IU: How did you come up with that number?

Burns: This worker would get 24% of his wages replaced by Social Security. Workers who earn less actually get a higher percentage due to the construction of the Social Security formula. The worker's spouse (who isn't working, in this example) gets a benefit equal to one-half of the worker's benefit from Social Security. So their total benefit would be 36% of their pre-retirement income.

IU: Where did the other 3% come from to equal 39%?

Burns: That's the 3% that this family in this example would need to replace from savings. The 3% represents the gap from what they've got to close from current levels of personal savings and investments. So from a quick-and-dirty calculation, the call for savings from conventional financial planners often comes up with much greater amounts than what people actually need. But this is just an illustration and not an exact calculation. Sophisticated software can come up with really precise figures.

IU: Do most planners leave out Social Security because they don't want to count on it being around in the future?

Burns: It really depends on whether a planner is a real planner or a salesman. There's a big difference. It can be argued that you should save more simply to cover for what we call public policy risk. That's the risk that Social Security might not be able to cover the income being promised. But that's another discussion. When you get right down to it, while Social Security isn't properly funded, the real elephant in the room is Medicare.

IU: Is that why you set up AssetBuilder.com?

Burns: No. I've been writing and advocating low-cost, index-based investing for decades. When I decided to take a buyout from the Dallas Morning News, a business opportunity presented itself to start an investment management firm that uses these principles. I already had the building blocks for the Couch Potato portfolios. They were basically low-cost balanced funds with different allocations for different levels of risk ranging from conservative to more aggressive. We thought there was a way to add value to the Couch Potato portfolios, which were designed for simplicity.

IU: But all of your clients realize the importance of low-cost investing?

Burns: Yes, and a good deal of them have been burned by the entire delivery system that charges them between 1.5%-2% of their money every year. We charge from 45 basis points for a $50,000 minimum account to 25 basis points for accounts of over several million dollars. Our typical account charges about 40 basis points. We figure we're a third to a quarter of what most people pay through the legacy distribution system.

IU: You're offering a broader range of risk levels than the Couch Potato portfolios, aren't you?

Burns: Three of our portfolios have less risk than the least-risky Couch Potato portfolios. On the upper end, we've also got several portfolios that take on more risk.

IU: How do you decide the risk level for people if everything's done over the Internet?

Burns: They go through a portfolio review process. Much of it's done online. We're very much oriented to the self-directed investor. If they understand their current risk level, they might want to change it. But we have a whole series of model portfolios and they select the one that best suits their needs.

We're not simply going out and buying Vanguard funds. We use Dimensional Fund Advisors funds. And we develop portfolios using mean variance optimization. We'll be the first to tell you that there are all sorts of questions about using mean variance optimization. The efficient frontier is a broad band, and we're just trying to get portfolios closer to that fuzzy band. If you do the work consistently over the years, we believe you can add some real value.

Murray Coleman is managing editor at IndexUniverse.com. He can be reached at: This e-mail address is being protected from spambots. You need JavaScript enabled to view it .

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