An adviser's retirement income software toolbox

ESPlanner

Program looks at all factors affecting retirement income A client's age, family size, salary and years remaining until retirement are just a few of the factors that help determine how much money she will need to retire comfortably.

“We have, in effect, a living-standard machine. ”— Laurence Kotlikoff,  president of Economic Security Planning Inc

Changing each variable can substantially alter the equation. That's why Boston University economics professor Laurence Kotlikoff developed ESPlanner to deal with all the variations that can occur over a lifetime. “We have, in effect, a living-standard machine,” said Mr. Kotlikoff, president of Economic Security Planning Inc. The software can handle many “what if” scenarios, such as a client deciding to work longer, sell a home or begin taking Social Security. It also can calculate how much a client can afford to lose if the stock market suddenly collapses. “No other software can provide a living-standard floor,” Mr. Kotlikoff said. “It requires some pretty heavy-duty algorithms under the hood.” Smoothing Spending The program is unique in that it smoothes spending power over a lifetime, said Wade Pfau, professor of retirement income at The American College. Proceeding on the assumption that someone needs to replace 80% of pre-retirement salary “can oversimplify matters quite dramatically,” Mr. Pfau said. ESPlanner is “building the complete financial picture.” But the program has yet to catch on among financial planners. “It should be [popular], but it isn't,” said Joseph A. Tomlinson, owner of Tomlinson Financial Planning. “It's powerful because it lets the computer do what would otherwise be very challenging manual work.” Part of the problem may be that the program must be downloaded. Mr. Kotlikoff is working on a web-based version that will be rolled out later this year. — By Mark Schoeff Jr.

HealthView Services Inc.

The hard truth about cost of growing old When it comes to retirement planning, HealthView Services Inc. is the bearer of bad — but necessary — news. The 7-year-old company's software is designed to help financial advisers give investors the cold, hard truth about future health care costs that most people don't realize or even want to think about.

“You can cut back on a lot of things in retirement, but there's no cutting back on basic health care. You either have it or you don't. ”— Ron Mastrogiovanni,  founder and chief executive of HealthView Services Inc.

“In retirement planning, if you leave out health care, you are leaving out the largest potential cost you will face,” said Ron Mastrogiovanni, founder and chief executive of the Danvers, Mass.-based company. “You can cut back on a lot of things in retirement, but there's no cutting back on basic health care,” he added. “You either have it or you don't.” Mr. Mastrogiovanni said the kind of reality that his software exposes can deter some advisers from even broaching the subject with clients, but he said advisers and “several large companies” are getting on board. The cost-projection software factors in basic information, including the age, gender and general health of the individual. Mr. Mastrogiovanni said a lot of people mistakenly assume Medicare and Social Security will be all they need to cover basic health care in retirement. But, he added, the numbers just don't add up that way. Behind the Eight-Ball “Whenever the federal government gets involved in something, it gets very complicated, and that means the average American is behind the eight ball,” he said. “Just consider the inflation rate on health care. If our Social Security goes up by a couple percentage points a year and health care goes up by 6%, by the time I'm 80, practically my entire Social Security check goes to pay for health care.” Medicare Part A will cover most hospitalizations, and Part B covers visits to the doctor. Premiums for both are deducted directly from Social Security payments and there are co-pays and excluded costs. Part D, covering prescription drugs, must be bought. “You will need to be able to pay for that,” Mr. Mastrogiovanni said. “If you're retiring today, there's very little you can do, but if you're retiring in 10 years you can find out how much you'll need and start saving, and if you're more affluent you may want to save for supplemental insurance as well.” — By Jeff Benjamin

InStream Solutions

Handling financial planning chores On the surface, there is nothing revolutionary about what InStream Solutions provides advisers. But there was nothing like it for financial advisers prior to the company's launch three years ago. Or at least there was nothing like it that met the standards of InStream founder and president Alex Murguia.

“We were bumping into roadblocks in terms of solutions that would help us grow our business. ”— Alex Murguia,  founder and president of InStream

“We were bumping into roadblocks in terms of solutions that would help us grow our business,” said Mr. Murguia, who developed the software program because it was something he needed in his financial planning practice at McLean Asset Management Corp. Among its features, InStream enables advisers to keep clients on track with their retirement income distributions through daily monitoring of withdrawals measured against portfolio performance and income needs. Withdrawing Too Much “It answers the question of when a client is withdrawing too much and putting his future income at risk,” said John Wotowicz, InStream chairman and CEO. Citing a specific “rules tab section” in the program, Mr. Wotowicz said both advisers and end clients are alerted “if your distribution behavior is putting you at risk.” “The program also helps you determine what the guard rails should be and it runs automatically,” he added. Mr. Murguia said there are now at least 200 firms using the software, which automates many of the more arduous financial planning services, including monitoring when is the optimal time to refinance a mortgage and calculating insurance thresholds. It even helps keep portfolios in balance with daily monitoring. The program was initially offered for free to advisers willing to help with beta testing, but InStream now charges a $1,260 annual fee for the program. Mr. Wotowicz said the program is evolving into an ideal tool for working with younger clients. “As investment advice becomes more commoditized, this helps advisers move from advice to planning,” he said. “It enables you to very quickly create a basic plan, but also enables you to expand that plan and develop something much more complex.” As Mr. Murguia pointed out, all of the software program's capabilities, from daily alerts on portfolio holdings to more-complex savings rate calculations, ultimately represent “touch points” for advisers to interact with their clients — using the latest technology to spark old-fashioned communication. — By Jeff Benjamin

WealthConductor

Over the course of his 37-year career as a financial adviser, Philip G. Lubinski specialized in managing clients' retirement income. He has used that expertise to design software to help other advisers with the same challenge.

“It effectively gives the adviser the ability to manage the client's income needs and the outcome of the investments as well.”— Philip G.  Lubinski,  co-developer of WealthConductor

Mr. Lubinski is co-developer of WealthConductor, a program based on a strategy of breaking retirement assets into segments that each have different return targets. The retirement income flows from a segment that has no market risk to segments that have risk ranging from conservative to aggressive. The software allows advisers to adjust the plan throughout the lifetime of their clients. As assumptions change about inflation, rate of return, client goals and other factors, advisers don't need to start the whole process over. “Life happens along the way,” Mr. Lubinski said. “You're continually modifying the cash flow to the retiree. It effectively gives the adviser the ability to manage the client's income needs and the outcome of the investments as well.” Instant Updates Given that it was created by an adviser, the software has features that make the adviser's life simpler. For instance, they can update the retirement-income strategy instantly, even as the client is arriving for a meeting. “They can prepare and review reports within minutes instead of hours,” Mr. Lubinski said. The program, which was co-developed with 3D Asset Management, also tracks the course corrections the client and adviser make along the way. That electronic paper trail can come in handy when dealing with aging clients and their families. “Having the history of all decisions that were made is valuable in these situations,” Mr. Lubinski said. His knowledge of retirement income has earned Mr. Lubinski the nickname “the pope of distribution,” a fitting moniker when aging baby boomer have made retirement-income a religion. — By Mark Schoeff Jr.

LifeYield

Creating tax-efficient retirement strategies LifeYield is not a name most investors will ever come across, but they will likely appreciate the benefits of its software, which helps financial advisers create tax-efficient withdrawal strategies. Founded six years ago to help advisers optimize tax efficiency at the household level, the main LifeYield software is the brainchild of economist Paul R. Samuelson, co-founder and chief investment officer.

— Hank  Osuna

The general idea is that, by the time somebody reaches retirement, they will have assets spread over multiple accounts, which could include both Roth and traditional individual retirement accounts, a 401(k) plan, annuities and trusts. LifeYield, which is designed to be applied to portfolios when investors are nearing retirement, considers withdrawals across the entire household portfolio to determine the most tax-efficient strategy. “If you query the system because a client needs to withdraw some money, it will consider taxes [and] expenses, while maintaining the same investment objective, unless the adviser tells it to do something else,” said Leonard Reinhart, a co-owner of the firm and a member of its advisory board. Audit Trail "It will manage tax efficiency right down to the tax lots," he added. "And the lawyers love it because it creates an audit trail, where everything is documented." The program is designed to save clients between 150 and 200 basis points annually through tax-managed withdrawals, said Jack Sharry, executive vice president of strategic development. "It's the kind of thing that advisers know about, but don't often implement on their own because it's just too difficult," he said. "We'll project a 10-year benefit, but we're adding value every year once we are utilized." Even though the tax benefits don't start adding up until withdrawals are made during retirement, the software is designed to help advisers decide the best location for money coming into various accounts, which is why advisers are encouraged to start applying the software to accounts of clients, in their 50s. The LifeYield program can be used by independent financial advisory firms, but it is really designed for a larger scale, such as current clients SunTrust, Northwestern Mutual, Voya Financial and Cambridge Investment Research. — By Jeff Benjamin

Retirement Benchmark

Minimizing taxes to maximize income When Americans leave the workforce, they ditch deadlines and demanding bosses. But one thing follows them into retirement — the ever-watchful Internal Revenue Service. The tax implications of distributing assets to finance retirement too often are an afterthought for investment advisers and their clients, said William Meyer, chief executive of Retiree Income.

“Our focus is the coordination of Social Security and taxes as the adviser is generating a withdrawal strategy.”— William  Meyer,  chief executive of Retiree Income

That situation led Mr. Meyer to develop Retirement Benchmark, a software program that is designed to maximize retirement income — including Social Security claiming tactics — by minimizing the taxes that have to be paid. “Our focus is the coordination of Social Security and taxes as the adviser is generating a withdrawal strategy,” Mr. Meyer said. His software takes a holistic approach that encompasses all assets to ensure that they're working together for the financial benefit of a retiree. “It's a marriage of financial planning with investment planning with tax management,” Mr. Meyer said. Achieving tax efficiency in asset drawdown is crucial to ensuring that retirees' income lasts throughout their lifetimes. '30% More Income' “We can make someone's money last on average seven years longer or generate 30% more income,” Mr. Meyer said. In fact, if advisers don't take tax consequences into account, they're falling short of their fiduciary duty, Mr. Meyer asserts. “You're flat out providing bad advice,” Mr. Meyer said. Adviser interest in Retirement Benchmark and similar software is likely to increase, as their clients age. “If advisers don't transition their practices from just accumulation into distribution, they will lose their clients to other advisers who specialize in providing withdrawal strategies or retirement-income advice,” Mr. Meyer said. — By Mark Schoeff Jr.