The decade of market growth we’ve experienced since the recession of 2008 has made many people complacent about their retirement planning. Many have become comfortable, and some think they have everything figured out. However, don’t confuse the market’s upside with brilliant investment strategy. When it comes to retirement planning, it’s not about how well you do when markets are rising, it’s about how well you do when markets are volatile.
Warren Buffett says, “You only find out who was swimming naked when the tide goes out.” Last year’s ups and downs were turbulent. If you don’t like watching your investments go up and down like the tide, and you’re worried about the future of your retirement nest egg, there is another way to approach retirement planning.
Know Who You’re Dealing With
Step one is to hire a financial professional to create an actual retirement plan. But, before step one, you need to know who you are actually hiring. There are three forms of a “one trick pony” you may run into.
1. Big-Name Broker Or Banker
A lot of people go the route of hiring a big company whose name they’re familiar with. However, you should know that while these people can be effective when you’re young and in accumulation mode (and you can afford to pay big commissions), they are not specialists in retirement planning. In fact, they may be far from it.
Brokers are not fiduciaries; although, they may claim to be. Most often, they hold a Series 7 license allowing them to be paid commissions on stock market trades as well as fees on the sale of other investments such as mutual funds. Many work exclusively on commission. Even if they offer “no-load” mutual funds, they may still receive fees or bonuses they are not required to disclose to you.
While brokers are required to recommend “suitable” investments for you, based on a risk questionnaire you fill out when you first meet, unlike a true fiduciary they are not legally required to only recommend what is in your best interests. In fact, they are often pressured by their employers to push a particular product, which earns their company (and them) the most money. Once you sign the broker/banker’s investment policy statement, you have created your own investment advice by virtue of “your personal risk tolerance” as indicated by the risk questionnaire you filled out, so you cannot turn around and sue the company for bad investment advice.
Keep in mind, most bankers and brokers are good people doing what’s legal; however, their structure and compensation model is different than a true fiduciary’s. They are not overly concerned about doing the long, hard work of finding the best earning investments for you and your specific point in life.
Bankers and brokers are “one trick ponies” because they take your savings, create a pie chart, and slice your money up in hundreds of different ways to give you “options.” The pie chart represents your “diversified” asset allocation, a mixture of mutual funds, bond funds, equities, etc. Whether you are 20 or 80, you’ll get the same pie chart, but they’ll include more bond funds as you get older. Once they decide you have “enough” money in the pie chart—usually millions of dollars—they will keep you invested in the market but cut you loose otherwise. You’ll be told to draw out 4% (or 2% or 5%) for retirement. You’re left to figure out the rest for yourself.
By the way, bond funds are not “safe,” even though they’re sold that way. Historically, they lose money when the stock market goes down, just like equities do. We have the Morningstar data, if you’d like to see it. In retirement, you can’t afford to take those 20 to 40% hits, which happen historically every 7 or 8 years. You can’t leave it up to a salesperson who’s incentivized to keep all your money at risk in the market. You can’t afford another repeat of 2008—when so many retirees lost all their money when the market crashed.
2. An Insurance Agent
Working with a financial advisor who is only licensed to sell insurance makes no sense. While some insurance products may work within the scope of your overall retirement plan, you can’t buy a policy or two, and call it a plan. An insurance person may lock your money up in a variable annuity (just say NO!) or other insurance policy with high fees (and high commissions paid), low returns, and without adequate liquidity. As retirement fiduciaries, who’ve been doing this for 30 years, we’ve seen this happen. Don’t let it happen to you.
3. The REIT Person
Regardless of their license or credentials, some financial advisors only think in terms of the latest shiny object—in this case, REITs (Real Estate Investment Trusts). They recommend REITs to pretty much everyone.
We had a client in Washington whose entire investment portfolio was in REITs, and he was living off the dividends. He eventually realized he didn’t want all his money tied up like this. We put together a real, retirement plan for him, but it took us two years to unwind these privately-traded REITs, which were illiquid. Had he had an adverse life event, it would’ve been catastrophic. Thank goodness that didn’t happen, but the danger was there.
Take Action Now
The three types of financial professionals discussed so far are, essentially, salespeople earning large commissions. It’s extremely important that when you’re talking about your retirement assets, you find out how your financial professional gets paid. Just ask them. Make sure you’re talking with someone who is independent and who doesn’t have a conflict of interest or a specific product they sell.
Be careful, because bankers, brokers, insurance agents, and others may want you to think you’re getting objective information. But, deep down, these financial professionals have a specific product or product line they’re going to put everybody in. They just bide their time until they convince you it’s best for you, whether it is or not, because they have that one product and approach to sell you.
Don’t feel bad about moving away from them in retirement, even if they’re nice people. Remove emotions, and focus on your retirement success instead. You don’t want to have to go back to work again like so many retirees did in 2008.
Retirement Planning Fiduciaries
Retirement planning fiduciaries don’t “have a horse in the race,” so to speak, because they are fee-based, independent, focused on actual retirement planning, and are legally bound to recommend only what’s in your best interests—not theirs.
Here are some things you should know about true retirement planning fiduciaries:
1. They Take A Comprehensive Approach
Let’s use taxation as an example. Brokers don’t even talk about taxation. They’re still spinning the old “buy-and-hold” and “withdraw 4%” plates. Conversely, a retirement planning fiduciary, like Decker Retirement Planning, looks at taxation as integral to the whole retirement plan. Much different than a CPAs approach, we analyze and run calculations on ways to potentially save money on future taxes, which can limit the amount of money you have for retirement and/or for passing on to your heirs.
When it comes to taxation, it’s an all-encompassing conversation. It goes from where your investments are now, how you will draw money in the future, as well as what your estate documents say for when you pass away. For taxes to be minimized throughout retirement and beyond, it has to be done comprehensively and correctly.
Taxes are just one piece of the plan, though. We also make sure you have adequate liquidity, emergency cash reserves, liability protection from lawsuits, a plan in place for long-term care, and much more.
2. They Understand The Importance Of Reliable Income
When you don’t have a paycheck coming in anymore, you suddenly realize what is meant by the importance of reliable, retirement income. First, a retirement fiduciary will help you optimize the way you file for Social Security, draw your pension, or receive real estate rental income. We’ll also look at a safer approach to specific time periods of your retirement, like the first five years, the next ten years, and beyond, using options to help generate reliable income from principal-protected accounts.
The goal is to look objectively for the highest-returning, lowest-risk asset vehicles available while taking into consideration liquidity, taxes, cost-of-living increases, and other factors, then putting together a year-by-year plan that is mathematically sound in order to maximize income.
Perhaps, most importantly of all when it comes to reliable income, if you are married, you must consider what will happen to your income when one of you passes away—and consider it from both points of view. You will lose one Social Security check and possibly a pension income, too. Your retirement plan should address this significant risk.
3. They Have All The Requirements Of A Real Fiduciary
All of these must be present:
A true fiduciary must be only Series 65 licensed, fee based, independent, have access to hundreds of different vehicles from various financial product providers, and structured as an RIA (Registered Investment Advisory) firm.
4. They Won’t Recommend Bond Funds Or Equities
There’s something you should keep in mind if you still have a pie chart and have been told to rely on dividends: in 2008, companies stopped paying them.
You should also know that you should never draw income from a fluctuating account. This flies in the face of the “draw 4% advice,” but it’s based on what has historically happened to retirees who have kept the majority of their investments in bond funds at risk in the market.
It’s not that you can’t keep some of your money at risk in the market, but you should minimize that risk using two-sided strategies designed to hedge losses and earn returns in both up and down markets. You should only keep money at risk in the market that you won’t need for the next 20 years or more once you retire.
