Retirement calculators evolve into sophisticated tools

Broader view of income, expenses provides rich picture to participants

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Edmund Murphy said the tool really helps participants get a better understanding of their retirement income.

Interactive financial calculators, long a staple of defined contribution plans, have evolved from a collection of numbers that yield a lump-sum accumulation to a detailed analysis of retirement spending that counts more than a participant's DC plan balance.

Independent research and surveys by record keepers show the calculators can change participants' attitudes about retirement savings and, more importantly, can influence actions. One reason, providers say, is that modern calculators aren't buried in hard-to-find places on company websites. Instead, they are often prominently placed on 401(k) home pages where participants can review their accounts and easily make changes.

These Internet-based calculators embrace a broader view of income sources as well as of potential expenses to help participants plan their retirement on a monthly basis. Outside investments, defined benefit plans, IRAs, Social Security and even health-care costs are part of the calculations.

“It's not about accumulation,” said Edmund Murphy III, head of defined contribution services for Putnam Investments, Boston. “It's about spending in retirement.”

Putnam, which began offering a retirement income calculator to clients in January 2010, started rolling out an updated version in December that also allows participants to incorporate estimated health-care costs. “You can't do comprehensive retirement planning without taking into account the cost of health care in retirement,” Mr. Murphy said.

Although its initial research involves a very small sample, Putnam found that 800 participants used the health-care-cost component to experiment with different deferral scenarios. Of that group, 30% increased their deferrals to an average of 11.3% of salary from 8.1%, Mr. Murphy said.

The newest calculator includes information about insurance premiums, out-of-pocket expenses and the state where a future retiree plans to live, as well as projections of costs as a person ages. That information is added to the data — salary, account balance, corporate match, Social Security, etc. — in Putnam's original retirement income calculator.

Using a lifetime income calculator “makes people estimate how much they need over time,” said Helene Sanford, director of compensation and benefits for Intersil Corp., Milpitas, Calif. “It takes a big number and makes it manageable.”

Intersil's $330 million 401(k) plan started using Putnam's retirement income calculator in January, and added the health-care portion in March. Adding the health-care cost component already has “made people aware of health care,” Ms. Sanford said.

The University of Michigan, Ann Arbor, offers financial calculators to participants in its two 403(b) plans with aggregate assets of about $9.8 billion. Each of the school's two record keepers — Fidelity Investments, Boston, and TIAA-CREF, New York, provides a “comprehensive and thorough” calculator, said Steve Sindlinger, assistant director in the benefits office.

These calculators enable participants to incorporate outside income sources like IRAs and investments so they can “take a holistic approach” to their retirement savings, Mr. Sindlinger said. “It helps the participants become more engaged.”

“Many individuals want to do more (financial) modeling on their own time and on their own terms,” he said, adding that the calculators allow them to do so.

In January, Fidelity began offering its Income Simulator, the latest upgrade and evolution in calculators that the firm has had for about 15 years, said Thomas McGirr, senior vice president of participant products for Fidelity Workplace Investing, Smithfield, R.I.

This calculator lets participants incorporate assets from outside sources, including defined benefit, IRAs, Social Security, taxable investments, household savings and health savings accounts.

New health component

The HSA component is new. “We see many participants using HSAs for retirement savings,” Mr. McGirr said.

Fidelity's calculator asks about income, gender and retirement age. It assumes participants will want to retire with an 85% replacement income, although that can be adjusted. The calculator allows participants to take “personalized next best actions,” such as changing asset allocation or taking greater advantage of a company match, Mr. McGirr said.

Last year, 36.4% of participants who used a Fidelity retirement calculator and other online tools raised deferrals, changed asset allocations and/or consolidated assets, he said.

Participants using the financial calculator from Principal Financial Group Inc., Des Moines, had an average deferral rate of 8.87%, while those who didn't use the calculator deferred an average 6.08%, said Joleen Workman, assistant vice president for individual investors in the company's retirement services division.

Principal started offering a calculator in 2008. “We continue to make enhancements,” Ms. Workman said. The calculator enables participants to count current income, savings and expected sources of retirement income such as Social Security, DB plans and outside assets.

The calculator incorporates information such as a corporate match and auto escalation, and makes an assumption of an 85% replacement rate for retirement income that can be adjusted.

Like other firms' calculators, it sets a monthly goal and alerts participants if their current income sources don't match their retirement spending goals.

Retirement planning “is not just account balances,” Ms. Workman said. The biggest change in the company's calculator strategy, she said, has been to emphasize monthly goals and spending in keeping with Principal's retirement readiness campaign.

When officials at Prudential Retirement, Newark, N.J., decided to redesign Pru's financial calculator, “we looked at a lot of competitors' products,” said Michael O'Sullivan, director of digital strategy. “We found extremes. One was so complex you needed a CPA sitting next to you to fill it out. Some asked very few, vague questions.”

The resulting calculator, which went live in 2007 after substantial testing, includes questions about current account balance, salary, Social Security, outside assets, employer match and current savings rate translated into dollars. It asks participants about their investment style, the age they expect to retire and how many years they expect to be retired.

Prudential's calculator assumes an 80% retirement income replacement. The interactive calculator lets participants adjust their deferral rates and change retirement age.

The calculator compares a participant's monthly retirement goal to his or her ability to meet that goal based on the financial information. That's a big difference from an early Prudential calculator that had fewer features and presented a participant's nest egg as a lump sum. “People couldn't relate to the lump sum,” Mr. O'Sullivan said. n

This article originally appeared in the May 13, 2013 print issue as, "Retirement calculators evolve into sophisticated tools".