How to know If you’re on track for a nice retirement
October 22, 2009 · Tagged with Retirement
Schwab Real Life Retirement Services
Cost: This service, available since January, is free to those with brokerage or 401(k) accounts at Charles Schwab Corp. Advisers receive bonuses for providing portfolio consultations.
What’s Involved: We answered an optional nine-question survey, and a Schwab financial consultant — Michael Garner in Peachtree City, Ga. — gathered additional information about the Ryans’ finances over the phone. Soon after, we received a five-page report that, among other things, showed us how much more the Ryans would need to save to support their lifestyle through age 90.
Hand-Holding: Most clients work with an adviser, on the phone or in one of Schwab’s more than 300 branches. Do-it-yourselfers can use a less sophisticated online calculator to get a sense of whether their retirement finances are on track. Most clients receive one consultation that typically lasts an hour “with some follow-up as needed,” said Stacy Hammond, director of Schwab’s Real Life Retirement Services.
We asked Mr. Garner for help calculating the Ryans’ annual out-of-pocket medical expenses. His estimate: about $11,000 — an expense Schwab’s software assumes will grow by 2.6 percent a year.
Advice: According to Mr. Garner, the Ryans are likely to deplete their $1.2 million nest egg around age 80 — about a decade shy of the age Schwab says clients ought to plan for. He recommended that Jack and Rose work longer — to ages 66 and 64, respectively — and make modest cuts to their retirement budget.
Mr. Garner touched on a few areas some of the other planners had overlooked. He suggested the Ryans consider using the $3,600 they currently spend annually on life-insurance premiums for Jack on a long-term-care insurance policy. Alternatively, he said, the couple could also look into purchasing life insurance on Rose. Such a move would provide Jack with extra income if she were to die first — triggering a steep reduction in her pension check.
Portfolio Construction: Mr. Garner gave the couple’s current allocation — 40 percent in stocks and 60 percent in bonds — high marks; in fact, it lines up with one of five model portfolios Schwab recommends. Mr. Garner explained that this allocation offers the Ryans a significant amount of downside protection.
Mr. Garner would have the couple pare their IBM holdings gradually, from 13 percent to about 5 percent of their portfolio. Before selling their shares, he’d look for ways to offset the taxable gains with losses on other investments.
As with the other companies, Schwab recommended the Ryans spend the assets in their taxable accounts first. Why? When money is withdrawn, the profits are subject to the lower capital-gains tax rate, which is currently 15 percent for their tax bracket. With tax-deferred accounts, in contrast, withdrawals are taxed at ordinary income-tax rates of as much as 35 percent.
Plan Monitoring: Schwab sends clients quarterly reports that track whether investments held at the firm are allocated according to plan.
Mr. Garner said he typically checks in with clients at least once a year to update their financial plans and once every couple of months to discuss matters including portfolio allocations.