The Efficacy Of Publicly-Available Retirement Planning Tools

The Efficacy Of Publicly-Available Retirement Planning Tools

Taft Dorman

Texas Tech University

Barry S. Mulholland

Texas Tech University

Qianwen Bi

Utah Valley University

Harold Evensky

Evensky & Katz Wealth Management

February 18, 2016


Publicly-available retirement planning tools are publicized to aid households in their retirement planning efforts, but households are likely overestimating tool effectiveness. The authors conclude that the advice provided from a majority of these tools is extremely misleading to households, and propose a more systematic approach to tool development by improved choice of input variables. Analyzing professional advisor opinion and theory, critical input variables are identified and recommended. A case scenario is developed incorporating these critical variables and used to test the efficacy of 36 publicly-available retirement planning tools.

The Efficacy Of Publicly-Available Retirement Planning Tools – Introduction

“Annual income twenty pounds, annual expenditure nineteen six, result happiness. Annual income twenty pounds, annual expenditure twenty pound ought and six, result misery” – Charles Dickens, David Copperfield

Retirement planning is complex and continues to be a challenge for American households, financial professionals, and researchers due to uncertainties about the future (see Bernheim, Skinner, and Weinberg, 2001; Skinner, 2007). Consumer questions abound: Will I be able to retire? Do I have enough to retire? Will I run out of money in retirement? And, how do I find the correct answer to these fundamental questions? Even after decades of research, the challenge of producing lifetime income remains a conundrum (see Siegel 2015). Therefore, it is no surprise that the CFA Institute’s Future of Finance initiative considers “Retirement Security” as one of its six areas of focus (see CFA Institute, 2015).

One approach to answering the difficult retirement questions is for households to seek a financial professional (see Campbell, 2006; Fischer and Gerhardt, 2007). But not all households can afford professional advice, and those who can struggle to discern good advice from bad advice (see Mullainathan, Noeth, and Schoar, 2012; Hung, Clancy, Dominitz, Talley, and Berrebi, 2008; Inderst and Ottaviani, 2012; Bodie, 2003; Del Guercio and Reuter, 2012). Finding a trustworthy advisor may be difficult because not all financial professionals provide unbiased, high quality advice. Consequently, search cost may be high for many households who desire financial advice, thus causing them to seek alternatives for their retirement planning needs, even “do-it-yourself” options.

retirement planning tools

retirement planning tools

One alternative is to conduct a web-based search for a publicly-available retirement planning tool that may attempt to answer the plethora of retirement questions in one place. Some households may think these tools are trustworthy because they come from third-party sources, or that they are cost effective since they may significantly reduce search cost.

We define publicly-available retirement planning tools as tools that provide an answer as to whether or not a household can meet its unique retirement goals. These are tools that households can find and use, either for free or for a modest fee, without the assistance of a financial professional. There are dozens of publicly-available retirement planning tools, many of which are found on well-known company websites. The variation of tool inputs and default settings invites the question: Which demographic, financial, and economic inputs, including their default settings, are necessary for publicly-available retirement planning tools to provide an appropriate recommendation?

This paper investigates the necessary inputs and default settings of publicly-available retirement planning tools while focusing on three important outcomes. First, it identifies the relevance of the advice provided to households using these tools. Second, it highlights the risk household’s face by using these tools. And third, it provides tool developers with critical information to convert their tools, as necessary, from their current state, into more valuable guides.

Figure 2: Results of Professional Survey on Variable Importance (Average Ratings)

retirement planning tools

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