Retirement income review: Financial Engines

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(MoneyWatch) This post continues my series on various retirement income offerings that are being introduced in 401(k) and other defined contribution retirement plans. Today we'll take a look at Income +, the retirement income service offered by Financial Engines.

Founded by Nobel Prize winner Bill Sharpe, Financial Engines is well-known as the financial advisory service that's available on the platforms of many 401(k) plan administrators. Since 1996, Financial Engines has provided online advice to 401(k) plan participants. These services help participants decide how much they should save to reach reasonable retirement savings targets and how to allocate their accounts among the investment funds offered in their 401(k) plans. In addition, participants can elect to receive professional management services, which monitor their retirement savings and progress toward retirement goals, periodically re-balance the investments in their accounts, and prepare personalized retirement plans.

In January 2011, Financial Engines introduced Income +, an extension of their professional management service. Income + isn't a product, such as an annuity or managed payout fund. It's a service that helps plan participants turn their 401(k) balances into monthly retirement income that can last for life. During your retirement, you stay invested in the funds offered by your employer's 401(k) plan, and Financial Engines helps you manage your account balances to generate a retirement paycheck.

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With its Income + service, Financial Engines can help you in the years leading up to retirement by developing an asset-allocation strategy that manages your exposure to stock market fluctuations. The goal is to prevent your retirement plans from being thrown off track due to stock market crashes just before your retirement. The services also provides estimates of your retirement income at various retirement ages to help you decide when you can retire.

When you retire, your savings are then divided into three pots. The first generates a retirement income until an advanced age, typically age 85; it's invested in fixed income funds -- either bond funds or stable value funds -- in your 401(k) plan. This pot equals roughly 65 percent of your 401(k) account when you retire.

The second pot equals about 20 percent of your account when you retire and is invested in equity funds in your 401(k) plan. The intent of this account is to provide boosts in your retirement paycheck until age 85 to help your income keep pace with inflation.

The third pot equals about 15 percent of your account when you retire and is invested to serve as a reserve you could use to purchase a lifetime annuity at age 85. The goal is to protect you if you happen to live longer than expected.

Currently, the initial annual income you'll receive if you retire at age 65 is a little less than four percent of your total account balance, not much different from the "four percent rule" that's advocated by many financial advisors.

Financial Engines charges between 0.20 percent and 0.60 percent of your accounts for their services, depending on the arrangement it has with your 401(k) plan. Its charges are roughly one-third to one-half the charges typically assessed by personal financial advisors, who charge a percent of assets under management.

Because you're invested in the funds offered in your 401(k) plan, you have complete flexibility with your accounts during retirement/ For instance, you can always stop your retirement paycheck and withdraw all your accounts, without a surrender charge. Or you can withdraw just a portion of your accounts and reduce your retirement paycheck accordingly. If you've been retired for several years and are more settled in your spending habits, you could decide to purchase an annuity before you turn 85 to lock in your retirement income.

Telephone representatives are available to help you understand the process. They can also help you develop a total retirement income plan, considering your benefits from Social Security and a company pension, if applicable. In addition, they can help you purchase an annuity if you decide that approach is appropriate.

As I've written in previous posts, there are many reasonable ways to generate a retirement paycheck, and each can meet different goals and circumstances. Income + is certainly a service you should consider. It gives you flexibility in accessing your retirement savings, with protection against two significant retirement risks -- inflation and outliving your financial resources. It also allows you to stay invested in your employer's 401(k) plan, which is a desirable outcome if your plan offers efficient investment funds.

If you're offered Income + in your 401(k) plan, it's well worth your time to learn more about how it works and compare it to other possible retirement income offerings. Deciding how to generate retirement income from your savings is one of the most important financial decisions you'll ever make.

  • Steve Vernon On Twitter»

    View all articles by Steve Vernon on CBS MoneyWatch»
    Steve Vernon helped large employers design and manage their retirement programs for more than 35 years as a consulting actuary. Now he's a research scholar for the Stanford Center on Longevity, where he helps collect, direct and disseminate research that will improve the financial security of seniors. He's also president of Rest-of-Life Communications, delivers retirement planning workshops and authored Money for Life: Turn Your IRA and 401(k) Into a Lifetime Retirement Paycheck and Recession-Proof Your Retirement Years.

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