How to know If you’re on track for a nice retirement
October 22, 2009 · Tagged with Retirement
Nationwide RetireSense
Cost: Launched in February, this service — aimed at those ages 55 to 70 — is free. However, you may pay commissions if you buy or sell investments.
What’s Involved: We filled out a one-page questionnaire. Nationwide also has a three-page budget worksheet.
Hand-Holding: The program, offered by Nationwide Financial Services Inc., is available to clients of brokers at several major independent brokerage firms, including Raymond James Financial Services Inc. and LPL Financial. So, prospective customers can turn to their brokers for help if needed.
Advice: According to RetireSense, the Ryans are in good shape to retire as planned in three years. The tool estimated that their nest egg has a 95 percent chance of supporting them over 30 years.
But we were skeptical — in part because company disclosures reveal that the program does not account for taxes. Instead, said Brad Davis, vice president of retirement income solutions at Nationwide, investment advisers should include taxes in their estimates of clients’ retirement spending. “We let the investment advisers handle that,” he said. “RetireSense is not a comprehensive, stem-to-stern financial-planning tool. We designed it to focus on retirement income.”
Portfolio Construction: Nationwide seeks to ensure that clients cover such essentials as food and housing with guaranteed sources of income, including Social Security and pensions. For those facing a shortfall, it recommends using annuities to bridge the gap. In the Ryans’ case, Nationwide suggested committing $263,000 to an immediate variable annuity — a type of annuity that pays a preset level of income that rises if the investment performs well.
The company figures the Ryans’ $1.2 million nest egg will grow to $1.46 million by the time they retire. The plan divided what they would have left after the annuity purchase into five “buckets.” Each was intended to cover the Ryans’ nonessential expenses, such as travel, for five years — or more, in the case of the final bucket.
Nationwide called for the Ryans to invest each of these pots of money, which range considerably in size, in a different way. “Assets you need for income today should be invested differently than the assets you’ll need for income years down the road,” says Paul Morganski, who leads Nationwide’s Income Planning Desk, which assists brokers with the program.
For instance, Nationwide figured the Ryans will need $165,000 in their first five years of retirement. The company recommended parking that amount in cash. But it advised putting the $407,942 reserved for their final bucket into investments likely to earn a higher return — a mutual fund with 80 percent in stocks. (The company uses six model portfolios. It placed the Ryans into one of the more conservative options.)
A big chunk of the Ryans’ assets — some $334,000 — would end up in another insurance product: a deferred variable annuity with a “living benefit.” This investment, which represents the third bucket, will pay the Ryans a minimum of $40,000 a year, Mr. Morganski calculated. Moreover, the couple’s heirs would inherit the account’s value. But there’s a catch: The Ryans have to hold this investment for 10 years before the payments begin — and if they raid the principal, the $40,000 payout is no longer guaranteed.
Plan Monitoring: Nationwide provides free tools advisers can use to help their clients keep their finances on track.