Demand for retirement planning advice has never been greater. Boomers are entering retirement, and estimates are they will inherit as much as $30 trillion in the years ahead. It’s no surprise, then, that just about everyone related to the financial services industry wants to provide retirement advice to wealthier boomers.

This need has caught the attention of some entrepreneurial folks who find fault with the current crop of retirement planning software. Enter the co-founders of Nest Egg Guru: Jack De Jong, Jr., and J.R. Robinson. De Jong is a CFA and finance professor at Nova Southeastern University in Fort Lauderdale, Fla. Robinson is the founder and owner of Honolulu-based Financial Planning Hawaii.

Nest Egg Guru software seeks to answer two seemingly simple questions: 1) How much will I have saved for retirement? and 2) How long will my retirement nest egg last after I retire? As any experienced practitioner knows, these questions sound simple, but arriving at the answers is complex.

Joel Bruckenstein, co-creator of the Technology Tools for Today conference series

The current methodology employed by most professionals requires the practitioner to estimate future rates of return for various asset classes after inflation and taxes. It also requires the user to make assumptions about market volatility and other factors over the period being modeled.

THE DIFFERENTIATORS

A number of things differentiate Nest Egg Guru’s approach to retirement planning from that of its competitors. The essence of the software’s methodology is to address what the developers believe is the often overly optimistic outputs generated by the typical Monte Carlo simulations widely used by planning professionals today.

Nest Egg does this in a number of ways. One is to run 5,000 Monte Carlo simulations for each scenario. They claim most competitors only run 250-500 simulations, numbers they deem insufficient to arrive at a reliable result.

Nest Egg Guru also allows advisers to take into account historically low rates on bonds and cash, something they say most competitors don’t allow for. Furthermore, the application allows advisers to consider the impact of both internal and external fees and expenses.

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"A number of things differentiate Nest Egg Guru’s approach to retirement planning from that of its competitors."

Rather than looking at a full range of possible scenarios, Nest Egg Guru focuses on stress testing the portfolio. It does this by downplaying the potential best 50% of returns in their Monte Carlo simulations, and focusing on the worst 50% of return scenarios. To avoid making assumptions about future market returns, Nest Egg Guru randomly samples monthly index returns in their Monte Carlo simulations.

GETTING STARTED

Signing up for Nest Egg Guru is easy. Visit their webpage and click on the 14-day free trial button. Then supply some basic information about you and your firm, including your logo, bio and disclosure statement, and the software creates a landing page for you and one for your clients.

Clients and prospects can access your white-labeled client portal in one of two ways: You can provide a hyperlink through email, text message or social media, or you can embed code within your current website. In either case, clients land on a page that provides access to two calculators: a retirement savings calculator and a retirement spending calculator.

I logged on as a prospect to the retirement savings calculator. The information the calculator requires is years to retirement, current savings for retirement, current income, total expected annual retirement contribution and rate at which the annual savings will increase.

As for investments, it requires current asset allocation (stocks, bonds, cash), detailed stock allocation and expected bond return, expected cash return and estimated annual investment expenses. You’re also asked if you want to maintain the current allocation during retirement, or if you’d prefer a declining glide-path strategy. Sliders and the like speed up the data entry process. For those prospects who do not know what to enter in a given field, there are icons that, when clicked on, offer explanations.

After entering the information, click the submit button. A pop-up requests your name and email address so a full report can be emailed. The calculator then runs 5,000 simulations to arrive at its results. The results summary provides the prospect with four numbers: the total amount that would be saved based upon the inputs, the growth over the period based upon the top 20% of simulation results, the median result and the worst of the 5,000 simulation results.

A more detailed analysis is presented in table, bar graph and line graph format. Users are encouraged to explore how changing inputs will impact results. A free PDF copy of the report, the free retirement stress test analysis, is emailed to the prospect/client.

A SIMPLISTIC ANALYSIS?

Some readers may be thinking this analysis is too simplistic for a number of reasons, including the limited number of inputs and lack of attention to taxes. I put this question to Robinson, and here is an abbreviated version of his response:

“There is a general a perception that Nest Egg Guru's Retirement Savings Calculator will most often be applied to illustrate the range of expectations for IRAs and qualified retirement accounts. These could be Roth accounts or traditional pre-tax accounts or some combination thereof. All we are doing with the savings calculator is focusing the clients' attention on the bottom half of the simulation results to give them a reasonable estimate of how much their retirement nest egg may be worth under less than ideal future investment conditions, and to then show them how changing variables within their control … may change their results.

“While not accounting for taxes directly in the retirement savings or spending calculators has led some advisers to suggest that Nest Egg Guru's analysis is too simplistic, it has been my real-world planning experience that, at a certain point, input complexity becomes inversely correlated to output accuracy and reliability. It is our firm belief that the attempts to incorporate detailed assumptions about taxes, and to incorporate many different asset classes, is, in part, responsible for the criticism about various Monte Carlo applications producing dramatically different projections.”

I’ll leave it to readers to draw their own conclusions.

The retirement spending calculator is equally easy to use. The inputs are: number of years that retirement savings need to last; current retirement nest egg value; desired initial withdrawal amount; future changes, if any, in the initial withdrawal amount; the same asset allocation information required by the savings module; and a withdrawal strategy.

Four withdrawal options are offered: maintain current allocation with annual rebalancing throughout retirement; spend down stocks first, then bonds, then cash; spend bonds first, then cash, then stocks; don’t spend down stocks following negative-return years.

Output works the same as the other calculator. You enter your name and email address, and the application provides results. As was the case with the savings calculator, the summary at the top of the page gives you the vital information: in this case, what percentage of the time your nest egg lasted longer than you did, and what percentage of the time it didn’t. You also see a dollar result at the top 20% of results and the remaining dollars at the worst result of the 5,000 simulations.

Below is a more complete sustainability chart showing the remaining balance in five-year increments at the 1st, 5th, 10th, 20th, 40th, median, 60th, and 80th percentile. Users can run the simulation multiple times. What becomes readily apparent is that simply changing the withdrawal strategy can significantly impact portfolio sustainability. I ran the exact same fact set through the four different strategies available. Two of the four strategies yielded an approximately 50% chance of success. Of the other two, one yielded a 78% chance of success, and another a 92% chance of success.

BOTTOM LINE

I’m not advocating that you ditch your current financial planning software and rely exclusively on Nest Egg Guru. I do, however, think the software can be used as a lead-generation tool and a client-education tool.

The software is easy to set up and deploy. The cost is reasonable ($30 monthly or $300 annually). Further discounts are available through a number of website providers and the FPA.

I understand the developers’ reluctance to tackle the issue of taxes in an application of this nature. It gets you back in the business of making assumptions, and it adds a great deal of complexity.

There are a few downsides to Nest Egg Guru in addition to the methodology, which some will object to. One is that there is no adviser dashboard. You receive an email with the name and email address of users, but you have to manually input that data into your CRM for follow up. There is no integration with any other planning software or custodial platform at this time. The developers argue this is not necessary, but advisers may feel differently. Time will tell.

Despite some question marks, Nest Egg Guru is an interesting addition to the marketplace. It has a great deal of appeal as a prospecting and education tool. Whether or not it becomes a primary retirement planning tool for advisers is something the market will decide over time.

Joel Bruckenstein

Joel Bruckenstein

Joel Bruckenstein, a Financial Planning columnist in Miramar, Fla., is co-creator of the Technology Tools for Today conference series and technology guides for advisors, including Technology Tools for Today’s High-Margin Practice.