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A Small Price To Pay For Retirement


BusinessWeek Investor -- The Barker Portfolio

A Small Price to Pay for Retirement

You've probably spent lots of time figuring out how much to save for retirement. But do you really have any idea how much you'll be able to spend once you retire? That's a devilish question, one that most people try to answer with crude assumptions and crossed fingers--or with the costly help of a financial planner whose assumptions likely aren't much better.

Stepping between those two alternatives, T. Rowe Price recently caught my eye with a new service, Retirement Income Manager. Built on software the $166 billion investment company hopes to patent, the service costs $500. That's a lot more than the free plan you might develop online or in an employer program. Yet it's one-third or less what you might pay a private financial planner. I wondered, is it worthwhile?

That's why I set out to look over the program myself, talk to potential clients plus some who are using it now, along with financial planners at rival fund companies and some independent experts. John Stophel, for one, is a 51-year-old Newington (Conn.) banker who is using a variety of software and services as he and his wife, Leslie, plan to retire early. Retirement Income Manager, Stophel told me, "is just a cut above anything else." I agree: It's a bargain."MONTE CARLO ANALYSIS." The service (800 231-2795) starts with a 25-page questionnaire mailed to you by TRP. It asks about your savings, what retirement income you expect, your attitudes on risk, and what legacy, if any, you hope to leave. TRP then takes about three weeks to size up your situation, checking details by phone and getting it all in a computer. Next, the software performs a so-called "Monte Carlo" analysis to simulate your chances of drawing a given income. Then, it uses a second mathematical technique, called multi-attribute utility theory, to find what mix of investments best suits your set of competing aims--to leave an inheritance, for instance, while seeing only small swings in your portfolio's value.

TRP sends its recommendation, plus two alternatives, by mail. They include how much income to draw each month, a portfolio strategy, and clear, complete explanations. One strength of the service is its recognition that many retirees own variable annuities, which can be costly and inflexible. Retirement Income Manager doesn't flinch at annuities, but incorporates them into a full portfolio strategy. Naturally, TRP is selling this service in hopes it will help it retain customers and get new ones for its funds. But you might just as easily take its recommendations and have any financial firm carry them out.

The service is neither complete nor perfect. It can't help on what to do if a big chunk of your assets is in one or two stocks. Nor can it wrestle with a large stash you may have amassed in an ordinary, taxable account. Investing that while minimizing your tax bill is a complexity unto itself. Also, the four hours or so TRP expects to spend on the phone counseling each client may not be enough contact, or the right kind, for some. Kent Oberle, a 51-year-old accountant at Phillips Petroleum in Odessa, Tex., told me these issues are so crucial that he'd want to meet his adviser. "I don't know if I'm going to want to take pot luck with whoever T. Rowe Price assigns that day to answer the phone," he said. But Antoinette Jahoda, a 70-year-old retiree in Roslyn Heights, N.Y., praised the phone service. "They were really on top of it," she told me.

TRP rivals Fidelity Investments and Vanguard Group offer good one-shot planning, too. Vanguard's costs $500, while Fidelity's is free. The difference is the software. Theirs, like most planners', project forward the annual average returns stocks, bonds, and other assets have delivered in the past. But if the assets return less than the long-run averages early in retirement, compounding power gets sapped. TRP's analysis, by contrast, simulates 500 scenarios--terrific, terrible, and many in between--to find a safer level of income.

TRP doesn't guarantee its forecasts. Yet if I were retiring with, say, $500,000, I wouldn't hesitate to spend 0.1% of that for the best advice around.Questions? Comments? E-mail barkerportfolio@businessweek.com or fax (321) 728-1711By Robert BarkerReturn to top


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