Retirement planning and financial planning software!

Preparing for life after work. RRSPs, RRIFs, TFSAs, annuities and meeting future financial and psychological needs.
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Flights of Fancy
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Retirement planning and financial planning software!

Post by Flights of Fancy »

Hello all; it has been a long time (too long) since I've participated here.

On Monday I have to teach to a set of fresh-faced fourth year finance students, many of whom expect to find work in the financial services industry.

The topic the prof I'm replacing has asked me to handle is to analyze and compare various retirement-income planning software tools, algorithms and in particular the role of annuities, and then these present results of analysis as hands-on case studies.

It occurred to me that the wise folk of the Financial WISDOM Forum might have some opinions about the strengths and shortcomings of retirement income planning tools - whether it is commercially-available software used by an investment advisor or the Excel sheet you've bashed together personally.

What works? What doesn't work, and why? How have you designed your retirement income stream? All opinions most welcome.
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Re: Retirement planning and financial planning software!

Post by chufinora »

Not sure if this is helpful, but from my analysis of online retirement planning tools they seem to fall into two types, those that use assets, predicted spend and provide monte-carlo based output, and those that use a fixed set of variables. The best example of the first type I have used is
http://www.flexibleretirementplanner.com/wp/
the best example of the second type I have found is
http://financialmentor.com/calculator/b ... calculator

Issues with most calculators - usually US focused need to work-around for Canadian issues - do not factor tax situations very well - do not factor value of future (government) pensions (the last is the biggest weakness for me, they do not provide a good indicator for when 'early' retirement is feasible.)

Pretty sure no tool I have tried looks at the role of annuities. I find the state of the "annuity industry" in Canada to be suspiciously weak (e.g. I have not been able to find any indication that CPI indexed annuities are even available in Canada yet alone published tables of annuity values - this is in contrast to the UK where such data is common (Though the take-up of annuities with pension savings is more 'enforced' there)
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Re: Retirement planning and financial planning software!

Post by brucecohen »

All retirement planning software is annuity-based in that it creates a stream of periodic income, but I've never seen or heard of a product that incorporates the purchase of a commercially-sold life annuity.

I've had little exposure to commercial grade software that many advisors use. The projections I did review -- and this was a number of years ago -- typically failed to include DB pension inflation indexing and, in one case, part-time and temporary work while retired. In that case, my friend asked the advisor about this shortcoming and was told, "oh, nobody works once they retire." I've never seen a calculator that reduces DB pension for CPP integration at 65.

I'm not aware of any calculators, aside from the Pension Puzzle calculator at Fiscal Agents, that pay retirement income monthly. Typically they draw all income at the start of each year. On one hand, that creates a conservative fudge factor. On the other, it increases the amount of capital needed.

The spreadsheets I've created for myself and friends are all pre-tax. That's because 1) we generally think of our incomes pre-tax and 2) calculating after-tax income requires a lot of coding that's subject to great political risk, especially in long projections.

TFSA and pension income splitting have really complicated the job of the programmer. RRIFmetic is the only home use software I know of that handles all the wrinkles and calculates after-tax income, but I haven't really looked. RRIFmetic has a steep learning curve. Just occurred to me that the new CPP PRB also complicates the programmer's task and I doubt that any calculators provide for it.

I still see web-based calculators that assume life expectancy is the point at which the user will drop dead.

I just threw together an easy-to-use/understand calculator for my SIL who's nearing retirement age. There are inputs for two kinds of income -- that which she doesn't control and that which she does. I included coding for employment income in retirement but she has no plans to work. She's an Ontario teacher so her DB pension is a big factor. OTPP told her that CPP integration will reduce her pension by 12% at 65 so that was easy to program. I kept coding quick and easy by drawing all income at the start of each year and told her that's a built-in fudge factor. The spreadsheet inflates her target annual income by the CPI assumption. First it applies DB pension, employment income, CPP and OAS to calculate a "still needed" amount. Then it applies RRSP/RRIF withdrawal and calculates a new "still needed" amount. Then it taps her TFSA and calculates a new "still needed amount." I have in mind an easy adjustment to recognize the tax-free nature of the TFSA withdrawal and reduced tax bite on cap gains but have not yet applied it. Finally, I apply draws from non-reg investments (of which she has none). The sheet then calculates a new "still needed amount" which determines if the plan works or fails early. The sheet is VERY conservative by not providing for pension income splitting etc. But it was very effective because she was worried that she could not afford to retire in the next year or so and was overjoyed to discover that even with very conservative assumptions she's well-positioned to retire on a solid middle-class income past age 100. Significantly, before doing any input I told her there's 100% certainty that this projection will not conform to reality. Every advisor should do that, but AFAIK none does.

FWIW, a friend went to a high-priced fee-only planner for a projection. The projection's numbers resembled mine, but the report lacked a table showing annual total investment value so my friend could see where he stands in relation to plan. There was a hard-to-decipher page that did show this but in five-year increments. The idea, it seems, is that he's to return to the planner each year for a review, generating a new bill.

The key point for the students, I think, is that retirement planning software creates the illusion of precision and certainty in a field that is inherently imprecise and uncertain. No matter how detailed, the projection is nothing more than a map in a poorly surveyed region with lots of lousy roads, traffic jams and closed bridges. Consider: anyone who had a projection done circa 1990 or so based his/her planning on averaging 10% or so every year. But the alternative is to drive blind, which doesn't make sense.
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Re: Retirement planning and financial planning software!

Post by Bylo Selhi »

brucecohen wrote:The key point for the students, I think, is that retirement planning software creates the illusion of precision and certainty in a field that is inherently imprecise and uncertain. No matter how detailed, the projection is nothing more than a map in a poorly surveyed region with lots of lousy roads, traffic jams and closed bridges.
:thumbsup:

And to carry your analogy, the vehicle is old, has high-mileage, is rusted and could need expensive maintenance/repairs before it eventually gives out altogether.
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Re: Retirement planning and financial planning software!

Post by dns902 »

Hi,

For what it's worth, at my University, second year Engineering students do a course in Economics and we've just introduced an approximation to annuity-like calculations which says that each annual payment of a term-certain annuity of N years in a yield environment of i pa and with an initial principal P is approximately P( 1/N + i/2).

This makes it very easy to guestimate annuity payments (or loan payments etc. ) rather than using the present-value functions in Excel or needing scientific calculators or looking things up in tables. It's very useful for back-of-the-envelope planning or for "blue-skying" or even for sanity-checking of the "correct" results. Generally for everyday practical calculations the errors are within about +-5%.

Further. if the annuity stream is to be indexed at e pa then the initial annual payment is approximately P( 1/N + (i-e)/2 ).

The math behind this is due to be published in the Journal of Personal Finance shortly. Our engineering students like its simplicity (some calculations are reducible to metal arithmetic alone) and insight. I imagine finance students might too.

David
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Re: Retirement planning and financial planning software!

Post by steves »

Wow. Talk about a range of solutions. From the ridiculous to the sublime.

Financial planning is, unfortunately, very complex. Rather than retirement, look at the period of time from age 40 say to age 95. During that time we have enough $ coming in the door (salary or a windfall say) such that we can save money. At other times ( a sabbatical, partial or full retirement) we need money removed from savings. It is not a simple matter of "now I'm working, now I'm retired".

Secondly, the financial planning paradigm has to consider loans, annuities, RESPs, windfalls, special cash needs, salary, DB&DC pensions, CPP/OAS/GIS, as well as investments (RRSP/TFSA/nonReg and realestate).

All this complexity exists in a world of taxation, and this is where the tricky part comes in...... our only concern is how much after tax money we get to spend on stuff such as food, gas, booze etc. The phrase 'after tax' means we need to account for income tax.

If it weren't for the fact that tax is a mathematical formula and not a single average or marginal rate, you could fairly easily spreadsheet the problem. The fact is, tax jumps all over the map as various forms of income come in and out of play over time.

Just in the last few years I have had to include TFSAs, changes to CPP and OAS start dates, new RESP rules, changing dividend tax credits, provincial changes to LIF maximum withdrawal rates, yearly changes to fed and provincial tax brackets.

As I said it is very complex and time consuming keeping the S/W up to date, but I certainly don't apologize for the anal accuracy and overkill.
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Re: Retirement planning and financial planning software!

Post by Benchwarmer »

steves wrote:Rather than retirement, look at the period of time from age 40 say to age 95.
I agree with the lifecycle approach, instead of just breaking it down to working & retirement. As I read this article, I was thinking Steves, they stole your idea :-)

Introduction to Lifecycle Finance

RRIFmetic is one of my best software purchases. Just because the future is uncertain, should not mean that I avoid using the most accurate tool available today. It may give me a false sense of confidence, but I am OK with that. It has a very steep learning curve though. I find that every year that I run it, I have to re-learn it.

I was able to adjust for the drops in DB at age 65 - I can't remember exactly, but I thought it was just a check box? My two suggestions (aside from more user-friendly) would be the ability to fully define (customize) a DB plan, and the ability to change the CPI number and have it automatically float through to all affected numbers.
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Re: Retirement planning and financial planning software!

Post by BRIAN5000 »

very steep learning curve
This is why I haven't bought it, a good tool in the hands of a beginner could be dangerous.
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Re: Retirement planning and financial planning software!

Post by Springbok »

Flights of Fancy wrote:Hello all; it has been a long time (too long) since I've participated here.

On Monday I have to teach to a set of fresh-faced fourth year finance students, many of whom expect to find work in the financial services industry.

The topic the prof I'm replacing has asked me to handle is to analyze and compare various retirement-income planning software tools, algorithms and in particular the role of annuities, and then these present results

What works? What doesn't work, and why? How have you designed your retirement income stream? All opinions most welcome.


Most here ( with some exceptions) , are amateurs looking after their own or their families affairs. If those students are budding financial planners, then presumably the prof was thinking in terms of commercial software. THis article compared 6 such programs including rrifmetic:

http://www.advisor.ca/special-reports/g ... ions-29380

Question might be - How do the students acquire those expensive programs?
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Re: Retirement planning and financial planning software!

Post by steves »

As long as the students can live with a 60 day time limit, RRIFmetic has a full demo they can download free. The only other limitation is that they can have just 5 clients..... Each client can be modelled numerous times. (A couple takes up two of the 5 slots).

The only other proviso is that RRIFmetic behaves best in an XP environment.

As far as 'difficult to use' is concerned..... I once had an 81 year old widow who loved the program.
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Re: Retirement planning and financial planning software!

Post by Flights of Fancy »

Springbok wrote:
Flights of Fancy wrote:Hello all; it has been a long time (too long) since I've participated here.

On Monday I have to teach to a set of fresh-faced fourth year finance students, many of whom expect to find work in the financial services industry.

The topic the prof I'm replacing has asked me to handle is to analyze and compare various retirement-income planning software tools, algorithms and in particular the role of annuities, and then these present results

What works? What doesn't work, and why? How have you designed your retirement income stream? All opinions most welcome.


Most here ( with some exceptions) , are amateurs looking after their own or their families affairs. If those students are budding financial planners, then presumably the prof was thinking in terms of commercial software. THis article compared 6 such programs including rrifmetic:



http://www.advisor.ca/special-reports/g ... ions-29380

Question might be - How do the students acquire those expensive programs?


Thank you so much for the article reference. There's no intention that the students acquire the software; my job is to show them (in essence) "it ain't as simple as you might think / as the financial services industry might suggest" (with their canned software solutions).

I was thinking of including some discussion of Bernstein's "Retirement Planner From Hell" series, link to a Pfau blog on the series here:

http://wpfau.blogspot.ca/2012/04/willia ... ement.html

I have yet to really turn my attention to the writing of my presentation; I am going to come back to this thread and again, my thanks.

p.s. SteveS - my co-lecturer tomorrow is a RRIFmetic user!
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Re: Retirement planning and financial planning software!

Post by steves »

Flights of Fancy wrote: p.s. SteveS - my co-lecturer tomorrow is a RRIFmetic user!
Whoa.... that narrows it down to about 15.
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