Should Retirees Use Robo Advisers?

We took four services for a test drive. Here’s how they compared.

Financial-service companies are rolling out robo-advisory products to help baby boomers produce steady streams of retirement income. Illustration: Carl Weins for The Wall Street Journal

By

Anne Tergesen

Robo-advisory services that pair algorithms with human help have long been popular with millennials because of their low fees. But as baby boomers increasingly embrace the trend, too, many companies are adding features for retirees.
These services used to focus mainly on helping clients save for financial goals such as retirement. Now, they also offer tax-efficient strategies for turning nest eggs into steady streams of retirement income, as well as recommendations on Social Security, Medicare and long-term-care insurance.
Client demographics explain the shift. Industry leader Vanguard Group says 85% of those enrolled in its $93 billion Personal Advisor Services are over age 50. Among participants in Charles Schwab Corp.’s Intelligent Advisory service, 53% are older than 55.
“Eighty percent of investible assets are held by people 50 and over,” says Matt Fellowes, chief executive of United Income Inc., a new service backed by investors including Morningstar Inc. that focuses on people ages 50 to 70.

To see what people in or near retirement can get from a robo-type service, we test drove offerings from Vanguard, Schwab, United Income and Betterment LLC—with the firms’ knowledge and support—using data from “Ellen and Greg,” a hypothetical 65-year-old couple in suburban New York who are about to retire.
We answered questions about the couple’s annual income ($300,000), after-tax spending ($126,000), savings ($2 million), and desire to sell their $1.5 million home to buy a $1.75 million Manhattan apartment.
The process took from 10 to 45 minutes, depending on whether we let the services estimate the couple’s spending or took the time to manually enter details including their budget.
Using screen-sharing technology, we spent about an hour with advisers at each firm. We got answers to key questions, including whether the couple can afford to retire, when they should claim Social Security, and how they should allocate their investment portfolio.
While we were impressed with much of the advice overall, we found some important differences between the services.
Here are our reviews:

Betterment Premium

Price: 0.4% (with no fees on balances above $2 million), plus investment fees of 0.07% to 0.16%.
Minimum investment: $100,000
Review: Our adviser, Garrett Oakley, said Ellen and Greg have a 97% chance of being able to maintain their desired spending until age 90—Betterment’s default life expectancy—even after using the proceeds from selling their $1.5 million home, plus $400,000 in savings, to purchase a $1.75 million apartment. (The $400,000 would cover the difference in price, plus capital-gains taxes and transaction fees on the home sale.)
Still, to minimize the drain on savings and find a way to pay for long-term-care insurance, Mr. Oakley advised Ellen and Greg to purchase a slightly cheaper apartment.
For new Medicare enrollees, Betterment often recommends traditional Medicare plus a Part D prescription-drug plan and a supplemental “Medigap” plan. Although the alternative, private Medicare Advantage—which operates like a health-maintenance or preferred-provider organization—often has lower premiums, it can expose participants to higher out-of-pocket costs if they go outside a plan’s network, Mr. Oakley said.
Betterment recommended that Ellen and Greg invest 56% in stocks and 44% in bonds at the beginning of retirement and scale back to 30% in stocks and 70% in bonds over time.
Pro: The program includes tools that estimate expenses based on a client’s ZIP Code and income and can link to a client’s Social Security benefits statement.
We appreciated the guidance with Medicare.
Con: Betterment’s default is to assume clients claim Social Security when they retire rather than recommending claiming dates that are likely to produce the highest cumulative lifetime benefits.

Schwab Intelligent Advisory

Price: 0.28% (with payments capped at $3,600 a year), plus investment fees of 0.07% to 0.22%.
Minimum investment: $25,000
Review: Our adviser, Andrew Porter, ran through a checklist of questions and told Greg and Ellen to review their will and monthly budget, obtain quotes for long-term-care insurance, and set up an emergency fund to cover three to six months of expenses, tasks the other advisers addressed as well. Mr. Porter raised Ellen’s life expectancy to age 96 from the program’s default age for women of 93, due to her family’s longevity.
Schwab gave our couple a 45% chance of having enough to buy the apartment and maintain their spending in retirement through age 91 for Greg and age 96 for Ellen. The problem, Mr. Porter said, is that after selling their $1.5 million home to pay for a $1.75 million apartment, they will have to withdraw $600,000 from their savings to cover the price difference, plus capital-gains taxes and transaction fees on the home sale.
To boost their odds of success, Ellen and Greg should reduce their budget by $1,700 a month or buy a cheaper apartment, Mr. Porter said.
Mr. Porter recommended a portfolio of bonds, dividend-paying stocks, real-estate investment trusts and other income-producing investments from firms including Vanguard, Schwab and BlackRock Inc.
Pro: The program is easy to use. It lets users drag-and-drop pictures of goals (“new home,” “travel”) into their financial plan and assess the impact of reducing spending, working longer or saving more. It also offers a choice between a 10-minute “express” sign up and a more detailed 45-minute version.
Users don’t have to decide whether to become a client until the financial-planning process is complete.
Con: Schwab recommended a 12% allocation to cash—which was much higher than what the other services advised and could be a drag on returns in a rising market. (Its other recommendations: 54% in stocks, 29% in bonds, 5% in commodities.)
A Schwab spokesman said “cash is an important asset class in a diversified portfolio” and is something “most investors care about,” especially when in or near retirement.
Mr. Porter instructed Greg and Ellen to enroll in Medicare as soon as possible. We were hoping for more detailed guidance on navigating the choice between Medicare Advantage and traditional Medicare—guidance Schwab says its advisers are able to provide.
Schwab’s default assumption is that investors will claim Social Security at full retirement age. The company, however, says its advisers can identify claiming dates designed to produce the highest cumulative lifetime benefits.

United Income

Price: 0.5% to 0.8% (with discounts for accounts valued at more than $500,000), plus investment fees of 0.1% to 0.25%.
Minimum investment: Financial plans and Social Security advice are free; $10,000 for those services plus investment management; $300,000 for everything in the lower tiers plus a dedicated adviser.
Review: Ellen and Greg’s adviser, Ben Meirowitz, gave them a 99% chance of having enough to last until Greg is 97 and Ellen is 102, even if they buy the $1.75 million apartment. To maximize their odds, Mr. Meirowitz told them to delay claiming Social Security until 70 and live on IRA withdrawals in the meantime.
United Income recommended that the couple invest the money they will need for essentials, such as food and housing, more conservatively than the money they will need for luxuries and health care.
To project the couple’s future spending, the company used results from a national study that finds, for example, that higher-income clients face smaller annual increases in health-care costs.
United Income avoids long-term-care insurance because it believes the market is unstable. To cover those costs, Mr. Meirowitz suggested Ellen and Greg invest money earmarked for health care more heavily in stocks, which have higher potential returns.
When designing portfolios, United Income estimates the lifetime value of clients’ Social Security benefits and—because those benefits are guaranteed—adds them to the bond side of the portfolio. To balance out that higher bond allocation, United Income advised the couple to put 65% of their investment portfolio in stocks.
Pro: For clients who pay 0.8% a year, United Income takes on such tedious tasks as filing for Social Security and Medicare, something the other services don’t offer.
The company assigns clients willing to pay 0.8% a year to a specific adviser.
You can create and update a financial plan and talk to an adviser up to four times without becoming a client.
Con: Unlike the other services, United Income doesn’t allow clients to link their bank and other financial accounts to its software, so either the adviser or the client must periodically update those values manually.

Vanguard Personal Advisor Services

Price: 0.3%, plus investment fees that range from 0.04% to 0.12%
Minimum investment: $50,000
Review: Our adviser, who identified himself only as Bryan, gave Greg and Ellen a 94% chance of success, assuming both live to 100. That’s premised on the idea that Ellen and Greg can spend slightly more than the annual amount they will need from their portfolio to supplement Social Security when the markets do well, but will have to cut back a bit when stocks decline.
Vanguard recommended 60% in stocks and 40% in bonds. The adviser suggested replacing non-Vanguard with Vanguard funds in tax-deferred accounts, but maintaining the status quo in taxable accounts to avoid triggering capital-gains tax bills. (Vanguard says clients who want to retain existing funds can do so.)
To maximize the couple’s lifetime Social Security benefits, Bryan advised the lower earner, Greg, to file at 66, so Ellen can claim a spousal benefit while delaying her own benefit until age 70.
Pro: Users don’t have to decide whether to become a client until after they review the financial plan.
Vanguard assigns clients with $500,000 or more to a dedicated adviser
Con: None that were immediately apparent.
It’s important to note that robo-advisory services aren’t for everyone. People with complicated needs or who need or want a lot of hand-holding may be better off with independent advisers.
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