Your Retirement: Bet in a Guessing Game?

For years, financial advisers have given their clients authoritative, seemingly precise guidance to tell them exactly how much they need to save for retirement—and how much they can spend when they get there. Last year’s market crash has exposed some flawed assumptions behind those numbers.

These complex formulas or “models” have dominated retirement-planning for a generation; advisers enthusiastically adopted these tools, and millions relied on them. But now that the steep decline in stocks has blown a hole through many retirement portfolios, even the experts who design these models are acknowledging that they have serious limitations. Indeed, some insiders say the number crunching is just an educated guess. “A really sophisticated guess, but a guess nonetheless,” says Gregg Janes, a developer at EISI, a company that makes financial-planning software.

Of course, financial planners aren’t fortune-tellers. Few could have predicted the speed and depth of the downturn. For many, their withdrawal calculations are simply broad guidelines for clients. But critics say that the numbers create a facade of authority that’s propped up by some relatively fuzzy math. Even planners who use the figures say they don’t do enough to account for the impact of something like the crash. That’s one reason national brokerage Edward Jones doesn’t give its advisers statistical models at all. With the most commonly used models, it’s too easy to misinterpret the results, says Scott Thoma, the firm’s director of investment advice: “We think it instills false confidence.” And even defenders of the models are rethinking them; according to a recent survey by the Financial Planners Association, almost 50 percent of advisers say they’re reconsidering how much they’ll tell clients to spend next year. The models are robust tools, said Matt Sommer, director of financial planning at Smith Barney, “but in 2008, they just didn’t work out.”

With markets having tumbled so far from their peaks, investors and their advisers are struggling to figure out how their portfolios can recover. Often, they’re using the same models they relied on in the first place—essentially, they’re guessing again. But elsewhere, planners, economists and computer whizzes are debating how to refine, improve or even throw out their formulas.