans, many people would retire earlier and spend more of their wealth because they would be reassured of the possibility of doing that because they would have tools in their toolbox rather than just having a wish and a dream that they have so much money saved that they run no risk of running out.

Either delay retirement (and waste years that you can't get back) or spend less in retirement (lose out on the satisfaction and joy your wealth can provide) when in actuality you could have both stability and satisfaction if you had the right turn by turn directions, real time monitoring, and contingency plans in place. 

So how do we incorporate prob of success tools into our retirement planning efforts

• Use them as a baseline
• Use dynamic spending tools like income labs that tie spending to dynamic variables like your portfolio value
• Use spreadsheets like a distribution rate table that gets updated annually so you know where your distribution rate risk will be and how to compensate or adjust for that
• Use real time spending tracking tools like everydollar or quickbooks
• Better risk and reward measures for our portfolio - instead of using ONLY Asset allocation and rate of return, use things like standard deviation, beta, market correlation, maximum drawdown, etc.

Ask yourself - if you use or have used a prob of success ret planning tool, and you have a high prob of success (say above 70%), why have you not retired? What are you waiting for? Is it a specific # on the prob of success? Is it a specific dollar amount in savings? What will those things mean for you if you achieve them?
I’d like you to consider whether higher probability of success or more money are what you are looking for, or if what you’re looking for

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