There's an app for (some of) that: online financial planning

During the pandemic, you may have taken to spending more time on the internet exploring investment advice pages and financial planning tools, apps, and platforms. The sheer number of online opportunities for playing with your finances can be overwhelming, and you may be wondering how much you should be doing on your own, or how and when to engage a financial professional.

Finding this balance requires an awareness of when you’re making a truly informed decision vs. when you’re taking action that could be consequential for your financial well-being, without having the expertise or experience to adequately assess the risks. You may be familiar with the tragic case of one user of the Robinhood app who took his own life after finding a negative $730,000 balance in his account.¹ While this is an extreme example, it does illustrate the dangers of gamified investment platforms that often have low barriers to entry and easy access to options trading, margin lending, and other tools that require advanced investing knowledge to fully comprehend. While it may be fun to see confetti pop up on your screen after executing a trade, the addictive nature of these apps can make it easy to forget that one misstep could wipe out your savings and put you in debt.

Navigating the Digital Finance Landscape

These risks don’t mean you need to completely avoid digital investment or financial planning tools. Here are some tips for using financial technology wisely:

• For those who do still want to partake in active online trading, start by using free platforms with small amounts of money that you could afford to lose. Apps like Robinhood do allow you to buy and sell small sums in penny stocks, which allow you to learn more about trading while putting a relatively small amount of “skin” in the game.
• If you’re looking to decrease the amount of risk you’re exposed to, avoid margin lending, options, shorting stocks, and other risky strategies that could cause significant harm if not managed well.
• Learn from your online experiences! By turning budgeting into a fun game, apps can help you gain better control over your finances. Many free, popular tools and platforms offer opportunities to manage your budget, track your spending and saving, link all your financial accounts, and monitor your credit. For young adults, especially, these skills can help you build your financial literacy and help make you a more informed client if you choose to work with an in-person financial professional at some point.

Robo-Financial Professionals and Retirement Calculators

In addition to the digital investment and financial management tools discussed above, robo-financial professionals have also caught the attention of those looking to plan their financial futures online. Robo-financial professionals are intended to function as digital financial professionals, providing financial advice or investment management, with minimal human interaction, based on algorithms or mathematical rules.

One of the most popular elements of robo-financial professionals is the retirement calculator. This tool can be highly effective in kicking off your financial planning journey, if used right. Before searching for a retirement calculator or robo-financial professional to use on your own, it’s helpful to understand the benefits, limits, and opportunities for using these tools in tandem with a financial professionals to build a holistic financial plan for your future.

Retirement Calculators: The Benefits

A retirement calculator can be a helpful tool to steer you in the right direction for retirement, but some of them can easily throw you off track. Here are the important attributes you should look for when selecting a retirement calculator:

• A strong emphasis on budget planning: The retirement calculator should help you envision the income you’ll need in retirement based on various planning scenarios. They should also help your understanding of how likely your savings are to last you through your retirement, so that you can start working with a financial professional to approach areas where you may fall short.
• Monte Carlo simulations: These are impressive retirement calculators that let you compare scenarios side by side while changing the variables and assumptions to see the effects of how your retirement savings will fare in various market conditions.
• An involved interview process: The initial “interview” process, in which you enter your financial data and answer some questions online, should be fairly straightforward, but it should also take some time. If you only need to spend a couple minutes inputting your data into a retirement calculator, it’s probably not asking enough. Your financial future should account for many aspects of your present life and your future goals. A thorough interview process also has the added bonus of helping you find and organize the important financial information in your life, so you have a clear understanding of your current financial status.

Limits of Retirement Calculators

While retirement calculators are a useful tool to have a better understanding of your current financial status and to give you an estimate of how much you’ll need to save for retirement, it’s also important to understand their limits:

• Many retirement calculators use a flat rate of return, typically based on a historical average or a rate the user provides. However, any portfolio can suffer from a down market at some point, and these retirement calculators don't always take variances in return into account. A bear market can cause losses of 40–50 percent, or more, and one of the most significant factors is the timing of the negative returns. During retirement years, if a high proportion of negative returns occurs in the beginning years of retirement, it will have a lasting negative effect and reduce the amount of income you can withdraw over your lifetime. Conversely, if there's a bear market that reduces your portfolio by 25 percent in early years of savings, you have some time to make it up. Retirement calculators are limited in their abilities to account for this.
• Not all calculators are created equal: Googling "retirement calculator" provides hundreds of results. Some calculators are better than others. In a recent study, researchers who tested 36 online retirement tools gave only 11 a passing grade.² Most failed because they were too simplistic. The more input the calculator analyzes, and the more freedom the tool provides to play with the numbers and compare multiple scenarios, the better.
• The calculations are dependent on pure assumptions. Who knows how long someone will live or how much they’ll spend in each year of retirement?  The calculator estimates the inflation and returns, but it's just that: an estimate. Even the smallest error on a rate of return or interest rate can make a huge difference in the calculations. Again, that doesn't mean retirement calculators are not valuable, but how you use (or misuse) the results is the key. The results should be seen as an estimate and starting point that shows if you're on track or not.

The Online/In-Person Hybrid Solution

Given these limits, retirement calculators can serve as a great tool when paired with an in-person financial professional. While online planning platforms keep getting more advanced, financial professionals do offer benefits that may never be digitally replicated. For starters, financial professionals are held to a fiduciary standard that means they’re required to avoid conflicts of interest. While it has not been determined whether or not robo-financial professionals meet the fiduciary standard of care, regulatory bodies, such as FINRA, have shown concerns regarding robo-financial professionals as they relate to the standard. Human judgment is an important element of the fiduciary standard, especially when applying well-accepted principles of modern portfolio theory. In addition, while a robo-financial professional may provide an analysis of investments in isolation, the financial professional adds the strength of analyzing investments within the context of the whole portfolio.

Going through the exercise of using a retirement calculator, however, makes you more prepared to discuss the current state of your finances with an in-person financial professional and get a realistic picture of the range of possibilities for your future. To prepare yourself for this conversation, come in having tried the calculator at least three times, playing with the inputs to get several different scenarios. For example, you could try a later retirement age, longer life span, lower or higher returns, less or more income at retirement, and various inflation rates. Also, don’t plan to just use the calculator once and rely on that number. Your life, the market, and the world will continue to change, so repeat this exercise once a year or upon any major changes.

If you’re just starting the search for a financial professional, Jackson offers free resources to help you understand what qualities are important in a financial professional relationship, what questions to ask, and how to best prepare.