DEFINITION of 'Roboretirement'

An automated advisory system that manages your retirement plan using algorithms set in place by robo-advisors. Roboretirement services differ from human financial planners in that the former creates retirement portfolios, allocates and manages assets, provides strategies, and recommends plans generated by a computer.

BREAKING DOWN 'Roboretirement'

Traditionally, financial planners provide retirement guidance to clients based on factors such as income level and total number of assets. This guidance is provided to the clients for a fee of about 1 to 2% of assets under management (AUM), which normally comes out of clients’ retirement savings. Additionally, the majority of financial planners require clients to have a set minimum value of assets in average of $500,000, making them inaccessible to young adults and individuals with a lower net worth.

Computer-generated advice in the form of roboretirement is more readily accessible to a wider range of the population in need of a retirement plan and portfolio. The cost of roboadvisory services range from 0.14 to 0.5% of AUM compared to employing human advisors and planners. Also, there is no minimum asset requirement under a roboretirement platform. Again, with the increasing use of and demand for technology-related products, it was only a matter of time before the retirement portfolio sector got automated. These reasons dictate why there is a growing use of automated retirement planning systems.

With roboretirement, clients fill in an online questionnaire that includes information such as age, income, risk tolerance, retirement goals, etc. Based on these quantifiable factors, the roboadvisor assembles a personalized retirement portfolio and strategy for each client. Some services are 100% automated, while others have some human involvement in the mix. For example, a client may input relevant information like his or her risk tolerance and income level as prompted by a computer, but a human financial planner may create and deliver the retirement strategy for the client. The type of providers that offer this mix when delivering a retirement plan are called hybrid roboadvisors.

Young adults saving for retirement, middle-aged professionals approaching retirement, and retirees in need of periodic cash withdrawals from their portfolios all have different goals and plans. Different roboretirement firms have different algorithms for particular situations and goals, making it crucial to work with the automated service whose strategies meet your needs. Some roboadvisors offer retirement planning strategies for clients approaching retirement. Others may be more involved in creating drawdown strategies for clients that have already retired and seek to maintain a constant level of portfolio withdrawals yearly. Because roboadvisors demand only a small fee from clients compared to traditional advisory firms, retirees using the automated platform may have an advantage of higher drawdown amounts annually.

Retiring robo style is not for everyone. Computer algorithms are best suited for creating portfolio strategies based on quantifiable risk i.e. risk that can be planned for. A 100% auto approach to retirement may not necessarily give the best plan due to unquantifiable risks i.e. unexpected risk such as a sudden market crash. In such cases, the human element of retirement planning is favorable. Also, for clients who have accumulated a lot of wealth and need extra guidance for tax and social security issues, a hybrid roboadvisor or human financial planner may be worth the extra cost.

Roboretirement systems provide a hands-off strategy for retirement planners as the computer system daily automatically rebalances the client’s asset allocation when events like cash deposit, cash withdrawal, or dividend payments are made.