All Aboard the SS Fidelity

By Matt

One of the best features on Fidelity’s Retirement Quick Check is that it allows not just an individual, but also a couple to plan for retirement. This is key because your retirement funds need to last as long as the oldest person lives. For example, let’s say a husband (54 years old) and wife (48 years old) are planning for retirement. Let’s say that the couple wants to assume that the wife lives to be 4 years older than her husband. So if the husband effectively has to add 10 extra years of expenses for a single elderly person. It’s great that Fidelity takes this into account, since most tools ignore the fact that in retirement planning your forecasting for the oldest person.

Besides having some great features, there are also a couple things that Fidelity can do to improve their tool:

  • They use a replacement rate of income calculation. This approach has been largely acknowledged as too simplistic by the financial planning community. Fidelity sets the default replacement rate at 85%. Some brokerages set it at 65%, while others set it at 100%. Do you have any idea what percentage of your income you’ll need (today’s or my peak income when I’m 55)? I don’t. A better way is to figure out what the fully loaded (as well as the basic) cost of retirement will be and then forecast what you’re saving for retirement.
  • When it figures out your portfolio allocation (stocks/bonds/cash) there is no provision for international stocks or mutual funds! It suggests only domestic stocks, which goes against one of the basic concepts of successful investing: diversification. Furthermore, it seems to overweight on bonds when the yield is not that much different than cash. Also, how to account for other types of investing or assets like owning real estate?
  • It runs”a minimum of 250″ Monte Carlo simulation, which sounds a lot like a defensive way of saying “we run 250 Monte Carlo simulations.” Maybe they do run more, but if they don’t, 250 is woefully inadequate to actually return results that can be considered credible. When independent financial planners run MC simulations, they do at least 1,000 and sometimes up to 5,000.

Fidelity it considered a leader in retirement planning and their myPlan has gotten a lot of press. While their planner is helpful, it feels a bit too focused on investments and doesn’t provide much help to help figure out how someone is actually going to save $1.6 million.

Update: I heard from a behavioral economist who is familiar with Fidelity’s work, that they do a significantly greater number of Monte Carlo simulations than 250.

This entry was posted in News. Bookmark the permalink. Both comments and trackbacks are currently closed.