Planning your retirement online

Imagine a loved one needs emergency surgery. In the operating room, the doctor turns to you. "Where would you like us to cut?"

The physician points to a surgical calculator in the corner of the room. "Go play around and see if you can find a direction," he says.

Unrealistic? Not in the world of retirement planning, where financial novices are forced to make decisions far beyond their comprehension, says Brooks Hamilton, founder of Brooks Hamilton & Associates, an employee benefits consultancy focusing on the 401(k) investment performance gap. "There was no Million Man March in Washington by workers demanding the right to direct their own investments," he adds.

Hamilton isn't the only one who compares do-it-yourself retirement planning to a layperson performing surgery. Even Jennifer Ridley-Hanson, a Certified Financial Planner who manages a team of CFPs at the education and consulting company Financial Finesse, has been stumped by an online retirement planning tool.

After calculating her finances, the tool spit out an unappetizing figure: It said she needed to save $992,000 for a comfortable retirement. She was already socking money away in her 401(k); how would she ever save that much more?

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Looking back at the inputs, it hit her. The tool hadn't asked what she's already saving, so it hadn't taken that into account. Whew.

Three types of tools
Do-it-yourselfers can turn to three basic types of technology tools for retirement planning, according to a recent Retirement Planning Software report from LIMRA International and the Society of Actuaries:

savings calculators,
online advice providers,
planning software.

Tools range from simple to sophisticated, with the six consumer programs studied requiring 20 to 160 inputs.

Some even use a statistical technique called Monte Carlo to generate values for unknown variables, allowing users to see the likelihood of their savings lasting throughout retirement.

"The value of consumer software is to help the average person be aware of the magnitude of saving for retirement -- how just a little bit more saved can go a long way," explains Betty Meredith, director of education and research at the International Foundation for Retirement Education, and a member of the software report's project oversight group.

Yet, these web-and software-based tools are often seen as little more than gadgets or curiosities, notes Andrew Gluck, founder of Advisor Products Inc., a communications and marketing company serving independent financial advisers. Not long ago, the industry thought, "Consumers are going to be building their own financial plans any day now. But it's just not materializing."

When a mention of these tools is made somewhere in the midst of their seven-pound 401(k) plan kit, says Hamilton, it's not surprising most consumers miss it.

Jane White, president of the nonprofit Retirement Solutions Foundation, suspects that people view these tools like they do taxes: "Here's a depressing thing where I'm going to have to find all the numbers," they sigh.

So who is most likely to get caught curled up with a good retirement tool? For starters, the type who would do their own taxes, says Ridley-Hanson. Experts site characteristics such as self-directed, detail-oriented and tech-savvy as requisites.

Great expectations
Want to take the self-planning plunge? Experts advise viewing retirement tools as a starting point only. "They simply never replace a good fee-only planner," says Rick Meigs, president of 401(k)helpcenter.com, LLC. "They can't come back and ask probing questions."

Don't expect clear answers from these tools, either. They may provide "a false sense of security or scare the you-know-what out of [you]," Ridley-Hanson says. "One site may say you'll live with dignity until age 95, the other will say, 'Shoot yourself -- you're in trouble,'" quips Craig Hoogstra, manager of financial products for AARP Services Inc. Users often don't know what underlying assumptions were used to create a tool. And, of course, rate-of-return and lifespan assumptions are anybody's guess.

But the availability of various tools, and the ability to play around with various scenarios, are "very positive steps on the way to greater awareness," says Brent A. Neiser, director of collaborative programs for the National Endowment for Financial Education. "It's sort of a way to look at a mirror of your finances."

Trisha Brambley, president of 401(k) plan consultancy Resources for Retirement Inc., concurs about the value of the exercise. The tools provide clues on the two basic decisions you need to make -- how much you need to retire, and how you're going to get there, she says, adding that most people spend less than an hour a year in retirement planning, compared to the 30-some years of retirement.

"'Be in charge of your own financial future.' The hype is really appealing," Gluck acknowledges. "But to make that the central intelligence driving your financial security is a risky proposition."

Particularly since, "The advice givers don't want to freak out the advice takers" with the truth about what they'll need, White says. She tested one tool that assumes retirees will live on half of their final salary per year -- when the conventional wisdom is 75 percent.

Bias is another concern. Experts advise seeking tools from nonprofits and those not sponsored by a particular investment company first. (Exception: If you've got a retirement account with a company, use its tools. Just be sure to try out others, too.) Meigs suggests evaluating retirement tools and related resources by investigating:

Who is responsible for the information being there?
Why is it there?
What are other sources saying?
How old is the information?

Garbage in, garbage out
It's the most vocalized concern regarding tech-based retirement tools. Sloppy inputs will muck up outputs.

"Not everyone has the capability to comprehend the numbers and the patience to input all this stuff," Meredith says.

Expect to be asked about Society Security benefits, pension and annuity income, current and future tax-deferred savings account contributions, non-tax-deferred assets, rates of inflation assumptions, current and future tax brackets and more.

The software study found that some programs provide assistance, such as online help guides. Still, Ridley-Hanson says, "The more you put in, the more room for error."

Results can easily be misinterpreted, too. "Some calculators will only tell you you'll have $840,000, and the user's thinking, 'Eureka! I'm going to be rich!'" says Hamilton, who estimates he's looked at a hundred calculators over the years. "They fail to tell you you'll be making $250,000 at retirement and will really only have a little more than three times your pay."

That's why he's been developing a tool called Compass for more than a decade. Available in 2005, it will show your total retirement funds should be about 16 times your annual pay.

Hoogstra simply hopes consumers will take a next step after using a retirement planning tool. "If it says you're not going to make it in retirement, you need to ask, How could I make it? What changes do I have to make?"

Neiser would like to see tools act like motivating coaches by providing suggestions of action items, from consulting a financial professional or taking a class to considering a Roth IRA or managing debt better.

The programs could also improve by offering assistance on spending retirement savings during the golden years, experts agree.

Meredith is aware of some firms working on making the process "more fun and not so number-heavy." That's a good thing, considering experts advise re-running retirement planning calculations annually. "What you end up doing is self-correcting every year," she says.

It's an appointment as crucial as any physical checkup.

Tech tools can help people "understand the magnitude of saving for retirement," Meredith adds. "If they can just get that, it will change their life."

Melissa M. Ezarik is a freelance writer based in Connecticut.

-- Posted: Dec. 1, 2004