The best way to pay your retirement advisor

(MoneyWatch) If you've decided you'd like to to help you generate reliable retirement income for the rest of your life, it's essential that the person has no incentive other than to act in your best interests. This often includes helping you choose between annuities and investing your savings to use systematic withdrawals for your retirement paycheck.

So one important thing to find out is how your advisor is paid. Having a trained professional whose compensation is aligned with your best interests can increase the odds that your retirement nest egg will turn out sunny side up, not scrambled.

My least favorite way to pay for retirement planning advice involves paying someone a commission or sales charge on investments or insurance products. With this method, advisors may be tempted to direct you to the investments or insurance policies that pay them the highest commissions. They may also be tempted to churn your account -- which means to buy and sell your investments frequently to generate commissions on every sale and purchase. Because commissions can range from 2 percent to 10 percent or more, on a $100,000 transaction you'd be paying $2,000 to $10,000 on every purchase or sale!

Fee-based planners are a better choice because, at least in theory, they shouldn't have a stake in your investing decisions. However, even here you need to be careful. The most common fee-based arrangement is to charge you a percentage of your assets that are under the advisor's management -- 1 percent is a common charge. And while 1 percent sounds small, it can really add up over the years. For example, suppose you have $400,000 in retirement savings. With this amount under the advisor's management, you'd incur annual charges of $4,000 -- year after year. After 10 years, you'll have paid your advisor $40,000 in fees, money you could have spent on yourself.

In addition, an advisor who charges an annual fee may not be too thrilled to recommend an immediate annuity -- which might be a good choice for you -- since those assets won't be subject to the advisor's charges.

My favorite way to pay for retirement planning advice is to find someone whom you pay by the hour or on a flat fee basis. Typical hourly rates range from $150 to $300, while a typical project fee could be $1,000, $2,000 or even more. Although that flat fee may sound high, it often works out to be less than 1 percent of your assets under management. It's comparable to the amount you might pay an attorney for estate planning or other legal matters. In many cases, an hourly fee-based advisor will give you a fee quote for a specific project, so you'll have a very good idea how much you'll spend in total.

A good hourly planner should also set you up with a plan to generate retirement income that doesn't need constant attention. So instead of paying a fee every year, as you would with a percentage of assets under management, you can pay for a periodic checkup or a review if an important event, such as the death of a spouse or a market meltdown, requires attention.

Even with hourly planners, however, there are no guarantees. Watch out for planners who put together complex plans that would require them to spend many hours each month monitoring your investments. All planners will have their biases, based on their background and training, but paying your advisor by the hour has the best chance of minimizing these biases.

Two networks of fee-based financial planners I'd suggest you investigate are Garrett Planning Network and the Alliance of Cambridge Advisors. Both of these planning organizations have national networks of advisors who meet specified standards for training and experience. These two suggestions are just starting points for your investigation, however, since there can be many qualified advisors near you.

Also, I should point out that many financial advisors who charge a percent of assets under management would also be willing to charge a flat fee or by the hour if you only ask them, so don't reject these type of advisors outright without investigating their fees further. If you can't find a planner who charges by the hour, then the percentage of assets under management is the next best approach. Be sure to have them explain the pros and cons of the different methods of generating retirement income.

You'll thank yourself for spending the time and effort to find a retirement advisor who has the specialized skills to generate your retirement income and who has your best interests at heart.

This post is an excerpt from my latest book: "Money for Life: Turn Your IRA and 401(k) Into a Lifetime Retirement Paycheck."

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    For more than 35 years, consulting actuary Steve Vernon helped large employers design and manage their retirement programs. 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 also delivers retirement planning workshops and has 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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