An Income You Won't Outlive An Impressive new Web tool helps retirees make sure their income lasts as long as they do. And it's free--for now
(MONEY Magazine) – If there's one area where all of us will need help when we reach retirement, it's in turning our motley collection of investments into income that won't give out before we do. This is why even I--a "curb your enthusiasm" kind of guy--felt a tinge of anticipation when Fidelity Investments introduced Retirement Income Planner, a Web tool designed to help retirees and near retirees figure out how much they can withdraw from their investments to maintain a decent standard of living throughout retirement.
But I did have my doubts that any tool could really forecast income over a period that for someone in reasonably good health could last as long as a career. The fact that the tool's acronym is RIP didn't inspire much confidence either.
Even so, I gave RIP a test drive. To my surprise, it proved to be helpful in assessing--and improving--your chances of maintaining an adequate income for life. Anyone over 50 who anticipates having to live off his or her investments ought to give it a whirl.
For my test, I created a scenario for a hypothetical 66-year-old retiree we'll call Kristyn. She is eligible for $21,000 a year in Social Security benefits and has $500,000 invested, 80% in bonds and 20% in CDs; she'd like to generate enough income to cover annual living costs that will start at $50,000 ($30,000 in essential expenses, $20,000 discretionary) and rise with inflation.
Within 10 seconds, I got the initial verdict: Kristyn has a 90% chance of covering all her expenses until the age of 84--or, put another way, she has only a 10% chance that her portfolio would run dry at 84 and leave her completely dependent on Social Security.
Those odds sound good until you consider that her life expectancy is 89, which means that she has a 50% chance of living even longer. So RIP also calculates Kristyn's odds at age 95. These results were not so reassuring: only a 27% chance Kristyn will have enough income at that age.
Boosting the odds
The neat thing about RIP, however, is that it allows you to explore options and "what if" scenarios that may improve your odds. One option is to change the asset mix. RIP recommended moving 20% of Kristyn's portfolio into stocks to boost return potential. That delayed the age at which her income fell short of her needs by only one year, to 85. And it raised the chances of a happy outcome at age 95 to just 32%. Clearly, I couldn't leave Kristyn here.
Going to the What If section, I added $2,000 a month from a part-time job. I didn't want to be unrealistic--or cruel--so I let Kristyn work only to age 72. That pushed the shortfall age to 89 and her odds of having enough income at age 95 to 69%.
At this point, I could have tried other strategies, such as assuming better investment performance. But I decided to play it conservatively by scaling back Kristyn's living expenses, which would require smaller withdrawals from her portfolio. I found that if she trimmed her annual spending by 6%, she had a 90% chance of covering all her expenses to age 95. That's the foundation of a decent plan.
I like the way this new tool shows that creating retirement income is all about probabilities--you can improve by investing smarter, trimming spending or saving more. It's important to remember, though, that RIP's projections are based on Fidelity's assumptions about future returns, now 8% for stocks, 6% for bonds and just under 3% for short-term investments. If the markets don't perform that well, your chances of achieving a given level of income could fall short of RIP estimates.
Making RIP work for you
Fidelity expects that most people will probably want to use this new tool with the help of a Fidelity rep, at least initially. Given the inherent complexity of the problem, they're probably right.
A number of refinements are already on the way. By the end of October, Fidelity plans to introduce an "income management" account linked to RIP. The idea is that money from Social Security, pensions and investments can flow into this account, making it easier to see whether your spending is on track with your plan. Eventually, RIP may also contain a feature that will trigger sales from the taxable and tax-advantaged portions of the linked portfolio to squeeze as much after-tax income as possible from your investments. And by early next year, Fidelity expects to add "collaboration," essentially giving reps the ability to control your computer's cursor and guide you through the tool as you talk with them on the phone.
THE COST: Until next year, all Fidelity customers will have free access to RIP on the Web or through a Fidelity representative by phone or face to face. Even noncustomers can go through RIP with a rep and come away with a free retirement income plan. Starting in the first quarter of 2005, however, investors with less than $100,000 in assets with the firm will have to pay a one-time $500 fee to work with a rep.
With RIP, I think it's fair to say that Fidelity has leaped to the forefront of the retirement income arena, but I'm sure the competition will heat up. Vanguard plans to unveil its own interactive tool for managing retirement income by the end of the year. I fully expect we'll see products from other firms in the near future. "We love the competition," says Cynthia Egan, director of retirement income services at Fidelity. "It makes us work harder."
Good. I think the entire financial services industry needs to work harder on this, because when it comes to turning our savings into a lifetime income, we need all the help we can get.