How to choose the right software for retirement planning

Questions about retirement often keep clients up at night: Can I afford to retire within the next 10 years? What will happen if I retire at age 60 instead of 65? What if I have a health care crisis? What if the market tanks after I retire?

Often, the first person they go to with these questions is their CPA.

Today’s clients expect retirement advice from their CPA, and they are looking to their CPA to guide them through confusion and uncertainty. However, without the right tools, it’s difficult to give clients the best and most useful guidance. Financial planning software can be a powerful way to open retirement planning conversations with clients; craft retirement plans that take into account their needs, hopes, and dreams; and show them the results of different retirement scenarios. If you do any kind of retirement planning with clients, it’s something to consider investing in.

If you’re already thinking about buying new financial planning software or updating the software you have, though, you’re facing a complex decision. There are myriad types of software to choose from, each with its pros and cons, and a variety of features to consider. This article takes a look at how financial planning software can enhance your practice, followed by a high-level overview of features to consider when selecting a package.

WILL EXCEL SUFFICE?

Some CPAs use spreadsheets to make retirement projections, but that method is usually not ideal. Spreadsheets have to be customized for every retirement scenario, said Michael Goodman, CPA/PFS, president and principal at Wealthstream Advisors Inc. What’s more, he noted, they can create quality-control issues. For instance, if you use a spreadsheet only sporadically throughout a client engagement, you may not remember what you set up within it from one meeting to the next. If multiple employees work on the same spreadsheet, maintaining consistency may also be a problem.

A more robust option for helping clients with retirement planning is to use specialized financial planning software. In a nutshell, you (and in some cases, your client) input data and variables, and the software provides you with a retirement plan that you can then fine-tune. Most types of financial planning software can integrate investments, taxes, cash flow, insurance, and estate planning into a cohesive analysis to guide your clients in making informed decisions and avoid operating in a silo or vacuum.

A VALUABLE CLIENT EDUCATION TOOL

Financial planning software can assist with client education as you can use it to show clients how likely they are to meet their retirement goals and what changes they need to make to get where they need to be. It allows you to change the variables to show the effects of different factors on a retirement plan, such as retiring sooner or later or changing spending habits. Some types of software can even predict the effects of factors beyond a client’s control, such as an economic downturn, a health crisis, or changes to the makeup of Social Security and Medicare.

What’s more, some software packages provide clients the opportunity to take an active role in their retirement planning. Many versions provide an online dashboard that allows clients to organize and monitor their financial situation on an ongoing basis, which helps to keep them engaged in the planning process.

Financial planning software can deepen the relationship between CPAs and their clients because it allows them to answer the kinds of questions that trouble clients most, said Brooke Salvini, CPA/PFS, principal at Salvini Financial Planning. As it demonstrates visually how much clients have saved and how much they need to save, it can either ease their fears or spark better saving behavior. Even if clients are not on the right path, “the software helps them realize it’s time to make a plan,” she said.

“It cements a long-term relationship with the client,” Salvini noted, as it can help CPAs answer questions that come up beyond an annual tax return.

Financial planning software helps CPAs take a more holistic approach to retirement planning, said Mark Astrinos, CPA/PFS, principal and founder of Libra Wealth. Clients want to know how other decisions in their life, such as buying a home or paying for their child’s college education, will impact their long-term plans, he said.

“The software is dynamic in the sense that retirement planning is one component, but there’s all these other mechanisms that it allows for,” he said, giving the examples of estate planning, college savings, and insurance planning.

WHAT TO CONSIDER WHEN RESEARCHING FINANCIAL PLANNING SOFTWARE

The financial planning software market is a crowded one, with a bewildering variety of options. Here is an overview of the main types of software available and features. Though, naturally, you’ll want to do your own research, read reviews, and talk to colleagues before making your decision, this summary can serve as a starting point.

Goals-based vs. cash-flow-based software

Financial planning software is typically categorized as either goals-based or cash-flow-based, as Michael E. Kitces, MTAX, CFP, lays out in a primer on software selection on his blog Nerd’s Eye View.

Software that uses goals-based models predicts how likely it is that clients will meet specific goals (such as being able to afford a certain lifestyle in retirement), based on their savings and annual investment growth rates. Cash-flow-based software, on the other hand, tracks all the cash flows into and out of a client’s life, including wages, investment returns, taxes, and spending, said Kitces, an author, speaker, and director of wealth management at Columbia, Md.-based Pinnacle Advisory Group.

Which type is the better choice depends, in part, on the complexity of your clients’ retirement plans and how you would prefer to structure conversations about retirement with them. Goals-based software, for instance, allows clients to estimate the chance of success for different categories of goals, from “needs” such as affording health care or not running out of money to “wants” such as travel. This feature can spark conversations about clients’ hopes, dreams, and fears for retirement, helping the adviser tap into what they really want and building their relationship.

Cash-flow-based software, on the other hand, is centered on all the cash flows into and out of a client’s life. This includes wages, investment returns, taxes, and the like. As such, it may be better at handling complex plans. As David Oransky, CPA/PFS, principal and founder of Laminar Wealth, noted, with cash-flow-based software, “Every year, every dollar is accounted for. This creates much more detailed and precise plans — for more complex scenarios, it’s almost necessary.” However, this degree of complexity means that the use of cash-flow-based software is more labor-intensive than goals-based software.

Cash-flow-based software can be valuable as a teaching tool, Goodman said. “Advisers underestimate the client’s desire to understand the cash flow,” he said. “By taking the time to walk my clients through the cash flow — as expenses change, and variables — the client understands and has a better buy-in.”

Type of modeling

Different types of software model the projections in different ways. Some use a linear model assuming a static average rate of return over the years, Kitces said, while others use what are called Monte Carlo simulations to model numerous outcomes and show what could happen in a variety of situations. (For a more detailed description of Monte Carlo simulations, see the article “Expect the Unexpected: Risk Assessment Using Monte Carlo Simulations,” JofA, Nov. 2017.)

A benefit of Monte Carlo simulations is that they enable a CPA “to stress-test the plan and evaluate whether adjustments should be made based on the client’s risk tolerance and willingness to adapt,” Oransky said.

Ability to make quick changes to a plan

Most software can handle the “What if?” scenarios clients present, such as “What would happen if I retire five years earlier than I planned?” However, Kitces advised it’s important to research how well these software programs can make changes on the fly.

“Any good planning software can model alternative what-if scenarios,” Oransky said. “The most important feature related to this is the ability to quickly and dynamically adjust the assumptions during client meetings, and then present the output in an easy-to-digest manner so that clients are involved in a collaborative planning process.”

Level of client interactivity

While Excel only lets CPAs crunch the numbers and then present a report to the client, most software now provides for at least some client interactivity. Many types allow the adviser and client to sit down and go through the planning process together. Some incorporate online client portals that clients can log in to and take a glance at their retirement plan, investments, and assets, Kitces said.

Look for a package that can give the client a condensed report that includes everything he or she needs to know, Goodman said.

“The reality is, if you can’t show a client on 10 pages, maximum, everything they need to know, it’s too much,” he said. “It’s got to be valuable information in a quick and easy-to-read format.”

Some programs allow clients to directly link investment accounts to their plan. The advantage of this feature, Goodman said, is that “you don’t have to wait for the client to give you old balances that are out-of-date. That’s very powerful — especially in a time when the market tanks and clients are very concerned.”

Also consider your clients’ technological savviness, said Chris Benson, CPA/PFS, principal at L.K. Benson & Co. Ask yourself if your clients will log in and keep account information up to date. If they change their password on their investment account, for example, will they remember to update that in the software as well?

Ease or difficulty of use and availability of free trials

You may want to test how difficult the program will be for you and your staff to master through a trial, offered by most software programs on the market.

Many software packages offer demo videos, which allow the user to see all of a program’s features. However, as Oransky noted, it’s important to also do a trial and run real scenarios to ensure the software meets your needs.

“See what issues you run into — what’s necessary to actually produce the plan,” he said. “You may need all the detail a program provides, or you may find it cumbersome and want something simpler.”

Free trials show not only what each program offers, but they give you a sense of how much you’ll need to learn once you start using one, Oransky said.

Once you purchase a program, you will usually be offered on-site and virtual training opportunities.

Cost and fee structure

Financial planning software is usually offered as software-as-a-service, where the client pays per user or per login. This means the larger the firm, the more expensive it will be, Oransky said.

It is possible to buy different levels of licensing. For instance, a firm can purchase one full license, meaning that one user can operate anything within the program, and more limited administrative licenses for other users.

Quality of technical support

Technical support is essential with financial planning software. Oransky said it’s important to look for tech support staff with an understanding of both the technology and financial planning.

“That way, they can collaborate with you — understand what you’re trying to do and how to make the software model that,” he said.

HOW TO MAKE THE BEST DECISION

The best way to ensure any software package meets your needs is to ask for references of organizations like yours that currently use the software, Goodman said. Then ask those people about their experiences.

About the author

Lea Hart is a freelance writer based in Durham, N.C.

To comment on this article or to suggest an idea for another article, contact Courtney Vien, senior editor, at Courtney.Vien@aicpa-cima.com or 919-402-4125.

AICPA resources

Articles

• “Make Technology, Not Talent, Your First Priority,” CPA Insider, July 10, 2017
• “The Single Factor of Most Concern in the Cloud,” JofA, June 2017

Publications

• 10 Steps to a Digital Practice in the Cloud, free excerpt from chapter 2 (#PTX1204EF, ebook)
• The CPA’s Guide to Practical Retirement Planning (#PPF1606E, ebook)

CPE self-study

• Retirement Planning Certificate Program (#166400, online access; #166480, online access with certificate exam; #166470, exam only)

For more information or to make a purchase, go to aicpastore.com or call the Institute at 888-777-7077

Online resources

• Bob Veres’s 2017 Software Survey, aicpa.org (free access for PFP Section members and PFS credential holders)
• The CPA’s Guide to Technology in a PFP Practice, aicpa.org (free access for PFP Section members and PFS credential holders)

PFP Member Section and PFS credential

Membership in the Personal Financial Planning (PFP) Section provides access to specialized resources in the area of personal financial planning, including complimentary access to Broadridge Advisor. Visit the PFP Center at aicpa.org/PFP. Section members can access Bob Veres’s annual software survey, which shows what percentage of financial planners use different brands of software and how they rate them. Members with a specialization in personal financial planning may be interested in applying for the Personal Financial Specialist (PFS) credential. Information about the PFS credential is available at aicpa.org/PFS.