Why Most Financial Planning Software Spit Out Garbage Reports

I’ve seen lots of different kinds of financial planning software over the years. None of them seem worthwhile to me after evaluating dozens of options. In order to be effective you have to input just about every detail of your financial life. Even then, you basically get a book report with no subjective thought put into identifying risks and solutions. 

The advisors who do this adequately will put in a lot of extra time explaining the actual solutions that most reports don’t even create. As such I don’t see the purpose or benefit of financial planning software.

The reality is that we can identify problems or shortfalls much more simply and easily. This is the case with a recent case I was asked to analyze. A frequent listener of the podcast sent the report from another advisor. It took me a while to get to it because the report was almost 70 pages long! My energy wasn’t quite where it needed to be for such a task and it got buried in emails. 

Fortunately, I have a chance to do it again so this guy is going to get my best effort.

When I looked through the documents it wasn’t nearly as complicated as the length would make it seem. Spending goals in relation to other sources of income showed how much the couple needed to produce for retirement income. 

Inflation adjustments were added to scare the living hell out of these people and an annuity was proposed that produced hypothetical inflation adjusted income that would start nearly 20 years from now. I have no idea why that was part of the plan because it makes about zero sense. I can sum up the case much more easily and help these guys focus on the real problems so a solution can be found in short order.

This couple is 59 and 53 years old and plans to retire in about three years when the older one is 62. Based on their current assets that is a reasonable goal but it will help tremendously to find an efficient way to do it. 

Here are the inputs we need:

Expected Spend Rate- $9000 per month

Debt Reduction- Mortgage will be paid off in six years.

Social Security- I’ll stick with the previous proposal where the older claims at 67 and the younger at 62 for a total of about $5500 per month.

Skipping inflation- Tackling the bulk of the problem now will leave sufficient assets for future planning changes and opportunities.

Long-term care- This is also a secondary concern because it can be handled with additional assets.

It took the financial planning software 69 pages to go over all of this and I’m going to do it in one page. To start I’m only looking at the first 30 years that would take the youngest person in the couple to reach 83 years old. We will of course plan longer, just in case, but this will identify the major issues. Inflation and long-term care are important to consider but will come in addition to the larger problems. 

Solid retirement planning happens in stages so it’s best to take one thing at a time. I’ve identified two major problems and maybe you can see them as well. First is the excessive portfolio distributions in the first five years of retirement and second is the long-term income gap. If these are addressed directly then this couple is home free.

Click Here to See the One Page Spread Sheet

Prudential ran a pretty good series of ads about a dozen years ago that they called the “Retirement Red Zone”. Academic studies have shown that the greatest risk for retirees is in the five years before and the first five years of retirement. So long as losses aren’t taken right before retirement or during the early years of distribution then chances of long-term success improve dramatically. 

Boy if that doesn’t seem to hit these guys squarely. They have three years to retire and guaranteed income streams don’t start for another five years. 

If the Prudential ads needed an avatar then this couple would be the perfect fit.

Once the mortgage is paid off and social security kicks in then they have a modest gap to cover and if done correctly can likely plan on greater discretionary spending. They will have options and I’ve seen it go both ways. Some will protect a large portion of the assets and some will take more risk. I’m not sure what these guys will do but we’ll talk about it. 

Interestingly enough, aside from an annuity that doesn’t pay out for 20 years, the proposal came from a company that seems to think they should keep all investments in the stock market. That may work and it may not and it may be based on what these people prefer. It’s all going to come out and a lot of this depends on what the potential client wants. In my opinion, tackling the problem with the costly early years of retirement should be the first concern. Money should be set aside and protected for at least a portion of that because adverse market events would have a detrimental effect on this plan in the long run.

Aside from that, there is a case to be made for annuities to secure the long-term income gap but that as well comes down to what these guys want. I say it to everyone. An annuity might not be absolutely necessary but it will sure make life easier. Planning software doesn’t do anything but make things more complicated. Get rid of all the pages and it’s easy to see the problem more clearly. Get in touch if you want a simple solution as well…

Podcast Episode: Why Most Financial Planning Software Spit Out Garbage Reports

Download Episode 138: Why Most Financial Planning Software Spit Out Garbage Reports on Apple Music

Further Readings:

All You Need to Know to Buy an Annuity

Are Fixed Indexed Annuities a Good Investment?

Fixed Indexed Annuity Taxes

Last Updated on August 30, 2024 by Bryan Anderson