retirement planning software

Tips for Insurance Companies to Create Retirement Planning Software

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Basics of developing software for retirement planning

In 2021, the retirement age was 66.2 years in the USA and 62-68 years in the EU. The average life expectancy in these regions differs as well. American men live 76.3 years, and women live 81.4 years. For European residents, these figures are slightly higher – 78.5 for men and 84 for women.

This means that an average person is going to live at least 12-25 years after retirement. Some states offer social insurance programs; others leave the issue to be managed by the individual. That’s why people resort to apps for planning savings. Let’s talk more about the peculiarities of retirement planning software. Why is the insurance sector interested in financial software development?

Pension statistics in the US and Europe

Every country has its specific pension system. The systems in the US and the European region are different.

The situation with pensions in the US

It is believed that the sum of $40,000 is enough for a comfortable retired life. American workers can collect such an amount in several ways:

  • Receive Social Security benefits;
  • Save for retirement using 401(k) plans from their employers;
  • Save money individually using private funds IRA.

Social insurance

Social Security is a federal financial assistance program for American citizens. Each employee makes monthly contributions in the amount of 6.2% of their wages to the Social Security Administration.

The organization prepares budgets for pensions, unemployment benefits, etc. – on average, $1,543 per month as of 2021. One needs to work for at least 10 years to receive a social pension. An individual’s pension is formed by taking 35 years of their career with the highest income and is adjusted in terms of inflation.

401(k)

Working Americans deposit to their retirement savings accounts – 401(k) – via their employers. On average, employees save 7% for an investment plan; 1-4% can be additionally deposited by employers. However, account holders under the age of 50 can deposit no more than $58,000 per year, with $19,500 deposited by the holder and the rest of the amount deposited by the employer. For workers aged 50 and older, the limits are a little higher – $64,500 for a total deposit and $26,000 for a personal one.

IRA

On their own initiative, Americans can open an IRA or Roth IRA through commercial funds, banks, online brokers, or personal brokers. It can be opened even if an employee already has a 401(k) account. But if a holder is less than 50 years old, they can’t transfer more than $6,000 per year; for older people, the limit is $7,000.

The pension program in the EU

In the EU, such retirement rules as age, the sum of pension payments, and the methods of accumulation vary from country to country.

British retirees, for instance, receive a basic state pension and an earnings-related one. The government aid will be available to those citizens who work for 30-35 years and pay National Insurance contributions (NICs) – 12% of the average salary. The earnings-related pension is formed from the sum that the employer deducts on payday, amounting to 20%.

Additionally, working citizens make savings through non-government pension funds. A common pension amount for British seniors is £25,000, with £14,000 paid by the government.

In order to receive a good pension in France, people need to work for at least 40 years. A pension is formed from two sources: mandatory and collective. The mandatory pension provision means that a retired person receives 50% from their average income calculated from their 25 highest earning years.

The collective provision requires a French citizen to pay 16% to the French Public Pension Fund, which then will form an additional pension. Employees can also turn to private funds, banks, and insurance brokers for individual retirement plans.

In Germany, there is a principle of solidarity between generations. Working Germans pay 20% (half of it paid by employers) of their salaries to state funds that pay senior citizens their pensions. A pension amount depends on the age of retirement, employment period (at least five years required), salary received, and type of pension. Employees can also create individual pension plans by participating in non-state funds.

Thus, pensioners in EU countries are more socially protected than pensioners in the US. Workers wanting a comfortable life when they are old take care of their pension planning by turning to social security pension programs.

Retirement income challenges

Everybody wants their retired life to be without problems or loans and with a decent pension. The question is how to calculate what sum of money will be needed for a comfortable life and accumulate this sum over the years of earning capacity. Also, some additional factors should be taken into account:

  • the number of years to live after retirement;
  • the employment period;
  • the return on investment, if any;
  • possible economic crises;
  • inflation, and other similar events.

Statistics show that 2020 has made people uncertain whether they have enough money for a carefree old age – approximately 70% are somewhat unsure about the future, and 30% are confident in their savings. In 2019 these figures were 5% higher.

That’s why seniors often turn to programs, calculators, or financial advisers to find out the most appropriate amount of their monthly retirement income. However, there are several inaccuracies that distort the forecasts.

Problem 1. Coverage

Not all employees of private firms have access to a pension plan through their employers. For example, approximately 33% of American workers are unable to deposit savings to a 401(k) account – either their employers don’t have one or they work part-time or change jobs frequently.

Problem 2. People find it difficult to draw up a retirement plan

It is extremely difficult to single-handedly project the amount of money to be saved monthly and consider future risks. A person needs to evaluate their lifetime income, factoring in possible inflation and other financial troubles. Such calculations may lead a person to 50% of their income. Striving to save this amount of money for 30 years is hard, and people give up. The working population is also concerned about global changes:

  • rising costs of healthcare services and long-term care;
  • an increase in life expectancy;
  • less support from employers;
  • slow wage growth for middle-class workers, and other hindrances.

Problem 3. Pension calculators make different forecasts.

Here is the situation: different mainstream financial programs make different forecasts, and the discrepancy in their estimates is discouraging.

This difference is confirmed by a Ph.D. study called Limitations of Retirement Planning Software: Examining Variance between Inputs and Outputs, published in the Journal of Financial Service Professionals. Using a variety of inputs, the researchers studied planning calculators popular in America.

The results offered by the programs diverged significantly. Retirement recommendations were different even when the software processed the same scenario. In addition, it was not always clear to people with a low level of financial literacy how to use the apps. Hence customers needed the help of a specialist so that they could confidently work with the calculator.

Problem 4. Very few people have a financial advisor

As shown by statistics, only 1% of Americans enlist the help of a financial advisor. The rest consider it an expensive service for well-off citizens. Apart from that, there is a lot of related information freely available on the Internet, so Americans believe that they can handle financial matters on their own.

In 15% of cases, finances are managed by their spouses, and in 4% of cases, this is done by their parents. Future retirees overlook the fact that a financial advisor can merely give advice on financial planning or offer one-time consultations. Only 25% of survey participants are confident that they will have enough income after retiring.

Problem 5. Real opportunities for savings don’t meet the expectations

Workers’ views on the amount needed for a comfortable post-retirement life differ as well: 18% of respondents believe that they should save no less than $100,000, 16% are determined to save $100,000-$250,000, and 17% find $250,000-$500,000 enough for their comfort. It is difficult to plan the accumulation of such amounts on your own. An average American family manages to save $65,000. This figure is hard to reach without dedicated retirement income planning software.

Difficulties with choosing retirement planning software, reluctance to use the services of a financial advisor, and uncertainty about pension amount sufficiency stimulated insurance companies to create pension plans. Statistics say that retirement insurance accounts are going to grow by almost $100 trillion.

Insurance companies are interested in helping clients plan their retirement income. Therefore, they aspire to offer the best experience – the ability to monitor an account via pension management software.

What retirement income planning software is

Pension management software is a program that helps a working person evaluate their earnings and choose a spending model to save enough money for their post-retirement life.

Such a program takes the following criteria into account:

  • possible time spent in retirement;
  • projected inflation rate;
  • taxes;
  • income of the user’s spouse;
  • investments (pensioners invest in shares, risking part of their assets);
  • health (the costs for emergency care and long-term care);
  • planned large purchases, education, and other factors.

Standard programs only offer plans for saving. More advanced platforms, usually custom-built by IT service suppliers, provide detailed forecasts. Developers can equip them with cutting-edge technologies like Artificial Intelligence, Machine Learning, and others.

Benefits of retirement income planning software

Software for pension management simplifies the process of income accrual by:

  • Automating the pension management process;
  • Eliminating paperwork;
  • Improving pension audit;
  • Taking financial risks into account;
  • Protecting information through backup;
  • Analyzing forecasts about the market, inflation rates, costs of healthcare services, including prices for long-term care, and so on.

Retirement software helps people manage their expenses given their limited income. Pre-retirement planning involves creating a strategy for saving, spending money, and investing before retirement. Retirement planning must consider risks indefinitely. For this purpose, financial advisors need to frequently communicate with their clients to learn about possible changes affecting the pension plan. High-quality software allows them to flexibly adjust planning to these changes.

Without a financial advisor, a person needs to plan a savings strategy on their own. A user of such a program will find it easier to estimate several scenarios, best and worst.

Retirement income planning software provides a means for:

1. Determining the retirement age;

2. Estimating the best time to receive a social pension;

3. Planning long-term retirement income;

4. Changing income and spending needs over time;

5. Classifying sources of income: social security, 401(k), IRA, and others;

6. Including customer-specific goals for analysis;

7. Taking into account current and expected health state to estimate possible healthcare costs and life expectancy;

8. Considering various social pension-related situations: death of a spouse, early social benefits, postponement of social benefits, etc.;

9. Complying with changing tax legislation – this feature prevents the software from becoming obsolete;

10. Factoring in planned expenses like buying a house, a car, and other large purchases.

Research by EBRI is showing that half (48%) of workers are interested in calculating retirement income, which is 6% and 10% more than in 2019 and 2018 correspondingly. Plus, dedicated software helps to save more money than if a person calculates it on their own.

What makes retirement planning software better than financial calculators

Software for planning retirement gives workers what standard pension calculators are missing:

1. The program tells users how much they need to save monthly to get the desired retirement income, taking into account possible risks and parameters that can affect the post-retirement period. Calculators, in turn, only give a numerical answer – without analytics or forecasting.

2. Retirement planning software is able to collect and process big data; that’s why such a system can predict potential scenarios and alternative ways out. Online calculators don’t have capabilities for detailed analytics.

3. A pension management program allows the user to set planning goals and priorities – for example, how much money to accumulate in order to cover healthcare, home maintenance, recreation, and other expenses. Standard online calculators don’t provide the functionality to prioritize planning.

Features to include in retirement planning software

Software for pension management is a convenient tool for planning and saving. In order to accomplish its task fully, the program needs to have:

  • Intuitive screens for information entry with pop-up tips;
  • Online manuals and guides for working with the app;
  • Free support via chat, email, or phone;
  • Tables or graphs of expenses and income split into groups;
  • A sufficient number of data input fields (at least 70 parameters);
  • The ability to assess the quality of input data to avoid forecast distortion;
  • Functionality for factoring in various sources of pension income (social security, 401(k), IRA, and others);
  • Guides for interpreting results;
  • Risk assessment (inflation, healthcare costs, return on investment, and other factors);
  • The possibility to change the amount of social benefits;
  • Non-standard characteristics – for example, if the app is used by an immigrant who hasn’t worked the required number of years in the country of immigration to receive a social pension;
  • The possibility to factor in dependents;
  • Recommendations for cheaper housing options after retirement;
  • The function for collecting pension and non-pension assets in a single app;
  • The possibility to save multiple retirement plans;
  • Functionality for factoring in pay rise and changes in pension legislation;
  • Tax rates before and after retirement;
  • The possibility to work with spouses as a single client;
  • Strategies for withdrawing pension assets;
  • Visualization of statistics (diagrams of income, investments, and expenses);
  • Adjustment of income needs over time.

A program offering all these opportunities will allow a working person to draw up a spending plan to protect themselves from old-age poverty. It will help them make smarter decisions that will positively affect their pension. Accurate information on income, expenses, taxes, and social security benefits enables the user to delve into the details and plan their future more consciously.

Why insurance companies are interested in retirement software

Since retirement planning is risk-bearing, insurance companies include pension provision options in their packages. Well-thought-out insurance software protects customer retirement savings and improves return on investment.

Insurance companies should carefully select programs before offering them to clients. What is worth recommending, in the first instance, is software that makes projections from the perspective of insurable events and considers multiple retirement risks.

If an insurance company decides to independently develop retirement planning software, it needs to distinguish between the mechanisms for pre-retirement and post-retirement periods. In the former case, the planning is centered around money collection according to the strategy proposed by the program; in the latter case, it is centered around rational budget allocation for an indefinite period with risks in mind.

Retirement planning software development

When an insurance company has problems with finding commercial retirement planning software to satisfy the demands of its customers, it creates a unique program. If you want to develop a useful solution, consider the following:

Cost analysis tools.

Income and savings are possible to plan, but expenses are often spontaneous. A program with built-in analytics tools is able to set spending limits and recommend when it is better to save money rather than spend it on costly entertainment. The ratio of income and expenses can be displayed as an interactive chart so that the user can see their progress and approach their costs in a financially wise way.

Robotized tools.

Using RPA, the program can calculate how many years it will take a client to run out of money. Smarter technologies like AI and ML analyze possible accumulation scenarios and recommend the best ways to save money.

Pursuit of multiple financial goals.

Saving money for retirement shouldn’t – and won’t – be the client’s only goal. A person has other plans and dreams: going to college, getting married, buying a car, buying a house, and so on. The retirement goal shouldn’t be an obstacle to present-day goals, so the app should consider a person’s saving capacity in different periods of their life. For example, a worker is able to save more when they are getting closer to retirement rather than when they are just starting their career, as there is a need to buy a house and pay off a student loan.

Decent security.

The majority of retirement planning software programs are web apps. Among people of pre-retirement and post-retirement age, only 5.5% use mobile programs. But since smartphones are becoming adopted by these groups, retirement software is going mobile as well. Therefore, insurance companies should equip their web and mobile apps with reliable protection: two-factor authentication, encryption, biometrics, and other security means. Customer data must be stored in compliance with local laws: GDPR, PIPEDA, DPA, CCPA, or others.

Simple and convenient design.

The logic and structure of software for pension management are specific. For users, however, the program should be simple and intuitive. Built-in guides, pop-up tips, charts and graphs, and online chats are more useful for customers than sophisticated functions and diagrams. The task of the app is to make the difficult procedure of accumulation easier, not to complicate it even more.

Conclusion

Financial companies can leverage free and paid ready-made programs to provide pension insurance, but the level of their effectiveness and efficiency will cause doubt. If you want to meet customer expectations, providing accurate forecasts and ways to address risks, it is better to outsource financial software development to IT service providers.

By cooperating with an IT partner, you will create a high-quality, interactive, and user-friendly program with useful features that we discussed in the article. This is the only way to make sure that your customers’ data is under reliable protection, the program takes all risks into account, and, as a result, the consumer will be satisfied with the work of your financial institution. The insurance program will work properly, generate income, and bring in new clients.

Andersen has been involved in over 250 financial software development projects, including retirement planning software. The company’s experts work with AI, ML, Big Data, and other technologies useful for the industry. We have been creating individual financial, banking, investment, insurance, and other programs for over 16 years, and 70% of our FinTech developers have more than five years of FinTech product development experience.