This 4th of July, we’re excited to take a moment to celebrate independence in all of its different forms. And at Personal Capital, that means honoring the tools that help us achieve our financial independence, of course!
As part of Personal Capital’s engineering team, I was recently presented with the task of helping to build a tool that will enable thousands of Americans to become financially independent throughout retirement. When I started thinking about what it would take to build a truly great retirement planner, my head began whirling with thoughts: planning is not static; life is variable; money is emotional; financial data is scattered; and a planner needs to be aspirational. Building an effective retirement planner was a challenge, but I recognized Personal Capital’s unique position to overcome the problems that have stifled others, in order to build the next generation of retirement planner that is connected, real time, dynamic, and beautiful.
Hand me that shoebox of statements!
Back in the day, the first step to making a financial plan was handing a shoebox full of bank statements over to your financial advisor. From that pile of paper, your advisor would try to piece together a picture of how much you own, owe, save, and spend. As you can imagine, creating a holistic view of your financial life was a hefty task. But today, we know that a good retirement planner needs to collect all of your financial data, in real time.
I guess I’ll put this plan back in shoebox.
The saddest part of this story is that after all of the effort it would take to create a financial plan printed on beautiful, glossy paper, that plan usually ended up in the same shoebox you started with. But in order to be effective, a retirement planner must change with the adventure that is your life. Every turn or bump can alter your plan, and the right planner should automatically absorb these changes.
The answer: data driven retirement planning
We designed Personal Capital’s Retirement Planner to overcome these industry-wide issues, with a truly data driven design and architecture. The Retirement Planner’s algorithms are created by an experienced Investment Committee; the recommendations within the tool are backed by an experienced Advisor team; and the data used to forecast your retirement readiness is streamed in real-time from your financial accounts (banks, investments, mortgages, loans, and 401k accounts). This gives you a dynamic plan that adjusts over time, visualized through an interface that makes sophisticated algorithms and complex data feel intuitive.
A holistic view of your net worth
In designing the Retirement Planner, we wanted to first give you a holistic view of your financial standing, which you can see through the financial dashboard, to help you understand your true net worth — what you have versus what you owe. Because all of your accounts are linked through Personal Capital, we don’t just calculate your net worth once. The system runs continuously so your aggregated financial data is as dynamic as your life.
We also combine your financial data with other data sources by using heuristics and algorithms. For example, we augment your securities with valuation and classification data from financial market data providers. That allows us to determine your asset allocation, from which we can see the return and risk of your current portfolio. From this data, we can show you how much you currently pay in fund fees.
But we don’t stop there. We employ different classifiers that annotate and label your raw financial data, adding more depth, quality and accuracy. For example, we implement machine learning to identify advisory fee transactions, used to calculate how much you pay for your accounts to be managed. When we project your portfolio’s growth, it’s based on your current risk and return, and we can demonstrate how much the combined fees (advisory fees plus fund fees) could be costing your retirement.
Understanding your spending
When we designed the Retirement Planner, our motive was to help you answer two important questions: how much do you save each year, and how much will you be able to spend during retirement? Many of our users overestimate how much they’re saving and grossly underestimate how much they’re spending. That’s why we analyze the transactions across all of your linked accounts to help you estimate an accurate amount. You can also override the estimate with your own number. If the estimation doesn’t look right, use the Cash Flow tool to make sure. Every time you do, we use that data to train our models to generate continuously better values in the future. Our system is even designed to automatically ping you if your spending and saving deviate from your plan.
Goals and life events
We put a lot of engineering and design efforts into ensuring that the Retirement Planner can help you and your family plan for the future. With the planner, you can test “what-if” scenarios (such as retiring earlier or funding your child’s college tuition) to see how they affect your retirement.
Visualizing your future
Our mission behind Retirement Planner is to connect your financial data in a beautiful, accessible way. The user interface is built to show your goals, and help you understand if your current financial standing can support them. If not, the tool will recommend changes that you can make now.
Your evolving retirement plan
Once you link your financial accounts and build your retirement plan, you have created a plan built to evolve: one that is recalculated every single day and with every single change in your goals and financial standing, regardless of the channel. Your retirement plan needs to change with the adventure that is your life, and we engineered the Personal Capital ecosystem to capture these changes as automatically as possible.
If your spending goes up because of a new addition to your family, we will send you a notification that it’s time to revisit your plan. If you talk to your Advisor about a change in one of your goals, you’ll see the change reflected in your plan the next time you log in. If your company IPO’ed and you had a windfall, we will send you a notification that you are way ahead of your plan, so that you can revisit your retirement strategy.
Managing your retirement
The Retirement Planner comes with a recommendation feature that shows you ways in which you could improve your retirement readiness through a well-managed investment account, such as: change your asset allocation, reduce your investment fees, or take advantage of tax loss harvesting.
To illustrate the power of a well-managed investment portfolio, we recently analyzed all Personal Capital users with more than $100K in investable assets, who had provided enough profile information to generate a recommended optimal asset allocation. Compared to their current portfolio, close to 70% of these users could increase their chance of meeting their financial goals by simply switching to our recommended optimal asset allocation for them1. That means a huge potential improvement for your retirement.
1 We analyzed more than 80,000 users, and 36% of them could maximize their wealth in an average market; 32% could reduce risk in a poor market if they switched to our recommended optimal asset allocation, based on historical asset class returns and covariance.
Check it out!
The Retirement Planner is a connected system that links your financial data to the experience of our Investment Committee, so you can live a better financial life. It is a proud achievement for our engineering team, and I cherish the opportunity to work with a superbly talented team driven by the mission to improve the financial independence of thousands of American families not just on Independence Day, but every day.
Ready to take Retirement Planner for a spin? Check it out here this holiday weekend, and don’t forget, we always welcome your feedback to make it even better.