Tools to Analyze Our Retirement Portfolio
December 16, 2008 by MJP
Filed under Investing for Retirement
I admit to being somewhat obsessive in trying to find ways to analyze the different investments in our retirement portfolio. My particular interest is, of course, portfolio survival: Will our retirement investments provide a steady and reliable income so that we will not outlive our money. Many other baby boomers are no doubt thinking carefully and worrying about this as well.
The Need for Portfolio Analysis
The market crash of 2008 has increased the importance of having an optimal selection and allocation of assets to produce income in retirement. I’m counting on Social Security to help but we will need more than Social Security to have a retirement lifestyle that Mrs. GoTo and I had planned for.
When I analyze our retirement portfolio, I am more interested in an objective analysis rather than a subjective review by someone who may be trying to sell me something. This means finding an analytical tool that looks at actual data associated with different investments and asset classes and processes that data to provide meaningful output. Fortunately, I have found a few online tools that can analyze a comprehensive retirement investment portfolio and provide predictive feedback as to the ability of that portfolio to survive and provide income in retirement.
Financial Engines Retirement Goal Tool
The first portfolio analysis tool is called Financial Engines. Financial Engines has developed patented algorithms that are able to provide an automated portfolio analysis. You enter basic information about your different investments (including names and amounts in different funds and stocks). The software then goes to work, using historical data and running thousands of different Monte Carlo scenarios on that data to predict future performance. Beyond that, the Financial Engines software can give very specific recommendations for changes or additions to your retirement portfolio that may increase the probability of portfolio survival. It is like having a computer acting as your personal financial planner. No hand-holding. Just the facts.
I am a regular user of Financial Engines and can recommend it. The downside of this portfolio analysis tool is that most baby boomers will have to pay for using it. Mr. GoTo is fortunate in that our 401(k) provider has arranged for free Financial Engines access by all retirement plan participants.
Consumption Smoothing Using ESPlanner
Another subscription-based tool for analyzing your retirement portfolio is called ESPlanner. This software was developed by a college economics professor in collaboration with one of my favorite personal finance columnists, Scott Burns. ESPlanner is based on the well-known but under-utilized economic concept of “consumption smoothing.” Consumption smoothing is a way of looking at your life-long goal for maintaining your standard of living and then assessing whether your spending, saving, and investing strategies will allow you to achieve that goal. It’s a unique but very logical approach to retirement planning.
I have not used ESPlanner yet but I have read the companion book written by Burns and the professor, Spend ‘Til the End, that explains consumption smoothing in an understandable way. You might want to read the book and then consider using the ESPlanner portfolio analysis tool.
Free Portfolio Analysis Tools
Finally, there are many free portfolio analysis tools available online. Unfortunately, most of them are provided by companies that are trying to sell you something. Therefore, I do not feel comfortable relying on those tools. There is one free online tool that is not associated with a commercial product or service. It is called FIRECalc and fashions itself as a “different kind of retirement calculator.” I like this tool for several reasons. Although it incorporates your saving, spending, and investing data, it is very easy to use. It does not require you to enter any personal or private information. The FIREcalc site provides a thorough explanation as to how it works so there is less mystery as to the output. And last but not least, there is a large community of FIRECalc users who are willing to share their thoughts and experiences about using the FIRECalc retirement calculator tool.
Update 1: ESPlanner has introduced a basic version that can be used online for free from its website. It lacks all of the features of the subscription version but it should at least give you a taste of how consumption smoothing works.
Update 2: Cake Financial is a new site that promises to guide you (using proprietary algorithms) to lower cost fund investments that will get you closer to your goals. Only the “Cake Lite” service is free. You can upgrade from their for an annual fee.
Final Thoughts on Retirement Portfolio Analysis
Based on recent market developments, baby boomers who use these online tools to evaluate their retirement portfolios may not like what they see. Nevertheless, it is important that we do the analysis and feel the pain. Only by learning the strengths and weaknesses of our retirement investments will we have a chance to get back on track.
Do any of you know other useful tools for analyzing a retirement portfolio?
Photo credit: Matt Palmer
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i tried cakefinancial before but it shut down already. Nowadays, i use secondopinion.asia which has nice portfolio analysis and risk management tools. it monitors the risk of my portfolio and also automatically pulls my new transactions, no need to keep a spreadsheet anymore.
I have to highly recommend an excel spreadsheet which you can download from http://www.simpleplanning.net called “Retirement Planner”. It cost me $10 bucks, but its worth it. There are several tabs where you input the usual things like age (incl your spouse), money in taxed accounts, non-taxed accounts, expected rates of return, expected inflation, when you and/or your spouse plan to retire, your budget in retirement, and then shows you graphically how your investments grow, and your nest egg adjusts. I’ve used it to get a real understanding of how much my monthly/annual expenditures can be in retirement to live to say 95. It’s the best spreadsheet I’ve seen, and I’ve been doing this for 10 years.
Try flexibleretirementplanner.com. has lots and lots of options, from very simple to more detailed. Runs Monte Carol simulation (similar to what Financial Engines does, as noted above – but without the detailed portfolio analysis).
Has good online help to explain how it works. Be sure to click on the button for “Additional Inputs” to enter things like one time purchase of new car, or one time cost to repair roof/replace heating-air/other big ticket expenses.
Note – it focuses on one person – so to analyze for two, enter data as if younger person has both incomes and all expenses and all accounts.
Downside, the free version won’t let you save scenarios – unless you donate, in which case they could send a downloadable version that has ability to save scenarios.