Confidence Boost from Retirement Planning Tools

I am a 100% self-directed investor, including using a self-managed brokerage account inside my 401(k) plan. Nevertheless, I periodically look for affirmation from objective third-party sources that our retirement investment plan is on the right path to success. I received some positive affirmation this past week, boosting my confidence in our plan.

I have written in the past of how our 401(k) plan provider allows participants to have their retirement investing strategies evaluated by Financial Engines. I continue to use this benefit and receive a quarterly FEAdvisor “Retirement Update” email.  This email provides clear statements to me on two specific topics, with links back to a more comprehensive report.  The two topics are: (1) Can you reach your retirement goal based on your existing retirement investment allocations? and (2) Can you you do better?

The Financial Engines analytical software has direct access to current information about our 401(k) plan investments.  I input and update information about our other retirement investments so that the Financial Engines tool has a complete picture.  I also input our retirement goal. More specifically, I tell the software (a) how much retirement income we will need (including Social Security) and (b) the age at which we will “retire” and therefore need this income.  I chose age 66 for me although I may work – at least part-time – beyond that age. I want to know that we will enough income available at that age so that I won’t be forced by financial necessity to keep working if I don’t care to.

The Financial Engines software runs its analysis based on our current investments and communicates a probability of reaching our retirement income goal. The maximum probability range is “greater than 95%” which is what my recent report stated. That’s satisfying. It hasn’t always been that high. It dropped to 36% probability in February 2009 but moved back to 70% probability by May.

The second component of the report  – should I make any changes to our investments – has always included recommendations for changes, until last week. Instead, I received this message in my FEAdvisor email:

At your current risk level, we cannot suggest any changes to your investments that would significantly improve your retirement outlook. Any changes we could suggest would provide about the same chance of reaching your goal.

Honestly, I was surprised by this. Although I do a lot of research and analysis before arriving at our investment decisions, I assumed that a computerized investment wizard running millions of Monte Carlo simulations could do better. Apparently not this time. I think one aspect of our plan that is in my favor is how little risk I am willing to take of being unsuccessful. At age 60, that’s the way it should be. If our risk tolerance were greater, the Financial Engines software might make some recommendations for changes.

I don’t claim to be an investing genius but this does give me confidence that with some learning and due diligence, any one of us can create a proper retirement investing plan.

Even if you don’t have the time to learn about retirement investing or trust yourself enough to do it, it would still be wise to use an analysis tool on your own portfolio, after the portfolio is designed by your financial advisor. If the analysis does not confirm that your plan will likely achieve your retirement goals, warning bells should go off in your brain. You should definitely raise the issue with your adviser and have him/her explain how the success of your plan is predicted.

The Financial Engines tool is available to anyone but if your employer doesn’t provide access, it requires a fee-based subscription.

There are other options to get your own retirement plan confidence boost. One that I have been aware of but haven’t tried yet is NestEgg Software. It is free for individual consumer use. I plan on giving it a workout this month. I have created an account and can tell after a quick look that it will take some effort to set everything up.

What do you to build confidence that your retirement plan is likely to be successful?


  1. Another Reader says

    A lot of people would be very surprised to run one of these programs using their real risk tolerance as opposed to what their financial planner uses or what they read in the media should be their tolerance for risk. Most people don’t have the tolerance for risk it takes to make these programs produce results that “work,” i.e. give them the high probability their savings will last to age 95.

    If it were so easy to produce the needed income with safe investments, companies and governments would not be scrambling to get out of their pension committments. Can an individual, even with the help of a financial planner, hope to do better than a retirement system with an army of analysts and advisors?

    I don’t agree with your approach to wealthbuilding, but I agree with your premise of separating safe income producing assets from assets with more risk held for a better return. I believe in a multiple streams of income approach – real estate, residual business income, pensions, stocks, treasuries, and Social Security.

  2. Bob Melzer says

    How does Financial Engines project into the retirement years? If they convert your assets to an annuity then your portfolio risk could decrease just because you are getting older.
    I have used their program and their results are similar to other calculators. My problem with all calculators is how do you know the correct rate of return and inflation rate? In fact, you probably need a few rates. For example, an inflation rate for health care. At an 8% inflation rate the costs can double in about 9 years. You also need the ability to adjust your expense by age, maybe more travel in the first few years of retirement and less as you age. I have switched to a spreadsheet with a lot of detail to test my plan, but I do run all the calculators I come across to help identify potential problem areas.

  3. Don says

    In case anyone is interested, Terry Savage dot com had a link to get a free years worth of use of the FE web site. It’s quite the tool. It’s run by |William Sharpe (Sharpe’s constant, Nobel, etc.) I also just recently learned that if you have a Vanguard ??? account (>$50k) you get free use of the FE web site also.

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