For Boomers Near Retirement, Toolboxes Aplenty

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For Boomers Near Retirement, Toolboxes Aplenty

By Elizabeth Harris, The New York Times

January 4, 2004

Investment companies are perfecting a new pitch for baby boomers: Let us help you through retirement.

Fidelity Investments, Charles Schwab, Merrill Lynch and others have stepped up their marketing to retirees and, increasingly, to people who have just begun to think about retirement. Many companies are offering more advice and have introduced sophisticated online financial calculators intended to help investors solve the often confusing problems involved in building a nest egg and then safely consuming it. Fidelity and Merrill Lynch are even planning cash management accounts for retirees that will pull in income not only from investments at the brokerage firms, but also from monthly Social Security and pension payments.

Some of these efforts have not been universally welcomed. "Social Security is an entitlement program, but I don't know if it's an entitlement program for the brokerage firms," said Ross Levin, a certified financial planner and president of Accredited Investors, based in Edina, Minn.
And Sue Stevens, director of financial planning at Morningstar Inc., warns investors to take financial advice with a dose of skepticism. Asset management companies are using ''marketing tactics to attract that group and hopefully better serve it, but you can't forget why they're doing it," Ms. Stevens said. She recommends that investors ask for a detailed breakdown of the cost of any financial advice, and to check the credentials of potential advisers.

Behind the marketing campaigns are substantial demographic shifts. Individuals in 13.8 million households are expected to retire over the next 10 years, according to a study conducted in 2002 and published in 2003 by SRI Consulting Business Intelligence, an employee-owned spin-off of the former Stanford Research Institute, based in Menlo Park, Calif. Those households have $4.4 trillion in assets, or about a quarter of all financial assets in the country, according to SRI's research. Current retirees under the age of 70 hold $3.3 trillion in wealth, excluding their homes, the firm said.

These assets represent an attractive prize for financial services companies, Mr. Levin said.

Financial planners report much confusion about retirement finances among many working people. Some concerns are longstanding - for example, how to convert assets into enough income to cover lifetime expenses.
For baby boomers, however, there are some new concerns. Relatively few boomers have company pensions to supplement savings and Social Security income. That means a bigger role for their 401(k) investments, and adds to the importance of their choices about drawing down those accounts. Meanwhile, increasing health care costs, longer life expectancies and some lingering unrealistic expectations about investment returns make it difficult for some investors to get these complex retirement decisions right.

Some retirees, like Taylor and Patricia Larimore of Miami, have figured out how to pull income out of their savings on their own. Mr. Larimore retired in June 1982 as chief of the financing division for the federal Small Business Administration, focused on southern Florida. Ms. Larimore recently took a part-time job as executive director of a South Miami real estate office. In addition to income from that job, Social Security and Mr. Larimore's pension, the Larimores have been withdrawing money from investments in diversified Vanguard mutual funds and from an annuity.

"Our immediate concern upon retiring was, how much can we withdraw annually from our investment portfolio without running out of money?" Mr. Larimore, 79, said. "Fortunately, I spent most of my life in finance, so I knew the danger of drawing more than 4 percent or 5 percent from a portfolio during early retirement."

Some investors, like Tim A. Maloney, 52, are looking for more help. Mr. Maloney ran several retirement possibilities through Fidelity's online Retirement Income Planner, which Fidelity began offering free to customers in October.

Mr. Maloney, a customer network engineer at Verizon who designs fiber optic transport networks, was considering an early-retirement package. But with the help of the planner, on Fidelity's Web site, he found a low probability that his portfolio would sustain his and his wife's expenses after he stopped working. He has decided to keep his job for an additional 10 years and to lower the amount he will eventually withdraw annually from his portfolio to 4 percent from 11 percent.

"The bear market just blew me away," Mr. Maloney said. "I had to rethink everything, and I hate thinking 4 percent because 4 percent is a lot less than 11 percent, but in reality that's what I should be thinking."

Many investors still have inflated ideas of how much they can withdraw from their assets annually in retirement, said Christine Fahlund, a senior financial planner at T. Rowe Price. ''It'll be a long time before people figure out that withdrawing 8 percent won't work," she said.

T. Rowe Price began offering its Retirement Income Calculator on its Web site in 2000. It was among the first widely available tools to look beyond investors' desired retirement dates and assess the probability that they would reach monthly income goals. Investors provide information online, including age at retirement, projected length of retirement, assets, desired monthly income and investment mix. The calculator relies on mathematical techniques known as Monte Carlo simulations, running hundreds of possible investment returns to check the likelihood that an investor's plan will succeed.

T. Rowe Price research shows that withdrawing too much from a portfolio annually in the early years of retirement will probably deplete it before the investor dies, Ms. Fahlund said. Withdrawals of between 4 and 5 percent are recommended for most people, she said.

Fidelity's new online tool is also intended to help investors figure out how to tap retirement assets while preserving as much income as possible.
"The baby boomers are retiring, and just like everything the baby boomers have done or needed, it has determined very sharp trends and sharp needs," said Cynthia Egan, executive vice president of Fidelity's Retirement Income Services. "As they begin to shift from accumulating for retirement to actually living in retirement, it will require a great deal of thought as well as a great deal of education."

Fidelity will add retirement services over the next few months, including the cash management account, which will be available in the spring, Ms. Egan said. The company has not determined if there will be fees for some of these services.

Merrill Lynch is also expanding its retirement programs, including a service that will gather income from an investor's different funds and deposit it in a Merrill account. The firm will pair this feature with more retirement advice. A pilot program has started at Merrill's offices in Washington, D.C.; it will be offered nationally in the second half of this year, but the possible costs have not been determined, said Jim McCarthy, first vice president for retirement and education solutions at Merrill Lynch. He said the service will appeal to investors, who are "seeking an orderly process for producing a dependable income.''

Other companies, like Vanguard, plan to mix advice, education and financial products like income annuities - intended to help people draw income from their savings, said Robert Nestor, principal and leader of annuity and insurance services at Vanguard.

"Everyone's looking at the demographics and saying trouble is coming if we don't prepare people accordingly," he said of his industry's recent attention to retirement.

Beginning this year, Vanguard will provide more information and tools online to help people understand that they should assume they will live longer than the average life span, consider 4 percent withdrawal rates and prepare for the possibility of a down market. Poor returns in the first few years of retirement can be especially damaging, Mr. Nestor said. Some new tools will help investors check the probability of outliving their assets, and test the possible effects of changing their withdrawal rates or their investment allocations among stocks and bonds, Mr. Nestor said.

Charles Schwab's retirement group intends to direct investors to advice through several channels - its Web site, its phone and investor centers and the programs it offers in the workplace, said Trish Cox, vice president for education and advice at Charles Schwab Corporate Services.

This year, Ms. Cox said, Schwab will develop a series of income portfolios, with varying amounts of stocks, bonds and variable annuities.
"We're really trying to focus on that whole decumulation phase," she said.