Although they have hitches, these packages are surprisingly good for basic planning.
Most professional retirement planning software
packages do a competent job, but they are time consuming. Sometimes,
either because the client can't afford it or because a prospect doesn't
justify it, the advisor is limited in what he or she can offer. It is
at those times that professionals crave a fast, easy-to-use retirement
application. They don't necessarily expect this type of program to
create the perfect, detailed plan, but they do expect it to advance the
client's progress towards a retirement goal.
Let's examine two programs that promise quick and
easy results: OppenheimerFunds Retirement Income Manager 2.0 and
Retirement Savings Planner from Torrid Technologies, Inc.
OppenheimerFunds Retirement Income Manager 2.0
When I first covered OppenheimerFunds Retirement
Income Manager (RIM) in my October 2005 column, my initial impression
was favorable. OppenheimerFunds, to their credit, was one of the first
firms to offer advisors a simple, stand-alone, Web-based retirement
income planning application. Best of all, it was free.
Many who tried the program liked it, but soon they
requested additional features. These requests led to the recent release
of RIM version 2.0. According to John M. Davis, vice president of
retirement plans at OppenheimerFunds Inc. "We tried to keep version 2.0
simple on the front end so that advisors will be encouraged to use it
with more clients. At the same time, we tried to make the program more
sophisticated at the back end." I decided to take a look to see how
successful OppenheimerFunds was at meeting those goals.
Overall, I think they've succeeded. While the
program does some sophisticated calculations behind the scenes,
including a 2,000-iteration Monte Carlo simulation, the interface
remains accessible.
This version addresses a number of criticisms I
leveled at version 1.0. In the area of withdrawals, advisors now have
the ability to differentiate between four pools of assets (qualified,
nonqualified, tax deferred, tax free) and to designate the order each
of those assets will be spent at the client level. RIM 2.0 is smart
enough to start taking required minimum distributions (RMD) from
qualified plans and traditional IRAs when a client turns age 70.5,
regardless of the distribution order the advisor designates. This is
something the earlier version could not do.
The initial version had very limited portfolio
construction/asset allocation choices. Version 2.0 is much better. This
version's default model portfolios are comprised of up to eight asset
classes (U.S. large cap, U.S. mid cap, U.S. small cap, International,
bond, money market, REITs and real assets). Depending on your client's
risk tolerance, the program will recommend allocation to as few as four
or as many as eight asset classes. In addition, the application will
most likely recommend shifting the portfolio gradually to a more
conservative stance as the client ages. For example, an aggressive
couple might have close to 100% invested in equities upon retirement,
then scale it back to 65% at age 77 and further scale it back to 50% at
age 82. Better yet, advisors can now totally customize the allocations
to each asset class, so if they want to adjust the weightings it only
takes a minute to do.
RIM now offers users the ability to model primary
residence as a retirement asset. Users can classify the primary
residence as a use asset until death, as an asset that can be sold to
finance retirement or as an asset to be borrowed against through a
reverse mortgages. The reverse mortgage-modeling tool conforms to FHA
guidelines, so it is capable of illustrating a lump-sum cash inflow or
a fixed annual one. It will take into account closing fees, loan
origination fees and annual servicing fees, if any. In addition to the
primary residence, advisors can now model and include investment real
estate in the plan. Other enhancements include the ability to designate
an emergency fund and the ability to compare three scenarios side by
side.
Version 2.0 offers enhanced preretirement modeling.
Now, advisors can begin the retirement income planning process with
clients ten years before they retire, hopefully giving advisors the
chance to impact client decisions while they are still in their prime
earning years.
With all of these additions, you would think that
the interface might have suffered, but it hasn't. The core
functionality of RIM 2.0 requires only five screens, just as the
previous version did. Of course, if you want to use some of the
customization features or the optional worksheets you will end up
visiting additional screens, but even if you do the whole process is
intuitive and fast.
There are some minor annoyances. If you add a
spouse, you have to remember to check the "include spouse in
calculation" box. I'd prefer to see the box checked by default, giving
advisors the opportunity to uncheck it. You still have to save the
pages manually. I think a better option would be to save by default, or
at least to ask if you want to save when you leave a screen.
The program still does not automatically account for
state and local taxes, although you can enter an approximation
manually. Some of the error messages are undecipherable, so if you
leave something out or if you make a mistake you can't always determine
what the problem is.
The printed reports, while an improvement over the
initial version, still waste too much paper, largely due to
disclosures, disclaimers and explanations. One sample plan I ran
generated a report of 25 pages. Of those, less than ten represented the
core plan. Some of the rest was valuable educational material, but most
of it was disclosures that most clients will never bother to read.
While some will undoubtedly criticize RIM as a
planning lightweight, it does, in a matter of minutes, provide useful
output. The fact that it is free only adds to its appeal. Given the
fact that most baby boomers are woefully in need of fundamental
retirement income planning advice, Retirement Income Manager Version
2.0 can fill a real need. If you are looking for an inexpensive, easy
to use retirement income planning tool, contact Oppenheimer Funds and
take RIM version 2.0 for a test drive.
Retirement Savings Planner From Torrid Technologies Inc.
In contrast to RIM, which is Web-based, Retirement
Savings Planner (RSP) from Torrid Technologies Inc.
(http://www.torrid-tech.com/) is desktop software. It can be downloaded
from the Web and installed on any modern PC. The program was originally
designed for consumers, and the firm still offers two consumer-oriented
editions. The personal edition is designed for plan participants and
other individuals. The couples edition allows individual data entry for
each partner and provides a total picture of the couple's retirement
outlook. The professional edition, our primary focus today, allows
advisors to enter and save an unlimited number of "couples" files. The
professional version sells for $699; upgrades are $279.
Like RIM, one of RSP's most endearing features is
ease of use. When you create a new client file, you enter personal
information such as name, address, Social Security number and date of
birth. You can even include a client photo. The date of birth is used
to calculate the age of the client on the main screen.
Other personal information can be entered right into
the main screen at the bottom. If I want to change the retirement age
from 65 to 67, I would just click on the field and enter the value I
desire. As you can see, very little data is required to create a basic
plan. You need income, current account balances and estimated future
savings, projected Social Security benefit and any pension income
expected. As you enter data, the graph refreshes to enter the new
assumptions.
The Social Security portion of the program is well
conceived. You can enter your own estimated benefit, or the program
will calculate a benefit based upon inputs you provide on a separate
screen. If we were planning for a couple, there would be a tab between
the "John" tab and the "other assumptions" tab to enter the spouse's
information.
The "other assumptions" tab is where you enter the
retirement income goal, estimated inflation rate, end date (the date
the primary client dies), tax rate preretirement and tax rate
postretirement.
Once the data is entered, you can get a projection
for any point in time by dragging the red line in the graph. As you
move the marker from one year to another, all of the projected balances
for the year in question are displayed. Those requiring all the
underlying cash flows can click on the spreadsheet button to the right,
and the details will be revealed.
If you want to enter additional details, you can use
the buttons to the right of the screen to do so. For example, you can
select the investment button and enter individual holdings, each with
their own projected rate of return pre- and postretirement. Once you
are done, you click the "enter totals on main screen" button, and the
totals are transported to the main screen. If you wish to enter
additional cash inflows or outflows, you hit the appropriate button to
enter all the details. For example, if you anticipate an inheritance at
age 70, you can list the year, duration, growth rates of the asset, tax
status of the inflows, etc.
Retirement Savings Planner has a number of appealing
features. First and foremost is ease of use. Most data entry takes
place on two screens, yet with a few additional mouse clicks, you can
add numerous refinements to the plan. The graph updates as you work on
the main screen, which I like. The Social Security benefit estimator is
something many professional programs, including RIM, fail to provide.
Torrid Technologies offers an excellent series of
video tutorials (about 20 minutes in total) that should get just about
any professional up and running with the program, another plus.
On the other hand, there's ample reason to avoid
RSP. The primary concern is its reliance on straight-line calculations.
This program takes each "bucket" of money (taxable, tax-deferred and
tax free) and inflates them at a constant rate. We all know that this
is not the way clients realize returns in the real world. In the real
world, returns vary over time, sometimes dramatically.
We also know that in the retirement years, the order
of returns can be just as significant as the rates of return. That's
why Monte Carlo analysis, or some other probability measurement, has
become standard in almost every professional retirement planning
package. Unfortunately, RSP fails to provide any perspective on
investment risk. I admire the simple interface, the graphs and the
overall program layout; however the screens themselves look a little
dated. This is not a critical deficiency, but it is noticeable.
While this review is concerned primarily with RSP as
a professional tool, I'd be remiss if I did not point out the pitfalls
the general public might encounter using the personal or couples
edition. My primary concern here is that an uninformed consumer could
overestimate rates of return and/or underestimate expenses during
retirement. This could be disastrous. Without some constraints on the
consumer editions, and without some representation of risk, I find the
consumer editions more troubling than the professional one.
The bottom line of RSP is that it has potential, but
it needs to move beyond straight-line return calculations if it is to
be taken seriously by professionals. With the addition of probability
analysis, or some other representation of worst- vs. best-case
scenarios, RSP would be a more palatable choice for consumers and
professionals alike.
If you are looking for a quick and easy retirement
income planning program today, the Oppenheimer Retirement Income
Manager is the better choice. It is more sophisticated, it addresses
portfolio construction/asset allocation, it employs a Monte Carlo
simulation to address the probability of various outcomes, it attempts
to address longevity and it is free. I think RIM could do a better job
of estimating Social Security benefits, but it spite of that
shortcoming, it gets the nod over Retirement Savings Planner.
Joel P. Bruckenstein, publisher of
Virtual Office News (www.virtualofficenews.com) and an expert in
applied technology for financial services professionals, can be
contacted at [email protected].