Have you ever searched your health symptoms on the internet and attempted to self-diagnose what may be ailing you? What if you didn’t even know there was something wrong in the first place, and didn’t know what to look for?
When it comes to retirement planning, many people are unsure about what their retirement plan should, or shouldn’t, contain. They have no idea whether or not their plan might be set up to fail.
We put together these 10 signs that indicate your retirement plan might need a checkup, if not complete reconstructive surgery:
1. Your Plan Looks Like A Pie Chart
If your retirement plan looks like a pie chart, chances are you’re taking too much risk. While a pie chart is supposed to be a diversification of your investments into various asset classes, usually all of those assets are still at risk in the market, including bond funds.
The pie chart works for certain stages of life—especially during your early working career when you have a long time horizon to wait through market ups and downs. In other words, the pie chart is a good accumulation vehicle; however, big issues arise with the pie chart when it comes to retirement planning.
Does the pie chart tell you how much money you can draw, so you won’t run out of money before you pass? Does the pie chart spell out how your finances will look year by year? Does the pie chart plan for taxation or yearly cost-of-living increases? The answer to all of these questions is no.
A lot of bankers and brokers try to do a one-size-fits-all plan for their clients. They’ll have the same strategy for a 20-year-old client and a 60-year-old client. They’ll just a different version of the pie chart. It’s inappropriate for retirement; it’s not a strategy. You need a different approach altogether.
2. Your Broker Tells You To Withdraw 4%
You have your pie chart, and let’s say it’s worth x amount on the day you retire. On that day, when you receive your last paycheck, the whole game changes. Now, you have to take money out of your accounts rather than putting money in.
The 4% rule, along with the pie char,t is not a retirement plan. Neither is a directive to take 2% or 5% or any percentage out of a pie chart of assets. You shouldn’t have to guess your way through retirement. You’re meant to be enjoying bucket list vacations or extra hobbies you didn’t have time for when you were working. Time with the family, time to be more focused on what matters most to you, and less about this “I hope it works” situation.
The biggest issue with the pie chart is that during flat market cycles, like we had between 2000 and 2010, the 4% rule destroys your retirement! You cannot withdraw a percentage from your assets in a flat or dropping market cycle and maintain your income expectations. You have to lower your income, you have to go back to work, you have to sell a house, or you have to move in with kids—horrible choices we saw in 2008 because people were drawing a percentage from a pie chart in their retirement and ran out of money.
3. You Have A Lot Of Bond Funds
As a pre-retiree, you should be looking to have less risk in your portfolio; however, chances are, you’ve been told to move your money to more “bonds” as you get older. Maybe your broker has even been using the Rule of 100 where the percentage of bonds in your portfolio matches your age, growing as you get older.
Bonds and bond funds are well known as “safe” money, right? Here’s the thing: They are subject to market and interest rate risk. There are several important things happening right now that affect bonds and bond funds. Not only is debt at all-time highs—bonds are basically loans or debts that you expect to be paid back with interest—but interest rates are at all-time lows and have been rising. When interest rates are at all-time lows and rising, bonds or bond funds are both at risk.
The problem is two-fold. First, individual bonds pay you a fixed rate of return for a fixed period of time, either from a corporation, from a municipality, federal government, etc. With interest rates this low, holding the majority of your money in bonds as you get older means you are earning next to nothing on the biggest portion of your portfolio.
The second issue has to do with bond funds, which are different. Bond funds are a combination of multiple bonds, and their value is derived by what the earnings are on the total fund or all the bonds contained within it. As interest rates go up, investors look for bonds paying the highest rates; therefore, your bond fund’s value will go down. As a retiree, you can’t wait and hope for interest rates to drop at some point in the future, you need your money now to live on. Bond funds aren’t “safe.”
As a historic example from Morningstar, in 1994 interest rates jumped from 6 to 8%, and bond funds lost an average of 17% that year.
Interest rates have been held artificially low by the Fed for a long time. It is unsustainable, which is why we saw rates go up a few times last year and a few times this year. They’re expected to continue to go up a couple more times this year and next year. As rates go up, bond funds are going to lose money.
Unfortunately, bankers and brokers are trained to use pie charts, the 4% rule, and the Rule of 100, putting more and more of your assets into bond funds. This is a recipe for disaster.
4. You Own Municipal Bonds
Right now, municipal bonds have a tremendous amount of credit risk—credit risk is the risk that you won’t get all of your principal back at maturity—because 49 of the country’s 50 states have pension obligations they cannot possibly pay back. Many states are spending more than they’re bringing in; therefore, their pension obligations have become a big issue.
While these states might not go bankrupt, there will inevitably be a day of reckoning and reorganization of debt. People that are holding municipal bonds will likely be affected by that. Even though interest from municipal bonds may be free from state taxes, from an investment standpoint, you’re not getting compensated by the return for the risk you’re taking.
5. You Own Variable Annuities Or Other High-Fee Income Annuities
Variable annuities and many high-fee income annuities are toxic. They are sold by people who don’t do much (if any) due-diligence comparisons between the many types of annuities because, usually, they can only sell their company’s products.
Nearly all variable annuities are a scam. Actually invested in a mutual fund or funds in the stock market, they’re very complicated, they typically have a lot of fluff in them, and the returns are very poor. Surrender charges are often horrendous, so retiree assets get locked up. Additionally, variable annuities have three layers of fees.
The broker who sells variable annuities gets paid a lot of money up front—around 8% right off the top. They also get a percentage every single year you own it. The mutual fund company and the insurance company also get a percentage every year you own it. You’re paying around 5 to 7% worth of fees per year before you see any money. If the markets go up, you’re not going to do as well as the markets because you have high fees dragging you down. If the markets go down, they still get their fees, and you go down even harder.
Even though they may say there’s a guarantee, you only get that when you die.
Typically on the variable annuity statement, there’s the cash value and the account value. Most people when they see it think, “Gosh, the account value must be the cash value,” and they just assume that their account’s growing like crazy. No. If you wanted to cash out the policy, you wouldn’t get the account value.
Furthermore, when you get ready to take income, the insurance company will do funny math to figure out how much that large, fake “account value” number gets divided by whatever number they decide to use to calculate your dividends for the rest of your life. It’s fancy numbers and fancy mathematics, and those returns you have been sold as 5 to 7% guaranteed are not.
Many income annuities use fuzzy math and come with high fees. You’re paying an insurance company to get your own money back at a low rate of return, and the insurance actuaries hope you die sooner rather than later.
Only a true fiduciary will spell out exactly how things work in your retirement plan and will recommend only what’s in your best interest from among hundreds of options.
6. You Don’t Know That There Are 654 Ways You Can Take Social Security
Social Security is an important part of your retirement plan. Brokers and bankers don’t know anything about Social Security because they are licensed as salespeople earning commission selling whatever their brokerage or bank has to sell.
Only a retirement fiduciary will have the tools in their software arsenal to help you optimize and find the best way to file for Social Security benefits.
A fiduciary firm, like Decker Retirement Planning, will help you make sure you don’t leave thousands of dollars on the table by filing incorrectly. We will help you take into account your marital status, your health, your anticipated retirement date, your pension or real estate income streams, and all of your assets as well as projected income taxes.
7. You Haven’t Looked Into Taxation Or Roth Conversions
What a lot of people forget—and bankers and brokers don’t tell you, because they really don’t do retirement or tax planning, they do pie charts—is that income taxes can take a big chunk out of your retirement nest egg.
Required Minimum Distributions (RMDs) mandated by the IRS kick in at age 70.5, and these can throw you into a higher tax bracket if you don’t plan carefully. In case you don’t know, Social Security benefits are taxable, so all your sources of income must be calculated and considered as part of your complete retirement plan.
It is extremely beneficial to look at your taxable accounts like 401(k)s and traditional IRAs and to run various scenarios to see if you might benefit, tax-wise, by converting them in increments into tax-free accounts like Roth IRAs. For most Americans, Roth conversions are the largest tax-saving strategy you can do in your lifetime, often leading to hundreds of thousands of dollars’ worth of tax savings.
A fiduciary firm, like Decker Retirement Planning, does a complete retirement distribution plan including income tax mitigation, and we do the plan before you retire, running it up to age 100. We often find that Roth conversions can help our pre-retirees and retirees come out ahead. It’s all about doing the math and developing a custom retirement plan just for you.
8. You’re Not Using A Two-Sided Model For Investments That Remain At Risk In The Stock Market
A two-sided investment strategy is designed to make money in both up and down markets, an approach that’s critical in retirement. Most people don’t have access to the two-sided model or know that this even exists! As stated before, the big elephant-in-the-room problem is that most people are still using a broker or banker who has them in the pie chart “buy-and-hold” strategy, which is a one-sided strategy that makes money in the up years and loses money when the stock market is down.
The highest-earning money managers are actually quantitative, computer-driven trend-following algorithms. They are essentially computer programs designed to make money in both up and down markets, reading market trends and taking proactive action to protect your portfolio.
Retirement planning fiduciaries at Decker Retirement Planning have access to nearly any strategy out there. There’s no specific product that we sell and no one telling us what to do. We look at the largest databases of money managers and mutual funds—we’re talking the Wilshire database, the Morningstar database, and a couple of the smaller ones—and we look for the money managers who, net of fees, are the most successful.
NOTE: Keep in mind that this is after we plan for your income for the first 20+ years of your retirement from principal-protected sources available from banks, the government, and insurance companies which offer guarantees. Most clients have only about 15 to 25% of their asset base (or less) at risk in the market with our retirement plans.
9. You Haven’t Discussed Spousal Risk
Although death may be a difficult topic, if your retirement plan hasn’t addressed the potential loss of a spouse from each spouse’s point of view, then it needs an overhaul.
You can’t know what the future holds, but you can prepare for whatever may happen, be it a death with resultant loss of income from Social Security and/or other sources or a health issue requiring the need for long-term care, which can bankrupt the healthy spouse if there is not a plan in place.
10. You Don’t Have An Estate Plan
Adequately addressing spousal risk, as discussed above, includes having up-to-date, legal estate documents. These documents include your wills, trusts, healthcare directives, powers of attorney, and more. These plans need to be discussed with children too—especially if blended families are involved. If one (or both of you) have kids from a separate marriage, what’s the risk that your kids could be written out of the estate if you predecease?
We have been down this road many times, and we have seen how not having a proper estate plan in place can destroy relationships as the family fights over assets. Money can change people.
As a fiduciary retirement planning firm, we work with estate planning attorneys to address financial and emotional issues to help ensure your family’s needs, desires, and wants are met. We’ve seen boilerplate estate planning language backfire for people, and we will help you avoid those scenarios.
What You Should Expect From A Retirement Plan
It’s surprising to us how many people don’t know the right questions to ask and are currently painting themselves into a corner with a pie chart from their broker or banker. We make it our business to show clients a safer approach to retirement. We believe it is worth the lifetime you spent working and saving to come in and get clarity without the conflicts of interest that a banker or broker—a salesperson obligated to their employer or home office—has.
Decker Retirement Planning, Inc. is a true fiduciary—an independent registered investment advisory firm (RIA) working only under the Series 65 license. We are required to recommend only what is in your best interest. We have offices in Kirkland, Washington; Seattle, Washington; Renton, Washington; Salt Lake City, Utah; and San Francisco, California.
The first meeting we have with you is very important. During this meeting, we will get to know you and start to understand your goals, desires, and experiences as well as what your concerns are. We will take a look at where you are at and help you come up with solutions.
There are no upfront costs for any of this. You don’t sign anything. Our philosophy is, why would you pay for something that hasn’t been created yet and that you don’t know you want to move forward with either? That’s why we go through the entire planning process, and if you want to walk away at any point, feel free. There’s no obligation.
Call us at 855-425-4566.
