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Pension Plans for the Rest of Us

Anne Tergesen

The financial-services industry wants to be your personal pension manager. You should kick the tires carefully before signing up.

In recent months, companies including Fidelity Investments, Charles Schwab Corp. and Financial Engines Inc. have introduced services for investors to convert their savings into a reliable stream of retirement income. But the advice can vary widely--and there isn't a guarantee it will succeed in making your nest egg last your entire life.

Most of the programs, which typically pair investors with a financial adviser or a call center, go beyond simple calculators and worksheets to estimate how much a retiree can afford to spend annually throughout retirement. Investors also may be able to allow the companies to invest for them and tap their assets in a tax-efficient way. Some services even issue regular monthly checks.

For many retirees, given uncertainties about life expectancy, market returns and inflation, "it's a lot harder to figure out how to prudently spend a lump sum than it is to save it," says Katharine Wolf, senior analyst at Cerulli Associates, a Boston research firm.

While some of the services are open to anyone, others are available only to participants in 401(k)s or other defined-contribution plans. Many companies charge little to nothing for these programs. But some make them available only to clients, who must pay for other products or services. Others may push their own products.

We test-drove several services to see what advice they would offer to a married couple, both 65 years old and about to retire, with $1.7 million in various accounts, a house valued at $600,000 and expenses of $7,500 a month. In addition to Social Security, they receive a monthly pension of $2,500.

As we discovered, different companies have different ideas about how the couple should navigate their finances. Here's what we found:

Fidelity's Income Strategy Evaluator

Launched in February, this service is free to anyone who walks into a branch, calls a toll-free number or visits the company's website. It also is available in many Fidelity-administered 401(k) plans. We tested it by speaking with a Fidelity adviser in a branch office.

Advice: Fidelity recommends the couple spend $336,000 to buy two annuities to ensure a regular income stream. (The company sells a variable income annuity, whose payout depends on market performance and whose principal is guaranteed, and has partnerships with providers of other annuities.)

The rationale: Together with Social Security, the annuities will ensure the couple can cover essential expenses.

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With the $1.36 million that remains, the couple can take annual withdrawals to cover its discretionary expenses. Assuming it invests in a portfolio that is evenly divided between stocks and bonds, Fidelity projects more than $4 million will remain in 30 years--allowing the couple to potentially leave a sizable inheritance or spend more than they had budgeted.

Pros: The service includes a detailed budget worksheet and can take into account a household's total assets. To facilitate comparisons, Fidelity offers the same plan without annuities.

Cons: The tool doesn't calculate required distributions that IRA and 401(k) owners must generally take after age 70½.

Financial Engines' Income+

This service, launched in January, is available to participants in many 401(k) plans for which Financial Engines serves as a money manager. (It is free to those choosing the managed-account option, in which one pays a fee for professional management of 401(k) assets.) We spoke to a company representative.

Advice: Because Financial Engines manages 401(k) assets, it confines its advice to the $950,000 our couple holds in these accounts. To ensure the couple receives a steady income, the firm would invest 80% of this money in bond funds, producing annual pretax income of $38,000 to start.

The company recommended investing the remaining 20% in stocks--an allocation that would move into bonds as the couple ages. Assuming the stock market delivers average annual returns, these investments would permit the couple to increase their annual 401(k) spending allowance by 2.5% to 3%. (When combined with Social Security and a pension, their pretax income would reach $95,500 a year.)

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If all goes according to plan, the couple would have enough left in their 401(k) at age 85 to finance six to seven more years of a comparable lifestyle. Alternatively, they could use the leftover money to lock in a similar level of lifelong income by purchasing a fixed immediate annuity before they turn 85.

Pros: Income+ issues regular pretax checks.

Cons: The service doesn't include the $750,000 the couple holds outside their 401(k)s. To gain access, they must sign up for a managed account, which typically costs from 0.2% to 0.6% of a 401(k)'s annual balance.

GuidedChoice's GuidedSpending 2.0

Also launched in January, GuidedSpending 2.0--a service of GuidedChoice.com Inc., an advice and managed-account provider--is available in some 401(k) plans. The cost: $49.95 a year for advice on a current 401(k) plan and $249.95 annually for help with all assets. We completed the process with a company representative over the phone.

Advice: GuidedSpending says our couple can afford to spend $108,000 a year after taxes when markets perform poorly and almost $130,000 otherwise--and still expect to leave $2.1 million to heirs, assuming each lives approximately 25 years. To ensure a steady income, GuidedSpending recommends a relatively conservative mix of about 35% in stocks and 65% in bonds.

Pros: The software can estimate the impact of purchasing an annuity or deferring Social Security.

Cons: The company issues after-tax checks only to those whose 401(k) plans have a relationship with GuidedChoice. Otherwise, it can advise you on how to tap your accounts yourself.

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Schwab's Retirement Planning Consultation

Launched in March, this service is free to clients who visit a Schwab branch or contact the brokerage by phone. Schwab plans to put a similar do-it-yourself tool, to be called "the Retirement Planning Calculator," on its website this summer. We sent our info to a company rep via email and received a report.

Advice: According to Schwab, our couple can spend up to $112,000 a year after taxes, with a strong likelihood of leaving at least $900,000 to heirs--assuming a 35-year retirement. The program leaves specific asset-allocation and investment recommendations to a financial consultant, a step we didn't take.

Pros: At the heart of this program is a detailed cash-flow analysis that compares projected spending with sources of retirement income, including Social Security and assets held in brokerage, 401(k) and individual-retirement accounts. In a two-page spreadsheet, Schwab recommended how much our couple should withdraw from each of its accounts annually over the next 35 years, estimated tax payments and took into account required distributions.

Cons: The service can't execute the advice. Instead, it leaves it up to the client to do so.


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