A recent study from Northwestern Mutual Life Insurance finds that 83% of people were prompted to either create, revisit or adjust their financial plan during the pandemic. That is hardly a surprise to J.R. Robinson, a financial software developer and founder of Honolulu-based Financial Planning Hawaii. Robinson, whose software, Nest Egg Guru, was developed for industry professionals, said there’s a silver lining in the current environment if people improve their financial discipline.
“The problem,” he said, “is that retirement spending simulation software being offered as a free service by direct-to-consumer financial institutions is universally overly optimistic.” In other words, these calculators will lead people to believe that they will have more money for retirement than is realistic.
Robinson, who has been featured in the Wall Street Journal, Forbes, USA Today and the Honolulu Star-Advertiser, recently published an article on this subject in the trade journal Advisor Perspectives that was titled “Be Afraid, Very Afraid, of Retiring in the 2020s.”
To test the theory, he used Vanguard’s popular “Retirement Nest Egg Calculator,” which is available for free. He said this software anomaly is not confined to Vanguard. “The issue,” Robinson said, “is ubiquitous.”
To get a third-party assessment of Robinson’s analysis, I spoke to Honolulu-based Mike Sklarz, founder of Collateral Analytics and an investment pro with a national reputation. Sklarz said he agreed with Robinson’s premise.
“Today’s low interest rates and high stock valuations make for a challenging environment going forward for realizing good investment returns,” Sklarz said. “This combination is quite different from more typical levels upon which these types of calculators are based. Retirement calculators using historical data will not reflect the present reality and, thus, will not provide an accurate evaluation unless these factors are considered.”
I sat down with Robinson recently and asked him what readers might do to better manage their retirement planning.
Question: In your article. “Be Afraid, Very Afraid, of Retiring in the 2020s,” you state that off-the-shelf retirement planning software is inaccurate. How did you come to this conclusion?
Answer: The return assumptions for bonds and cash tend to be based upon the historical experience rather than the current investment climate.
Q: What lessons can someone planning for retirement in the next decade take home from your research?
A: The most important lesson that investors should glean from our work is to understand that we are in a unique historical period for retirement income planning. Investors have generally perceived bonds to be safe and stocks to be risky. Today consumers need to recognize that with interest rates near historic lows, bonds may be nearly as risky as stocks.
Q: Can you provide an example?
A: Last week a client asked me to check out a government bond index ETF as an alternative for his cash, which was yielding 0%. The ETF he gave me has a current yield of 1.75%. To answer his question, I showed him the year-to-date total return for the ETF. The fund was down almost 12% for the year because of a relatively minor uptick in long-term interest rates. Were rates to rise more significantly, these “safe” bond funds and ETFs may not look so safe.
Q: What can people do to offset this problem?
A: I would say remain flexible in your spending strategy in retirement. Were we to experience a major prolonged bear market in stocks (similar to what we experienced in the 2000s) paired with the current low-interest-rate environment, it will be a perfect recipe for premature portfolio depletion. Riding out such a storm may require reducing spending in retirement if we begin to see rising interest rates paired with stock market declines in the next several years.
Q: Is there a better retirement planning software that you recommend?
A: To be honest, I don’t think there is any consumer retirement planning software that realistically illustrates the risk pending or recent retirees face in outliving their savings.
Q: What can an investor do to correct this problem?
A: The first thing is to avoid adopting popular static spending strategies such as the “Four Percent Rule,” which falsely implies that a 4% inflation- adjusted spending rate will last indefinitely. Instead, retirees should set their initial spending at a level that meets their fixed and discretionary needs. They should be prepared to adjust their spending amount up or down incrementally over time, depending upon future investment conditions.
Rob Kay, a Honolulu-based writer, covers technology and sustainability for Tech View and is the creator of fijiguide.com Opens in a new tab. He can be reached at Robertfredkay@gmail.com.
