Fidelity's Retirement Planner Versus MaxiFi Planner

No One Can Safely Use Fidelity's "Planning Tool" to Plan their Finances

This article is highly critical of Wall Street’s conventional financial planning, in general, and Fidelity Investments’ financial planning, in particular. But full disclosure is immediately in order.

I have a software company, Economic Security Planning, Inc., which markets MaxiFi Planner and Maximize My Social Security These extremely precise tools do economics-based financial planning, which was developed over the past century by a Who’s Who of economists.

No tool is perfect, so we describe our tools as educational and point out that we aren’t financial or tax professionals. For example, I don’t have a CFP, CFA, CPA, RIA, CIIA, CIC, or any of the other 240 financial planning credentials that the Financial Industry Regulatory Authority (FINA) recognizes. I have a PhD in economics from a pretty decent university — Harvard.

I didn’t develop the theory underlying economics-based financial planning. I implemented it. Economic analysis of saving began with the seminal work of Yale’s Irving Fisher in the 1920s. Fisher’s framework was extended by storied names in finance, including Harry Markowitz, William Sharpe, James Tobin, and Robert Merton, each of whom received the Economics Nobel Prize for work in finance. Their handling of risk, including investment risk, is based on foundational analysis of the economics of uncertainty developed by John von Neumann and Oscar Morgenstern. This is the same John von Neumann who worked on the Manhattan Project and made pathbreaking contributions to physics, mathematics, statistics, and computing.

The fact that the financial industry’s spending, saving, investment, and insurance advice bears essentially no relationship to the work of these economic and mathematical geniuses, let alone common sense, is deeply disturbing. But it’s not surprising. The industry’s goal is not financial planning. It’s accumulating fee-generating AUM — assets under management. As discussed here, the industry uses a well-honed bait and switch, aka conventional financial planning, to pick their clients’ pockets, exposing them, in the process, to major financial risk. FINRA certifies conventional planning as meeting a fiduciary standard. No surprise. FINRA is financed by the industry it “regulates.”

“Competing with Fidelity”

My company’s tools compete with those of Fidelity and all other conventional planning tools. But “compete” is an exaggerated exaggeration. Fidelity, on its own, has over 44 million customers! My company has tens of thousands. Still, word travels at light speed these days. So, please share this post.

I’m One of Fidelity’s Customers

I’ve been a Fidelity customer for precisely 40 years. This week, I decided to run Fidelity’s on-line Retirement Planner tool — something I’ve never done — and compare its spending recommendations with those of MaxiFi Planner. Surely, Fidelity, arguably the industry leader, was doing a better job with planning.

As background for considering Fidelity’s spending advice, let me describe what economics-based planning, as embodied in MaxiFi Planner, suggests.

Economics-Based Planning’s Spending Guidance

MaxiFi runs in both deterministic and stochastic modes. Both produce the same recommended spending guidance. The two planning modes accord with the two ways that economics says we should adjust for risk in our financial lives. It’s worth understanding these two approaches.

Deterministic planning adjusts for risk, including investment risk, by using highly conservative assumptions. This includes assuming you’ll earn the safe rate of return on all your risky investments. TIPS — Treasury Inflation Protected Securities — comprise the market’s safe asset. The current real yield on long-term TIPS is close to 2 percent. Short-term real TIPS yields are roughly 1.8 percent.

Every risky asset has the same risk-adjusted safe return, namely that provided by TIPS. The reason is simple. You can risk adjust (eliminate risk from) each of your risky assets by selling them and using the proceeds to buy TIPS. Hence, planning based on earning the TIPS safe real yield on all your assets is not just a thought experiment. It’s entirely feasible. (Yes, this abstracts from TIPS coupon-reinvestment risk, discussed in this podcast about building a TIPS ladder. And, although TIPS are the safest asset around, they do come with risk — the compensation they provide for inflation, whose future value is uncertain, is taxable. In addition, Uncle Sam could do something he’s never done — default on U.S. Treasuries. Finally, most of our maximum lifespans exceed 30 years, the longest maturity of TIPS.)

The focus of MaxiFi’s deterministic planning is not on your investing. It’s on your spending. It produces highly conservative spending guidance whether you are investing in safe assets or not. Economists call deterministic planning certainty-equivalent analysis. It entails treating an uncertain world as certain by, as mentioned, using safe assumptions. For example, if you are sure you’ll earn $50K a year at your current job, but think you may be able to find one paying $70K, certainty equivalent planning requires assuming you’ll earn $50K on an ongoing basis.

The other way economics handles risk is via stochastic planning, which considers your current and planned future holdings of risky assets. It entails running Monte Carlo simulations to determine how your household’s living standard paths will adjust over time as your portfolio does well or poorly. One can then calculate the lifetime happiness (utility is the economists’ term) resulting, on average, along each of these paths. The average of these values produces von Neumann-Morgenstern expected lifetime utility.

Happiness, and, yes, this will sound weird, is described mathematically by economists, but the formula is grounded in something very basic — the physiology of satiation. Consume more and the utility formula says you’ll be happier. But as you stuff yourself, your extra utility gets smaller and smaller.

Think of it this way. No one would want to eat their lifetime complement of ice cream at one sitting. Declining marginal utility is controlled by the formula’s risk aversion coefficient. It’s called this because the happiness lost from dropping and, therefore, eating one less ice cream cone is larger than the happiness gained from accidentally being handed and, thus, eating an extra ice cream cone.

MaxiFi has a user-friendly name for expected lifetime utility, namely the Comfort Index. Were John von Neumann alive, he’d surely be using MaxiFi Planner’s stochastic tools — Upside Investing and Full Risk Investing — to decide how to invest. The reason? It does precisely what modern finance, building on his theory prescribes. MaxiFi has you specify your degree of risk aversion. Again, this lets you indicate the extent to which you are more concerned with downside spending risk — having less to spend — than upside spending risk — having more to spend.

Why Am I Focusing on Fidelity’s Spending Advice?

As discussed here, spending aggressively can be as risky as investing aggressively. It’s why MaxiFi’s stochastic planning is designed to have users spend with great caution — spending as if they can only earn the same safe real return assumed in deterministic planning. Hence, MaxiFi’s spending guidance is the same whether you run the tool in deterministic or stochastic planning mode. MaxiFi stochastic planning also simulates users spending less when their assets perform poorly and spending more when they perform well.

My goal in comparing MaxiFi Planner with Fidelity’s Retirement Planner is to understand their spending, not their investment guidance. I’ll leave that for a future newsletter. If you’re being advised to over spend, you’re being exposed to more future downside living standard risk. The industry’s bait and switch entails having you overspend and then pretending it can reduce the resulting risk by having you invest more aggressively.

This is connected to the false claim, spread by the industry, that stocks are safe in the long run. Here’s what the financial website, Motley Fool, says, “… as long as you stay in the market for the long haul, there's never necessarily a bad time to invest.” Just to be clear, we have only three independent 30-year observations of the cumulative return on the stock market — observations that aren’t using overlapping data. Here’s a fourth observation. The Japanese stock market index was at 40,000 in 1989. Thirty years later it stood at 17,803. And this doesn’t begin to address the need to use financial assets in the short and medium terms to finance your living standard — a need that introduces sequence of return risk from risky investing.

Fidelity Investments is one of the world’s largest investment companies, perhaps the largest. It has roughly $20 trillion under management or administration. Surely, it provides sound spending advice unlike the rest of Wall Street.

Drum beat.

Running Fidelity’s Tool

To ensure an apples-to-apples comparison, I entered the same resource (asset and earnings) data in Fidelity’s Retirement Planner as my wife and I entered in MaxiFi. But then I got stuck when Fidelity’s tool asked me to enter our retirement spending, which it calls expenses.

Gee, I thought, shouldn’t Fidelity’s planner be able to tell me the most I can spend while leaving enough resources to sustain my living standard? I’ve just told Fidelity about all my resources? MaxiFi treats taxes, Medicare Part B premiums, housing expenses, and special expenses, like alimony, as off-the-top. Everything else is discretionary. Then MaxiFi’s figures out, in under one second, the amount of discretionary spending I can afford while saving enough to maintain my living standard right through my maximum, not my expected, age of life. (Economists, btw, call this consumption smoothing.)

Furthermore, MaxiFi makes its spending calculations in light of five critical constraints. The first is lifetime budgeting — ensuring we don’t plan to spend even a dollar more over our lifetimes than we can afford. The second is cash flow constraints — ensuring we lower our living standard as needed to keep from going into debt. The third is using advanced computation, not high school algebra, to ensure that MaxiFi’s tax, spending, and life insurance calculations are all internally consistent. The fourth is making extraordinarily detailed tax and Social Security benefit calculations. The fifth is providing results in user-friendly terms and in sufficient detail so that users can confirm the program’s results.

Fidelity, as I’ll now describe, violates all five constraints.

Answering Fidelity’s Spending Question

Fidelity’s spending question is broken down into essential expenses and discretionary expenses. Personally, I think annual, court-side Celtic tickets are essential, but I can’t afford them. That aside, I entered what we specified in MaxiFi as non-discretionary spending apart from taxes, which Fidelity’s tool purports to calculate.

As for discretionary spending, my first instinct was to enter $1 trillion a year. But Fidelity’s describes this spending as “Additional expenses you could live without.” That’s a tough one. I guess we could live without ever going on vacation or eating at a restaurant or buying birthday presents or going to the movies or …

So, immediately I was stuck. Then I thought, Gee, a user who hadn’t run MaxiFi to calculate their affordable discretionary spending could just enter what they are currently spending. But that didn’t make sense. What if they were spending too much or too little on a discretionary basis? Then they’d be induced to put in the wrong amount. Furthermore, if they thought they were spending the right amount, why would they be using Fidelity’s tool in the first place?

Perplexed, I clicked on Fidelity’s links and found their Default Expense Estimator. Here’s its description.

We take your current income (which includes salary, commission, and bonus, as applicable) and grow it at a rate of 1.5% over inflation from now until retirement. The value at retirement is multiplied by 85% and taxes are subtracted.

I decided to use this industry-wide replacement-rate method, which is all part of the bait and switch, I’ve written about. As for taxes, I relied on MaxiFi’s calculation of this year’s taxes — something I’d otherwise need to guess.

Running Fidelity’s tool with Fidelity’s default expense amount resulted in a 54 percent higher spending target than MaxiFi says is the most we can safely spend if we want to maintain our living standard!

Using this input, Fidelity ran 250 Monte Carlo simulations to determine whether we would run out of money. In running these simulations it appeared to be using its knowledge of our investments, including investments in TIPS. But it seems to have treated the TIPS as risky bonds as opposed to yielding safe real streams of interest and principal.

Anyway, Fidelity’s tool provided three answers labeled Average Market, Below Average Market, and Significantly Below Average Market with these descriptions.

Average Market

In 50% of the simulations, we saw results as good or better than the results shown.

Below Average Market

In 75% of the simulations, we saw results as good or better than the results shown.

Significantly Below Average Market

In 90% of the simulations, we saw results as good or better than the results shown.

In all three cases, Fidelity says we run out of money. In the Significantly Below Average Market, we run out of money in our mid eighties. But this and the other two results assume we keep spending, year in and year out, precisely the same amount independent of the bad investment returns we earn. This assumption — putting your spending on autopilot whether or not your financial house is burning down — violates the most basic principle of consumption smoothing and common sense.

Who in their right mind would blithely continue spending the same amount, year after year, as their assets continued to fall? This assumption, to be clear, is part and parcel of standard conventional planning’s six parts:

1. Ask an unanswerable question about the client’s spending target.

2. “Help” the client answer the unanswerable question by providing the industry’s standard 85 percent replacement-rate formula that invariably produces a spending target that’s miles too high.

3. Put clients’ typically miles-too-high retirement spending on auto pilot.

4. Run Monte Carlo simulations that, given steps 2 and 3, raise the probability of one’s clients running out of money.

5. Offer the concerned clients two options — spend a lot less than “your” goal or let us invest for you to raise the probability of making “your” goal to a safe — 80 percent or higher — level.

6. Don’t point out that an 80 percent chance of not going broke is a one-in-five chance of becoming financially destitute, which could happen as early as the first day of retirement.

The Story Gets Worse

I have a PhD in economics from Harvard. I’m a Warren Professor (a University Professor) at Boston University. I’m a Fellow of the American Academy of Arts and Sciences. I’ve published hundreds of articles in referred economics journals, including the top journals in economics. I’ve written thousands of articles for the public about a wide range of economic issues, including finance and personal finance. My columns have appeared in essentially every top media outlet. I’ve spent 31 years developing personal financial planning software. My book, Money Magic, published in 2022, was judged the best book in personal finance by SABEW — the association of professional business writers. My co-authored book, Get What’s Yours — the Secrets to Maxing Out Your Social Security, was a NY Times best seller.

You’d think that with this background I’d be able to understand precisely what “We saw results as good or better” means. Not a clue on first reading and not a clue after reading Fidelity’s small print documentation many times over. So, I called Fidelity to ask. Actually, I called twice. Each time I was transferred to someone who was genuinely nice and said they specialized in the tool and would be happy to help. But both said they didn’t know what “seeing good or better results” actually meant. Indeed, they confessed that they didn’t have the slightest notion.

The first person said they’d have someone who programmed the tool call me the next day — at 4 PM. No call. So, I called back. The second person said they’d ask, but that the programmers won’t call you back.

I also asked both reps whether the tool does detailed annual federal and state tax calculations? The documentation suggests it doesn’t? The first rep said they didn’t know. The second said they just apply the same tax rate year after year to taxable income components. The rate depends on the component, but they don’t do an annual tax return. This is truly ridiculous. I’ve run a ton of MaxiFi plans. Virtually all experience very different average rates of taxation during retirement.

Next I asked about cash-flow constraints. How does it handle someone who is planning to take Social Security at 70, but is now 62 with limited regular and retirement assets? Neither rep had any idea. Incredible. Over 60 percent of American households are cash-flow constrained during their lifetimes, including those with upper incomes. And Fidelity’s tool ignores these constraints? Or hasn’t bothered to tell its tool specialists how it handles constraints?

Finally, I asked about Social Security. The tool asks you to enter your retirement benefit estimate. But what if you don’t know it? The second rep said the tool will use your current earnings and some other simple assumptions to form an estimate. OMG! This will produce an estimate for almost every worker that’s miles off base!

The documentation does tell those who read it that you can get a more accurate estimate from Social Security. What the person writing the documentation surely doesn’t know is that ssa.gov’s calculators make crazy assumptions, particularly that there will be zero future inflation and no economy-wide real wage growth.

OMG! We just experienced a 20 percent increase in prices in the last couple of years. If you’re, say, 40 and using Social Security’s calculators, you can easily get a future benefit estimate that’s 20 percent too low. For those over 60 and still working, the estimate can be too high — by a lot.

Even worse, Social Security has eight benefits in addition to its retirement benefit. I didn’t see any reference to spousal, divorced spousal, widow(er)s, divorced widow(er)s, mother and father, child-in-care spousal, young child, or disabled child benefits. MaxiFi calculates each of these in exquisite detail.

My Overall Assessment

I’m just one very biased observer. But, in my professional opinion, no one should remotely use Fidelity’s Retirement Planner. Putting your retirement spending on autopilot when you are investing in risky assets — the FINRA-approved industry standard — is first-order nuts.

Guessing your non-essential spending at levels that may be completely unaffordable is first-order nuts.

Using the industry’s replacement rate formula to estimate your spending needs is first-order nuts.

Using a tool that ranks the probability of going broke based on criteria that its expert reps can’t explain is first-order nuts.

Using a tool that doesn’t calculate your taxes, including your IRMAA Medicare Part B premium (a tax except for its name), on a precise, annual basis is first-order nuts.

Questimating users’ Social Security retirement benefits and, unless I’ve missed it, leaving out the system’s seven other benefits is first-order nuts.

I could go on. Malpractice is a strong word. But it applies here. No decent doctor would dispense medicine to an ailing patient on a random basis without doing a thorough checkup and running all the necessarily tests. America’s retirees, including lifetime high earners, are, as a group, facing a terrible financial crisis. They need precise, sophisticated, professional guidance — the best help a century of economic science has to offer, not “planning” that violates the very meaning of the word fidelity.

My advice is click this button, which will take you to maxifi.com.

Or if you just want to maximize your lifetime Social Security benefits, click this button, which will take you to maximizemysocialsecurity.com.

Is Fidelity and the Rest of the Financial Industry’s Financial “Planning” Violating a Reasonable Fiduciary Standard

This is a question the Department of Labor that oversees employer retirement plans needs to ask. While conventional planning meets Wall Street’s fiduciary standard, it certainly doesn’t meet the economics’ profession’s fiduciary standard. Not a single top economics department or business school teaches conventional financial planning. My guess is that any faculty member who did so, apart to expose it as financial malfeasance, would be fired in ten minutes. And, by the way, none, to my knowledge, of the 240 industry-credentialed programs teaches economics-based financial planning.

What If You Want Someone to Run MaxiFi Planner for You?

Tens of thousands of households and many responsible financial planners are using MaxiFi Planner, all on their lonesomes, with absolutely no problem. It’s a kick because the tool helps you figure out how to safely raise your living standard. (Here’s a great example of MaxiFi’s ability to do Money Magic.) Indeed, we have a ton of addicted users showing up at our tri-monthly office hours. But if you want me to run MaxiFi for you, here’s the button to click.

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