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U.S. brokers target those tapping into savings

 

JOHN HECHINGER, The Wall Street Journal Wednesday, August 13, 2003

 

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(08-13) 07:37 PDT (AP) --

 

For decades, financial firms made a mint helping Baby Boomers save for retirement. Now, with those customers graying fast, firms are plotting how to make money from the boomers' inevitable next step: Drawing down their nest eggs.

 

Mutual-fund companies, insurers, and brokers are rolling out all manner of new products and services that -- for a fee, of course -- promise to help retirees avoid running out of money. The products range from simple annuities to automatic portfolio-rebalancing tools.

 

All are aimed at the growing number of workers who rely on 401(k) or similar plans, which are designed to generate a big sum of money that retirees must manage themselves. The problem with such plans is they don't guarantee a secure monthly income , like a traditional pension plan, or even guide retirees about how to achieve that goal.

 

Meanwhile, retirees in general are living longer, making planning even tougher. An average 65-year-old man can expect to live to 81; a woman to 84. Owning stocks used to be considered the answer for a long retirement, but many retirees are leery about taking that route after the recent bear market.

 

For financial firms, the stakes are huge. The first wave of boomers will begin retiring in just seven years. By 2030, 20 percent of the population, or 70 million people, is expected to be 65 years or older, compared with almost 13 percent, or 36 million today. Retirees will take $670 billion from their investments for living expenses in 2012, up from $134 billion in 2001, according to Boston consultant Cerulli Associates. Luis Fleites, a Cerulli analyst, says financial firms have been so busy collecting money in retirement plans that they haven't devoted enough attention to the key worry of their customers. "Clients' biggest fear is outliving their money," Mr. Fleites says.

 

However, the security of these new products comes at a price. For one, they tend to carry much higher fees than plain-vanilla mutual funds. In addition, retirees moving their 401(k) money into more conservative pension-like instruments won't benefit if the market takes off again. Here's a look at the latest offerings and their main benefits and drawbacks:

 

 

FIXED ANNUITIES: As is often the case with Wall Street, many of the new products are twists on old ideas. Consider immediate fixed annuities, a tried and true product that allows you to convert a lump sum into monthly payments for life. Because of low interest rates, they aren't as attractive as they were several years ago. A 65-year-old buying a $500,000 annuity from TIAA-CREF would get $2,750 a month recently.

 

Earlier this year, Principal Financial Group rolled out an account that tries to combine the advantages of a fixed annuity with the growth potential of stocks. Rather than immediately shell out a big sum for an annuity, customers put their money into an account that starts with investments in mutual funds, then automatically shifts into annuities gradually over many years.

 

The account, called a Principal Income IRA, works as follows: An investor rolls over his or her 401(k) retirement plan into an IRA with 37 investment options, including funds from Principal, Fidelity Investments and Putnam Investments. Then, the investor picks a time period -- as long as 15 years -- during which the money is shifted into annuities. The advantage, says the company, is that the investor has less risk of locking in an annuity at a time when interest rates -- and thus monthly payments -- are low.

 

"I thought it was a good idea to get something guaranteed," says Leo Leiden, 69, a retired owner of an Ohio cabinet company, who recently rolled over more than $600,000 into a Principal Income IRA. If he bought an annuity today, Mr. Leiden says his nest egg would generate $3,000 or so in monthly income. Instead, by gradually shifting into annuities between 2008 and 2013, he hopes to generate $5,000 a month at the end of that period.

 

But insurance products and one-stop solutions, like the Principal Income IRA, can be costly. The Principal product features funds with average annual expenses of 1.58 percent if purchased directly from the company. An additional annual fee of as much as 1.10 percent is tacked on if it is sold through a broker.

 

 

GRINS: For workers still years away from retirement, Prudential Financial Inc., the big insurer and money manager, is testing another kind of hybrid annuity product. The goal: Turn a 401(k) plan into a traditional pension.

 

Using a product conceived by a Boston start-up called Retirement Engineering Inc., Prudential plans to offer a "Guaranteed Retirement Income Security," or GRINS. Instead of buying mutual-fund shares, investors would purchase GRINS units guaranteeing them a certain amount of pension income down the road. For example, Prudential says a 45-year-old man who invests $12,000 in GRINS this year would guarantee himself payments of at least $170 a month at age 65.

 

Scott Sleyster, president of Prudential's retirement business, says the product is pitched at Americans who don't want to make their own money-management decisions. "People are saying, 'I never wanted to be my own chief investment officer and pension manager," he says.

 

Wall Street's flood of new products aimed at servicing aging investors is showing no sign of letting up. Next year, Fidelity Investments plans to launch an account aimed at those nearing retirement who have various of pots of money, such as 401(k)s and bank and brokerage accounts. The Fidelity product would group all these together and figure out a strategy to harvest cash for living expenses. It would rebalance investments automatically to make sure sharp market swings don't leave a portfolio too heavily or lightly weighted in stocks or bonds.

 

The goal, says Cynthia Egan, the Fidelity executive in charge of the effort: generate a pension-like monthly paycheck from retirement savings with a minimum of fuss.

 

Of course, unlike an annuity, stock and bond investments can lose value with market swings and aren't guaranteed to last until you die. That means you need a pretty big nest egg for safety's sake. Take a $1 million portfolio. If that sum were invested 60 percent in stocks and 40 percent in bonds, a retiree could withdraw 4 percent a year -- or $40,000 during the first year -- and have a 90 percent chance having the money last for 30 years, says Rande Spiegelman, vice president of financial planning at the Schwab Center for Investment Research.

 

"It's pretty daunting to think about having to save a million dollars just to generate 40 grand," Mr. Spiegelman says.

 

 

 

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Hand-Holding for a Fee

 

Worried about managing a retirement account by yourself? A few alternatives:

 

 

* Principal Financial Group and others are pitching variants on annuities that promise guaranteed income for life.

 

 

* Prudential Financial plans a product that will let you exchange 401(k) dollars for pension-like payments.

 

 

These new products generally charge higher fees than the regular mutual funds often found in retirement funds.

 

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