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The Honolulu Advertiser
Posted on: Thursday, January 26, 2006

Financial-planning assumptions may not fit you well

By Michelle Singletary

WASHINGTON If you really want to make a good investment, then get the February issue of Consumer Reports.

In it you will find an informative investigation of low-cost and no-cost retirement planning services. The consumer magazine also threw in an evaluation of one high-end (i.e., high price) financial service.

There is enough free information on the Internet and in books to help people develop a well-balanced investment plan. However, many people are afraid of making a financial mistake that they won't catch for years.

So an increasing number of consumers are hiring financial planners to show them what they need to do or reassure them that they've made the right investment choices.

The question is: Do you have to pay a lot to get the best advice?

Consumer Reports found there are some good low-cost options for consumers. To test what's out there, the publication sent three employees from Consumers Union to get retirement advice from banks, mutual fund companies, online planner networks, a Web-based software service, and discount brokers. Consumer Union is the nonprofit publisher of Consumer Reports, which is an independent publication that accepts no advertising (to be as unbiased as possible).

The testers used companies that offered free plans. They also paid for retirement planning advice that was priced from $250 to $3,000.

The three testers represented a range of ages and financial needs: a 42-year-old with a stay-at-home wife and kids ages 2 and 6; a 63-year-old married granddad with grown kids, including one in college, and with his eye on early retirement; and a 48-year-old married working mother with one child in middle school.

Consumer Reports discovered that, for the most part, the testers received good, solid investment advice whether it was free, bargain-priced or expensive.

And guess what? Even with a planner low-cost or expensive you've got to spend a lot of time checking what they recommend, according to Consumer Reports.

One of the most useful pieces of information in the report is a caution about the assumptions that planners make.

If any of the assumptions in your plan are way off base, you might end up not investing enough or wind up overly confident that you can retire earlier than you actually can.

The following is a list prepared by Consumer Reports of common assumptions planners use and what you need to know about them, whether you use an adviser or develop your own plan:

  • Inflation. Based on the Consumer Price Index, the average inflation rate has been 3.3 percent since 1913. If your planner is cautious, he or she might use 4 percent. Higher assumed inflation rates, however, mean you'll have to save more or earn more on your investments.

  • Education inflation. While the focus of the test by Consumer Reports was on retirement planning, your financial plan might also include goals such as saving for your child's college education. College tuition costs have risen 8 percent on average since the data began to be tracked in 1978, according to the Bureau of Labor Statistics. In the most recent report from the College Board, the average total tuition and fees at four-year public colleges and universities in 2005-06 are 7.1 percent more than in 2004-05. You might want to look at the report yourself. Go to www.collegeboard.com and search for "Trends in College Pricing 2005."

  • Estimated investment return. The average annual rate of return on stocks, based on the Standard & Poor's 500 Index, has been 10.4 percent since 1926. Long-term government bonds, the benchmark for the bond category as a whole, have averaged 5.5 percent over the same period.

  • Projected lifespan. Planners generally use age 90 as a rule of thumb. They assume a couple who are currently both 65 can expect that at least one of them will live to age 90. However, if your family has a history of longevity, you might push that number out another five or 10 years.

    You can get a free synopsis of this investigation by going to www.consumerrepots.org. Click on the link for personal finance.

    However, I highly recommend you read the entire article if you're looking for professional financial advice at any price range. If you already have a planner, definitely read the full report.