You should only have to retire once.
Millions of retirees lost their retirement savings and had to re-enter the workforce after the Great Recession of 2008. Often, they were forced to take jobs beneath their skill level, working as fast-food servers, bank tellers, or greeters at big-chain discount stores.
Given that so many retirement plans failed more than a decade ago, why has so little changed when it comes to retirement planning?
Market Risk
Advisors have had it pretty easy since the recession. For the last 10 years, it’s been a bull market, and making money in an up market is, quite frankly, not that hard to do. Americans seem to have almost forgotten what happened just over a decade ago. That is, until October of 2018, when market volatility began affecting retirement portfolios, recession warning signs got louder, and retirees began questioning their financial advisors’ approach.
As Warren Buffet says. when the tide goes out, you can see who’s swimming naked.
A Pie Chart is Not a Retirement Plan
So, what investment approach caused so many people to lose their nest eggs in 2008 and is still putting much of America’s retirement savings at risk in 2019?
Not everyone is set up for failure, but if your retirement plan looks like a pie chart, supposedly “diversified” into small cap, mid cap, large cap mutual funds, ETFs, some bond funds, etc., it’s important for you to understand that all of these investments rely on market performance. When the markets crash, historically, everything in the pie chart goes down, even bond funds, which are touted as “safe” by many.
Stop Chasing that Elusive Withdrawal Rate
Look up “sequence of returns risk” in your search engine, and you’ll start to see what happens when you withdraw money from a fluctuating accounts held in stock market investments like the pie chart method advocates. If markets go down early in your retirement, you will most likely run out of money.
“Buy-and-hold” and “dollar cost averaging” worked when you were young, but sequence risk works just the opposite when you are withdrawing money to live on in retirement. Whether it’s 4%, 2% or even just 1%, withdrawing money from fluctuating accounts is a bad idea no matter what your withdrawal rate. Instead, there are “guaranteed principal” options out there for you to utilize for your retirement income. That way, you can keep the portion of your money that you won’t need to touch for many years in the market, if you want to.
Market Warnings Signs are Very Much There
Most experts think we are at the top of the bull market headed downward. After all, historically, we have had market crashes roughly every seven to eight years, and we are well overdue at 10+ years. But, there are many other economic warning signs and indicators, which you can about read here.
Don’t Confuse a Fiduciary with a Commissioned Salesperson
The term fiduciary gets thrown around a lot these days, by pretty much any financial services representative, and its use is not regulated. Though often misused, fiduciary is more than just a buzzword—if you know how to identify one. In order to gain the real transparency and retirement planning know-how that you need to weather a bear market and stay retired, you should find a retirement fiduciary as soon as possible.
Look for these three things:
1. Series 65 Licensing
Some people believe if they hire a CFP (Certified Financial Planner) they’re hiring a fiduciary, but accreditation or education doesn’t guarantee that someone is a fiduciary. Their licensing does. FINRA has a way for consumers to check which licenses an advisor holds.
The license held by a true fiduciary is the Series 65, requiring a fiduciary retirement planner to put your best interests above all else. The Series 65 license allows a fiduciary to invest some of your assets in the market (with your permission)—if it’s in your best interests to do so. But, a retirement fiduciary will not keep your whole portfolio at risk in the market if you are getting close to retirement, so you can kiss the pie chart a fond goodbye and good riddance.
The most important thing you should understand is that the Series 65 license mandates that any securities trades be done only on a fee-basis, because Series 65 licensees are not allowed to make sales commission on securities. In fact, they are required to disclose all fees, including fees within the structure of the investments they recommend. Thus, when your portfolio earns higher returns and makes you more money, the fee-based fiduciary also makes more money. When you make less money, they make less money. Therefore, they have a true incentive to do what’s best for you.
Conversely, stockbrokers with a Series 7 or other securities license are commission-based and make money every time they make a trade on your behalf. In fact, back in 2008, while so many retirees were watching their accounts drain down, their brokers were often making more money, because of the constant “buying and selling” trying to “help” as the markets were tanking.
When all of your money is held at risk in the market in a pie chart, securities-licensed brokers continue to make commissions and bonuses each year that you “hold” the investments, too. Brokers still sell toxic C-share mutual funds, and even many of their so-called “no-load” funds are laden with fees.
You need to know that brokers are not obligated to divulge any fees or bonuses they make on any particular investment, as long as that investment is “suitable” for you based on a risk questionnaire you take as well as your age and general circumstances. Keep in mind, this is not illegal. Brokers are not bad people; this is just the way the industry is structured. But, caveat emptor, most people don’t know about all this. Only a real fiduciary will lay the truth out for you.
Special note about dual licenses: Dual licenses are allowed. If your Series 65 licensed fiduciary also holds an insurance license, it can be a benefit, because they can help you examine options like annuities that might provide a guaranteed source of retirement income depending on policy structure, fees, and performance.
But, beware of advisors that hold both a Series 65 and a Series 7 (or other) securities license. This “dual-hat” licensing situation allows a broker to—part of the time—advise you about what is in your best interests, and—the other part of the time—make sales commissions on your investments and securities trades. All they have to do is tell you that this is what they’re doing in your initial meeting. Just say no to this situation—it is a conflict of interest.
2. Registered Investment Advisory (RIA) Firm
To be a pure-bred fiduciary, your advisor should be set up as an RIA—not a broker-dealer and not a bank. A broker-dealer gets paid by keeping your money at risk in the market, and they’re all set up as salesmen. A bank is great for checking and savings, but they’re really not specialized for retirement planning or investments.
Only the RIA is a fee-based only.
3. Independence
An independent, fiduciary retirement planner has one boss, and that’s you, the client. They have access to a broad array of investment products and strategies from multiple financial institutions, making their retirement plan recommendations agnostic, without hidden agendas or conflicts of interest. They do their due diligence in developing a retirement plan that contains the strategies they believe to be the best for you given your age, goals, and circumstances—not the investments a home office is forcing them to sell.
Think about this: if you go to Vanguard, they’re going to sell you Vanguard mutual funds. If you go to Fidelity, they’re going to sell you Fidelity mutual funds. If you go to a bank, they’re only going to sell their brand’s investment products.
With an independent fiduciary firm, no one is telling them what to sell, what to offer, or what to recommend. The universe of options is wide. They are looking for the highest net-of-fee performance they can find for you.
Retirement is a Big Transition for Everyone
Maybe you started mowing lawns when you were 14 years old, or you got your first job out of college. Either way, for your whole working life, the goal has been to save more money than you spend, so that someday you will have enough put away to have a comfortable retirement when you get older. Eventually, you have this big pile of money, you retire, and suddenly you no longer have a paycheck coming in.
This is a completely new mindset. What do you do now? How much can you take out? How much can you spend? How, exactly, will this retirement thing work? You don’t want to spend too much and run out of money, and you don’t want to scrimp either. After all, you’re supposed to be checking off your bucket list now.
Most people have a really difficult time with the process of actually retiring, unless they’ve been working with a retirement fiduciary who has already laid everything out. A real retirement plan isn’t a pie chart, it’s a distribution plan, an asset allocation strategy for each stage of your retirement. It shows you year-by-year and month-by-month exactly where you will get/take your income, net of tax, optimizing Social Security, and factoring in inflation.
Don’t Let the Unknown Cause you Big Problems Later in Life
Rely on a retirement fiduciary who has taken hundreds of others through the retirement transition successfully. You deserve the answers to all the retirement questions you didn’t even know you should ask.
