Financial Engines feedback

[Nords]

Does anyone know how FE calculates retirement income? How does the portfolio advice change after retirement?

What REW said. You can mess around with tax rates & inflation rates before/after retirement but here's no provision for actually changing the portfolio after retirement. You can adjust retirement spending for Social Security but I'm not sure if you can adjust it for other things like paying off a mortgage or selling the boat.

In fact if you're retired you have to trick FE into thinking that you're still working.

 

[Gumby]

That's why I use it only to calculate estimated portfolio size. I use FIRECALC to then calculate income.

 

[rs0460a]

no provision for actually changing the portfolio after retirement

Actually, FE does have a disclaimer (on the Vanguard entry point) of "Designed for investors at least five years away from retirement".

Further, it states that "If you're near or in retirement, consider one of Vanguard's other financial planning and advice services."


- Ron

 

[Brat]

Ah, and which one are those?

 

[rs0460a]

Ah, and which one are those?

https://flagship.vanguard.com/VGApp/hnw/content/AccountServ/Advice/ATSAdviceOVContent.jsp

 

[Bob_Smith]

Does anyone know how FE calculates retirement income?

It has been awhile since I looked into this, but at the time it appeared to me that Financial Engine's results weren't very useful - or at least they were confusing and required considerable caution. I tried to run it down and get it confirmed, but the Vanguard FE support person didn't get what I was asking, and I gave up. But if memory serves, this was the issue in a nutshell:

1) FE projects the value of your portfolio at retirement under various market scenarios utilizing a proprietary Monte Carlo type of algorithm.
2) To determine the annual income the portfolio will provide, the portfolio is "annuitized". In other words, FE presumes that the portfolio will provide the income you would get if you cashed in the portfolio and bought an insurance company annuity with the proceeds.
3) To this they add other income streams you enter into the system (Social Security, pension, etc.).

At the time I was very close to retirement (only a few months) and the annual income projection I was getting from FE was quite a bit higher than all other projections I was using. FireCalc was by far the most useful, IMO, but I used several others and they were all pretty close - except for FE. Although FE's site clearly stated that the projected income takes future inflation into account, I learned (if I can rely on the Vanguard FE rep) that this is only partly true. As I understand it, FE takes inflation into account only until the date of retirement. The annual income they project is a combination of the estimated annuity income (which is NOT pegged to inflation and will likely gradually lose purchasing power) and SS (which IS pegged to the CPI). So it appeared to me at the time that they were mixing different types of incomes (some pegged to inflation and some not) and they were not accounting for those differences.

I don't believe the Vanguard FE rep quite understood the questions I was posing. He quickly tired of the discussion and suggested that I hire a financial planner, so I wasn't able to verify everything, and by then I didn't really give a rip because I had pretty much decided that the projections FE provides aren't really all that useful if I have no way to verify their methods.

So FWIW, if you intend to use FE, I'd limit the data you input to those things that are not tied to inflation (so the projected income doesn't mix apples and oranges), and realize that the income they project does not take post-retirement inflation into account - which I think is one of the most, if not THE most important things one must consider.

So that was my take on it at the time, and I always hold out the very real possibility that I may be wrong.

 

[Corporateburnout]

It has been awhile since I looked into this, but at the time it appeared to me that Financial Engine's results weren't very useful - or at least they were confusing and required considerable caution. I tried to run it down and get it confirmed, but the Vanguard FE support person didn't get what I was asking, and I gave up. But if memory serves, this was the issue in a nutshell:

1) FE projects the value of your portfolio at retirement under various market scenarios utilizing a proprietary Monte Carlo type of algorithm.
2) To determine the annual income the portfolio will provide, the portfolio is "annuitized". In other words, FE presumes that the portfolio will provide the income you would get if you cashed in the portfolio and bought an insurance company annuity with the proceeds.
3) To this they add other income streams you enter into the system (Social Security, pension, etc.).

At the time I was very close to retirement (only a few months) and the annual income projection I was getting from FE was quite a bit higher than all other projections I was using. FireCalc was by far the most useful, IMO, but I used several others and they were all pretty close - except for FE. Although FE's site clearly stated that the projected income takes future inflation into account, I learned (if I can rely on the Vanguard FE rep) that this is only partly true. As I understand it, FE takes inflation into account only until the date of retirement. The annual income they project is a combination of the estimated annuity income (which is NOT pegged to inflation and will likely gradually lose purchasing power) and SS (which IS pegged to the CPI). So it appeared to me at the time that they were mixing different types of incomes (some pegged to inflation and some not) and they were not accounting for those differences.

I don't believe the Vanguard FE rep quite understood the questions I was posing. He quickly tired of the discussion and suggested that I hire a financial planner, so I wasn't able to verify everything, and by then I didn't really give a rip because I had pretty much decided that the projections FE provides aren't really all that useful if I have no way to verify their methods.

So FWIW, if you intend to use FE, I'd limit the data you input to those things that are not tied to inflation (so the projected income doesn't mix apples and oranges), and realize that the income they project does not take post-retirement inflation into account - which I think is one of the most, if not THE most important things one must consider.

So that was my take on it at the time, and I always hold out the very real possibility that I may be wrong.

I agree with your statement regarding FE projections being higher than other estimates. I ran the same number through FE and Fidelity and found FE portfolio projections to be 5% higher and the projected income to be about 10% higher than Fidelity.

 

[Bob_Smith]

Yes, and did you notice that under the "retirement forecast" (where they provide your annual retirement income projection) they include the following comment:

"Amounts shown are in pre-tax dollars and have been adjusted for inflation."

But they only adjust for inflation up to the date of retirement - not after. So the annual income they project will gradually lose its purchasing power. This strikes me as very likely to mislead anyone who doesn't realize what FE is doing, and their added comment about adjusting for inflation adds to the likelihood that the annual income projection will be misunderstood.

If you include nothing in the FE equation but your investment portfolio (IOW, no SS), after retirement you would need to slash the annual income they project by somewhere in the vicinity of 40%-50% to keep pace with the US historical worst case inflation scenario going forward. If you include other income streams, like SS, that ARE pegged to inflation, I believe that they just add those in (minus the years until you collect)... so now you have a projected income that includes a mix of income streams with some pegged to inflation, and some not, and no consideration for the difference... a real cluster f**k. Plus it seemed to me that their annuity figures were off by quite a bit. All-in-all I found it to be a pretty convoluted and useless tool. Maybe I'm missing something.

 

[rs0460a]

I agree with your statement regarding FE projections being higher than other estimates. I ran the same number through FE and Fidelity and found FE portfolio projections to be 5% higher and the projected income to be about 10% higher than Fidelity.

Part of the "challange" (and can account for some difference) is the life expectancy "built in" to FE. Here's what they say:

"The Personal Online Advisor updates the mortality tables periodically to estimate population-average mortality rates for different genders within different age groups. Since these mortality rates are population averages, they do not incorporate individual-specific lifestyles or health status."

On FE, I'm assuming my mortality is set to the "average" of mid-80's (based upon the federal guidelines). However, within Fidelity's tool, I set it for the mid-90's (average +10, "just in case"). Of course, FE will "look better" than Fidelity in this situation, due to the extended draw-down at a longer age.

- Ron...

 

[kcowan]

Part of the "challange" (and can account for some difference) is the life expectancy "built in" to FE. Here's what they say:

"The Personal Online Advisor updates the mortality tables periodically to estimate population-average mortality rates for different genders within different age groups. Since these mortality rates are population averages, they do not incorporate individual-specific lifestyles or health status."

On FE, I'm assuming my mortality is set to the "average" of mid-80's (based upon the federal guidelines). However, within Fidelity's tool, I set it for the mid-90's (average +10, "just in case"). Of course, FE will "look better" than Fidelity in this situation, due to the extended draw-down at a longer age.
- Ron...

And this is the biggest error in the planning tool. I used a life expectancy tool from Harvard and the outcome for me was:
Median 89.5
25% quartile 84
75% quartile 96
so it has shaped my thinking about FIRE versus using a standard age. My Dad lived to 95. The spread was shocking to me and makes using an average (for the population) median age the biggest inaccuracy IMHO.