Test-Driving Retirement Plans

Anne Tergesen

More companies are rolling out detailed and affordable services to help get your finances in shape. We tell you what's good about them -- and what's not so good.

Can I afford to retire?

In the wake of the financial crisis, this question and its obvious follow-up -- How can I better prepare? -- are weighing on many people.

If you're among them, help is at hand. Financial-services companies, eager to tap the baby-boomer market, are rolling out programs that offer, at little or no cost, a detailed assessment of whether you're in danger of outliving your savings. Along the way, you'll also receive advice on what to do if your savings are deemed insufficient and how best to tap your nest egg, or what's left of it.

What's the catch? First, there's work involved; the programs can take hours to complete. Second, each company typically pairs you with a financial planner, who -- not surprisingly -- is likely to try to interest you in that company's products. Finally, the programs focus on saving and investing; if you need guidance on other matters, such as estate or tax planning, you may be better off elsewhere.

That said, these services, for the most part, are a good mix of analysis, one-on-one advice and modest costs. As such, they can help you start or enhance your retirement planning.

Many American households, wealthy or not, don't need enough hand-holding "to justify spending more than a few hundred dollars on financial planning," says Chip Roame, managing principal at Tiburon Strategic Advisors, a Tiburon, Calif., consulting company that specializes in the financial-services industry. For many people, he adds, these programs "are a good fit."

To help you sort through the options in this fast-growing area, we tested services, new and established, offered by four companies.

We asked each to provide a financial plan for Jack and Rose Ryan, a fictional couple we endowed with about $1.2 million in savings, plus a $600,000 home in Evanston, Ill. Concerned about job security, Jack -- a 60-year-old executive at a newspaper company -- wants to know whether he can afford to retire at 63. His wife, a 58-year-old public-school teacher with a generous pension, wants to retire around the same time.

The results? For the most part, the advice fell within conventional retirement-planning wisdom. Most of the firms, for instance, advised the Ryans to take the same basic steps, such as paring expenses and diversifying their stock holdings.

Still, there were important differences among the firms. Some caught possible problems others overlooked. Some mainly recommended their own products, while others were more eclectic in approach. More generally, some were considerably more optimistic than others about how long the Ryans' savings would last.

Here's what we found:

Fidelity Retirement Income Planner

Source: WSJ Reporting

Cost: Free of charge, and suited to those within five years of retirement.

What's Involved: As with the other programs we tested, this one starts with a questionnaire that asks for estimates of retirement income and expenses. You will also have to disclose the contents of your brokerage, tax-deferred and other savings accounts. Of the questionnaires we completed, this was the most detailed and time-consuming. It took us about 90 minutes. There's a shorter version for those who already have a budget worked out.

Hand-Holding: We took a stab at completing the survey ourselves on Fidelity Investments' Web site. But we felt more comfortable relying on a Fidelity adviser -- David Olsen, a regional planning consultant -- for help with navigating some of the software's more sophisticated features, such as a tool that allows users to vary expense estimates from year to year. We spoke to Mr. Olsen by phone, but we could have opted to work instead with an adviser in one of the firm's 132 retail offices. Typically, advisers and clients have two or three meetings.

We also gauged the company's thinking on a critical issue: How much do the Ryans need to budget for medical expenses? Using projections from government and academic sources, the software gave us an estimate of almost $13,000 annually at the outset of retirement -- an expense Fidelity assumes will rise by 7 percent annually, a much faster rate than the 2.3 percent for overall inflation.

(As with the other programs we surveyed, we could have asked Fidelity to adjust some of these numbers to better reflect the Ryans' situation or outlook.)

Advice: After looking at 250 simulations of possible future market returns, Fidelity concluded that the Ryans are at significant risk of running out of money by their early 90s. (All the programs assume you'll live at least that long.)

To create a bigger safety net, Fidelity told us to put $370,000, or about 30 percent of the couple's $1.193 million nest egg, into a fixed immediate annuity, which would generate about $22,500 in annual income. (Fidelity offers various other firms' annuities.) Together, the Ryans' Social Security, pension and annuity income would cover their essential expenses, such as food and housing -- at least at the outset of retirement, since the annuity payment does not increase over time.

Mr. Olsen also suggested the Ryans consider trimming their $10,000 annual travel budget or downsizing by selling their $600,000 home. Alternatively, he said, they could work longer or pick up some part-time work in retirement. He advised them to consider budgeting for big-ticket items, such as new car purchases and the costs of long-term care. He suggested they might consider funding some of this with the $3,600 they now spend annually on life insurance.

Portfolio Construction: Like the other services we tested, this one fits clients into one of a preset menu of model portfolios. In Fidelity's case, there are six. Because the Ryans face a potential shortfall, Fidelity recommended they reduce their exposure to equities -- to 20 percent of their portfolio from 40 percent -- and better preserve what they have. (If the couple were to get their finances into better shape, Mr. Olsen says, he'd recommend they ultimately increase their stock exposure to about 50 percent of the portfolio.)

As with the other services, Fidelity advised the Ryans to sell some of the IBM stock that accounts for 13 percent of their holdings. Once a single stock makes up more than 10 percent of a portfolio, it raises "a red flag," Mr. Olsen said.

Plan Monitoring: Fidelity told us about its myPlan Monitor & Alerts service. Available online, it lets investors track investments held both at Fidelity and elsewhere. If what they have in stocks and bonds differs from what their financial plan says they should have, Fidelity will send an email alert.

Vanguard Financial Plan

Source: WSJ Reporting

Cost: What you'll pay depends on how much money you have at Vanguard Group Inc. The program is free for people who have at least $500,000 with Vanguard. It's also free for those who move $100,000 or more to Vanguard. The cost is $250 for people with existing balances of $100,000 to $500,000, or $1,000 for those with less.

What's Involved: The process at Vanguard was relatively efficient. A couple of days after filling out a questionnaire that took us approximately 30 minutes to complete, we received a draft of the Ryans' financial plan via email. On the phone, we discussed ways to improve the Ryans' prospects with our planner, Mark Yakupcin. Later that evening, Mr. Yakupcin sent us a revised plan.

Hand-Holding: Each client typically receives one 45- to 60-minute telephone consultation. Most clients "wouldn't need another," Mr. Yakupcin said. (He gave us some extra time.)

When we asked Mr. Yakupcin how much the Ryans ought to set aside for medical expenses, he referred us to Web sites, including medicare.gov and aarp.org, that would help us come up with an amount. Karin Risi, principal of advice services at Vanguard, said that with real clients, Vanguard financial planners "lead clients through a robust discussion about the variables that will impact their medical spending needs."

Advice: After running more than 80 simulations of stock-market returns, Vanguard delivered bad news: The Ryans' odds of having enough money to last until age 95 were far below the 85 percent Vanguard considers acceptable. Mr. Yakupcin suggested Jack and Rose work until ages 66 and 64, respectively -- or pare expenses dramatically.

Portfolio Construction: Mr. Yakupcin urged the Ryans to increase their exposure to stocks to 50 percent from 40 percent. Such a portfolio -- one of nine Vanguard offers -- is consistent with the Ryans' time horizon and risk tolerance.

When it comes to selecting new investments, Vanguard recommends only its own mutual funds. However, if you want to hold onto other companies' products, Vanguard will plan around that. The company, in fact, builds two portfolios for each client. The first starts with current holdings you want to keep and adds Vanguard funds that can enhance diversification. The second assumes you'll move most or all of your assets over to Vanguard products -- a move that typically reduces annual expenses, the company says.

In both cases, Vanguard advised us to dump more than half of the Ryans' $151,000 of IBM stock and plow the proceeds into two Vanguard funds: Vanguard Total Stock Market Index and Vanguard Value Index.

Plan Monitoring: Those with $500,000 or more at Vanguard can reassess their plan every year and revise it if necessary. Otherwise, you must pay for another analysis.

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