Why You Should NOT Rely Solely On Financial Planning Software

Time For A Social Security Quiz…

Fun right? But read on, this is going to be incredibly important for you. 


When I was running an analysis on cash flow in retirement for a client, we’ll call them Bob and Jane, I noticed something horrific.  See below if you can identify what is wrong. 
Here’s a hint. Bob is the higher earner and in this scenario we have him dying at the age of 80. 

Anything jump out at you?

Well if you notice in the year after Bob dies, Jane’s Social Security is only $20,173.   Of course, if you’ve been following my emails and/or blogs you’ll know that Jane will actually receive the greater of her own benefit or what Bob was receiving at his death.

In this case Bob was receiving around $46,000 in Social Security benefits.  Yet, the software has Jane only retaining her own benefit.  This is a $26k mistake, made annually.  And as much as I wish it so, this is NOT user error.  This is a programming error.  The developers simply do not understand how Social Security works well enough to program the correct information.

This program also has Bob and Jane paying tax in GA even though they certainly will not given their total income.

Unfortunately, in the 20+ years I’ve been a professional financial planner, this is not an exception to the rule.  It is the rule. Just last night, I was looking at a different program because I’m very familiar with the  retirement planning professional this software group retained on their staff. Their Social Security models have issues too.

I’ve seen another software program run retirement scenarios where the retiree has a 100% success rate even though the retiree doesn’t have enough money to pay off his debts.  How can this be? Well if the investment return assumptions are 6.5% for a conservative portfolio we can make a lot of retirements look great, on a computer.

I’ve had other programs say a retiree needs $4 million to retire. When in fact, they probably need all of $800k or so.

At the end of the day, software is, and will forever be, junk in, junk out.

So, what does this mean for you? Well, you need to be careful with your software-generated retirement plan.  Make sure the numbers are legit.  Ask questions.  Make sure your planner knows what the heck he or she is talking about.  If they are just saying “Look Ms. Smith, you’re going to be okay because the computer says so.”  That does not inspire confidence.   The HUGE firms are more guilty of this than the smaller firms in my opinion.  The HUGE firms offer boilerplate financial planning with an off-the-shelf program that a lot of times was designed specifically for them.  Again, not confidence inspiring.

I use the software as a tool to help present a plan to a client. It certainly is not the end-all solution because the program is only as good as the developers behind it.  Who are those people? Do they know what they’re doing? Do you really want to trust your retirement to them?

Do a double and triple take with ANY financial planning document that is presented to you.

Lastly, if someone says your financial planning is good to go because they did a “Monte Carlo” analysis and you’re at at 95% success rate, the first thing you should say is… “That’s great! Is that before or after taxes and fees?”

Here’s a podcast episode and accompanying blog I did on this topic. Again things aren’t always what they seem and YOUR financial planning is too important not to know everything that went into making your financial plan.

As always, contact me with any thoughts, questions or concerns.

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