Morningstar backs new retirement calculator

United Income models 'future life outcomes' based not only on expected investment performance but potential life spans and spending levels

Sep 11, 2017 @ 12:45 pm

By Bloomberg News

Online retirement calculators usually make just enough assumptions to be dangerous. What if you live 10 years longer than you planned for? What if the market tanks? What if you need astronomically expensive round-the-clock health care?

The answer you typically get from financial advisers is to save as much as possible, or way more than you could ever spend, and hope for the best. The result is workers scared to retire and retirees terrified to spend a dime on anything fun or frivolous.

Now comes United Income, a new money manager backed by some of the biggest names in retirement, pitching big data as a solution. It's deploying huge sets of stats on investment performance, retiree spending, longevity, and other crucial factors to simulate innumerable outcomes. The software estimates the chances that each client's personalized retirement strategy will actually succeed, then refines the plan if it won't, based on as many as 18 million simulations per client, UI said. The aim is to make retirees' money go a lot further than other planning software, which Founder and CEO Matt Fellowes scorns as hopelessly out of date.

(More: How to fund a Social Security delay)

"We've invented a new approach to money management," Fellowes said in an interview.

That may sound familiar, but Fellowes, 42, has some street cred. A member of the family that owns Fellowes Brands, a 100-year-old conglomerate, he's a former Brookings Institution scholar. In 2009, he started HelloWallet, which companies hire to give financial help to employees. Morningstar Inc. acquired it in 2014 for $52.5 million, and Fellowes became the investment research giant's chief innovation officer. Now, Morningstar is helping to back United Income, with more than a third of the $5.8 million raised so far. The new firm officially opens to investors today.

"It's a bet on Matt, and that he can build an exceptional team to tackle a really difficult investor problem," said Joe Mansueto, Morningstar's founder and chairman. "It's a business opportunity, but it's also a way to improve the retirement of millions of Americans."

Basic retirement calculators just do math, estimating how money might grow over time. The more sophisticated calculators use historical market data to game out the best- and worst-case scenarios for investment performance.

United Income does that, too, but Fellowes stresses the many "future life outcomes" it models. By focusing on investing, he argues, other firms ignore the two most important questions in retirement: When are you going to die, and how much are you going to spend before you do?

To get the answers, United Income, whose 18 full-time employees are based in Washington, D.C., got advice from prominent people in policy and investing circles. J. Mark Iwry, a key architect of retirement policy in the Obama administration, is listed as an adviser, along with Stephen Utkus, director of Vanguard Group's Center for Investor Research; John Wider, a former president and CEO of AARP Services, a wing of the retiree organization; and several other former government officials.

Health, exercise, and, increasingly, education and socioeconomic status can help predict how long we live. Even as the average American's longevity has stalled, there are affluent, well-educated fitness freaks who should probably plan on hitting 100. United Income asks clients about these factors and then uses detailed actuarial tables to estimate longevity. It does the same for spending, tapping government data to plot out how people might actually consume over the course of their retirements.

(More: Good health is key to retirement security)

"Everybody's spending curve is different," Fellowes said. Spending on essentials tends to stay the same throughout retirement and may even decline—for example, if retirees pay off their mortgages. But discretionary spending, such as tourism, tends to spike at the beginning of retirement. Health care spending, though essential, is usually concentrated at the end. Your spending pattern is further affected by your marital status, financial situation, health, and other factors.

United Income crunches all these data and makes recommendations. It gives advice on the best times to take Social Security payouts and make taxable retirement account withdrawals, and builds and manages custom investment portfolios using low-cost exchange-traded funds. The key to making nest eggs go further, Fellowes said, is an automated, sophisticated investing strategy based on each client's estimated requirements.

For example, your essentials, such as utilities, groceries, and mortgage payments, must be covered with ultra-safe sources of income such as Social Security, pension payments, annuities, or conservative, bond-heavy investments. That lets you take more risk, and in theory get higher returns, with money you've set aside for other goals, which clients can customize. Money for an around-the-world trip might go in an aggressively risky, equity-heavy portfolio. The strategy for a granddaughter's college fund will depend on how soon the girl graduates from high school. Money for major health care expenses, which often occur later in retirement, can start out in risky investments and move to safer ones over time.

It might not sound like rocket science, but many advisers still base their strategies on basic rules of thumb, guessing at a client's longevity or relying on averages to estimate spending needs. A common method is to predict spending based on a percentage of pre-retirement income, like 80 percent.

"All those rules of thumb made sense in a world that could not personalize data," Fellowes said. "They just don't make sense anymore."

As a result, he said, retirees are often told to invest too conservatively. A 70-year-old with a modest lifestyle might have almost all her essentials covered by Social Security or a guaranteed pension. That gives her lots of freedom to invest aggressively, to build up a fund for late-in-life health care, and even to splurge on the occasional luxury.

United Income's approach could be a big step forward in retirement planning—if its models work.

"The challenge is execution," Mansueto said. Fellowes has "got great ideas, but there's a reason that it hasn't been solved yet."

United Income will have to get every detail right. Its main target is people between 55 and 70 with $300,000 to $3 million to invest. A plan that succeeds for these clients nine times out of 10 will still fail an unacceptable number of people.

"When you're giving investment advice, the guiding principle is 'do no harm,'" said Anthony Webb, research director at the Schwartz Center for Economic Policy Analysis at the New School for Social Research. Webb hasn't reviewed United Income's methodology but warns of the difficulty of creating customized retirement plans that work for everyone. You can try to estimate a client's longevity, for instance, but even with major health problems he or she still has a small chance of living to a very old age. You have to hedge that risk, he said.

One way is to recommend insurance products. United Income doesn't but is exploring adding simple annuities and deferred annuities, also known as longevity insurance, to its platform.

Clients can monitor their plan's risk of failing in real time. When they log on, they're greeted by a meter gauging "our confidence that this plan will succeed" and told how many of their spending goals are still on track. Don't expect that confidence number to waver much, though, Fellowes said, even if the stock market plunges 20 percent in one day. The calculations are based on all the factors that go into UI's models, spread out over the rest of a client's life.

United Income charges an annual fee of 0.5 to 0.8 percent of assets, depending on the level of service clients want and how much money they invest. (UI also offers a financial plan and Social Security advice for free.) It also keeps track of cash and investments held with other institutions and takes those assets into account when making recommendations. Ahead of its official launch, United Income said it has collected more than $200 million in assets since late July.

Why haven't more financial firms amped up the data piece of their retirement-planning tools this much? It's hard. For younger workers preparing for retirement, everyone's goal is pretty much the same, to save and invest as much as they can. But after age 55, the standard advice doesn't work as well and subjective measures matter more. How much do you like your job, and how secure is it? Where do you want to live? How's your health?

Another reason many retirees don't get sophisticated advice: Lots of firms try hard to sell clients a mutual fund or an annuity to reap a commission, but after the sale is complete they're much less interested in their day-to-day money management needs.

That gives United Income an opportunity, if clients find its advice valuable. And that could put even more pressure on the nation's incumbent financial advisers, already facing rapid change and increasingly demanding clients who have good reason to be skeptical of their advice.

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