The Office of Personnel Management has posted a new calculator on its Web site that can be used by agency staff and employees to help with retirement planning — www.opm.gov/benefits/ballpark/menu.asp. As a practicing financial planner, I am always on the lookout for new tools and resources that will help with the formidable process of educating workers about the realities of achieving financial success.
When I first entered the financial planning field, I occasionally lost some sleep worrying about becoming obsolete. Would expert systems give my clients everything they would need to do the job themselves, rendering me unemployed and working as a carpenter again — as I had in my 20s? Particularly during the dot-com boom of the 1990s, this prospect seemed inevitable. It was only a matter of time, experts said, until a worker would log on, enter his information, and receive complete guidance about everything from how to manage his investments to the best ways to spend his hard-earned wealth.
As the years have passed, however, I’ve seen many of these proposed solutions come and go, and one thing has become clear: My value as an analyst and planner is secure.
So, when I heard about this new calculator, I wasn’t concerned about being replaced, but truly hopeful that federal employees, the majority of whom are either not willing or not able to pay for real financial planning, would have access to a tool that would help them better prepare for the financial road ahead. I was hopeful that, at least in the simplest of cases, a useful resource had become available.
I was even a little excited that the calculator would be something that I could use in my practice to replace the various tools and resources that I currently pay for and which are cumbersome and time-consuming to use.
Unfortunately, I was disappointed with what I found when I gave the calculator a test drive May 31. Rather than a sophisticated expert system, I found a simplistic calculator that not only failed to provide quality analytic output, but appeared to function improperly. Adding to these shortcomings was a frustrating lack of user support and disclosure about the inner workings of the calculator or its output.
Now, I’m not the smartest guy in the world, but when it comes to things financial, particularly related to federal retirement, I’m better informed than most. So, if I can’t figure out what’s going on with the calculations, how likely is it that the average user, someone using the calculator to avoid having to make the assumptions and calculations necessary in the first place, will be able to make sense of it?
The calculator’s main failing is that it forces you to make predictions about things that are hard to accurately predict — namely individual life span, or estimated years spent in retirement, and future investment returns. It then appears to use these assumptions as though they will occur, exactly as expected, to predict whether you’ll meet your stated retirement income goal.
You have to tell the system how long you’ll live and how much your savings and investments will earn each year in the future. There is no evidence that the calculator accounts for the rather substantial risk inherent in these factors when making its assessment.
This is the type of error that continues to plague retirement analysis, and which needs to be eliminated if we are to avoid financial disaster as the first, and most massive, generation of retirees who will be largely responsible for managing their own retirement income resources puts its skills to the test over the next 30 years.
What if you live to be 105? What if your spouse will depend on your income and he or she lives to be 105? What if your investments don’t earn 8 percent every year of your life? Or, what if a particularly bad year in the markets coincides with that vacation home down payment you’ll need to withdraw from your Thrift Savings Plan account 12 years from now? These are a few of the critical questions that appear to be ignored by the calculator.
Add to this the fact that the calculation of additional savings needed did not appear to function properly, reporting the same answer even when the amount of existing savings was changed by 50 percent or more, and the calculator has the potential to do more harm than good.
While I support and am actively engaged in the effort to educate investors about the need to plan for retirement, it is time to stop pretending that it’s as easy as putting a few numbers into a black box.
Written by Mike Miles
For the Federal Times
Publication June 18, 2007