Are You Doing Your Financial Planning in a Vacuum?

Sir Edmund Hillary was the first to summit Mount Everest in 1953, but he didn’t do it alone. Sherpa Tenzing Norgay was his partner in the climb. Climbers today continue to attempt the grueling trek, and most take experienced guides.

Far too many people today are attempting a solo climb of another kind — the preparation for retirement — while relying mainly on do-it-yourself advice from well-meaning friends, neighbors or co-workers. While such advice may work in some situations, blanket recommendations are rarely one-size-fits-all.

Without a trained guide, they may be relying on luck and word of mouth to make some of the most important decisions in their financial future. Those who plan in a vacuum may not take into account all the necessary considerations. Each person or family brings a different set of circumstances and assets to the table.

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I frequently get questions such as “I just sold a house for $350K — how would you invest it?” or “When should I start taking my Social Security check?” or “I can’t stand market risk, but I want to grow my money. How can I do that?”

The answers to these and many other financial questions are specific to the individual and must take into consideration a wide range of factors, including the person’s age; their health; the types and amounts of assets they own; their debt; their income needs; and more. Even then, there is no one answer or solution that works the same for every person across the board. Be wary of those who suggest otherwise. And be cautious of those offering “always” or “never” answers or advice.

Assessing Social Security

Some examples of such all-or-nothing pronouncements I have encountered include: “You should always take your Social Security early because if you die the government gets it.” Or “You have to live 10 to 13 years before you break even.” Those who share this advice may confidently claim they have done the math and that you, too, should do it this way. In some cases, these friends and acquaintances have so much credibility in other areas that it’s tempting to take them at their word.

But casual advice also may be based on personal biases. For example, they hate a particular type of investment and so tell others never to use that investment. That is like saying, “I bought a car that was a lemon, so you should never buy a car. They are costly, no good and worthless!” Really? Are we that narrow-minded? Yet, we hear, read and take in this type of information all the time regarding our finances.

Such directives fail to look at the whole picture. A good adviser should never give advice in a vacuum. When it comes to when to draw Social Security, for example, questions should include:

• Where is the majority of your income coming from?
• Will that income change if one spouse dies, and by how much?
• Are you still working, and are you under the full retirement age?
• Would waiting to allow Social Security to increase help the remaining spouse if one of you dies? (The remaining spouse does not get both Social Security incomes.)
• What other pensions or assets do you have to produce income?

The answer also depends on whether the person is relying on Social Security or other saved assets as their main source of income. If the person has other assets and pensions beyond Social Security, they may want to explore taking Social Security early. If Social Security is the person’s main source of income, however, then that is a whole different planning process. You may not have the ability to earn wages at age 80, 90 or 95. The problem is not dying, because the bills stop when you die. The problem is living — and having enough income to last throughout one’s retirement years.

Understanding annuities

Another all-or-nothing pronouncement I often hear is, “You should never purchase annuities because they all have high fees.” When I hear that “never” statement, I ask: “What is the purpose of annuities? If you put 50 different annuities on the table, what are they designed to do if you could boil it down to one word?” I get a variety of responses, but I find that most often people don't know what annuities are designed to do on a high level.

My answer is always one word: payout. Annuities are insurance contracts designed for retirement or other long-term needs. They provide guarantees of principal and credited interest, subject to surrender charges. Annuity guarantees and protections are backed by the financial strength and claims-paying ability of the issuing insurer. Annuities are not a deposit. So, what does that really mean? It means they are designed to provide income — in many instances for both the purchaser and their spouse for the rest of their lives. Teachers unions use them, government workers receive them, fire and police departments provide them for a lifetime payout to their retirees. Even state lotteries give winners two choices: lump sum or lifetime annuity.

Some annuities have no fees, and some have fewer fees than others. It’s also important to note that there are many types of annuities, including immediate annuities, fixed annuities, fixed index annuities and variable annuities. Each provides a payout, and each one has different benefits and payouts depending on a person’s needs.

For example, for those who can’t qualify for long-term care insurance through a traditional policy, an annuity may offer a contract rider (at an additional cost) to provide a monthly payout to assist with health care costs. That is why I tell people to be open to the tools and willing to learn so that your choices aren’t made in a vacuum. Too often we hear messages such as “Why I hate annuities and you should, too,” but those messages are one-sided. For long-term needs, annuities can provide a guaranteed payout, which is backed by the financial strength and claims-paying ability of the issuing insurance company.

The adviser’s role

As an adviser, my job is to make sure clients know about their options and the various tools they can choose from to help deal with issues and plan in those needed areas. I often tell people I’m agnostic to the particular tool that is used. Depending on the person’s situation, that may mean using stocks, bonds, mutual funds, ETFs, REITs, dividend portfolios, fixed or index annuities, life insurance, long-term care strategies, cash, money market accounts or required minimum distributions from IRAs, for example.

As an adviser, I want all of this in a written plan that shows clients several scenarios. A written plan that shows how each tool will work if both spouses are living and one needs long-term care. A written plan addressing what happens if one spouse passes and leaves the other spouse with the financial job. A written plan for the surviving spouse should they need long-term care. A written plan to pass assets down efficiently to their heirs. This is why it’s so important to never plan in a vacuum.

A good adviser can show different ways to potentially serve a particular need. No one pair of shoes fits everyone’s feet the same way or is worn for all purposes. The shoes I wear to church aren’t the same pair of shoes I would wear to go hunting or fishing. In the same way, each financial tool serves a purpose, and they don’t all fit each person’s need the same way.

When choosing the sherpa who will help you with your retirement climb, here are a few things to consider:

• Stay open-minded and learn about all of your options; don’t be closed-minded about any tool in a potential plan. Situations change, and those changes may require using a different financial tool than before.
• Don’t think, voice an opinion or act in a vacuum. Exploring how to make one’s entire estate efficient regarding a distribution plan is always a better choice.
• Choose an adviser who isn’t planning in a vacuum. If they say, “Everyone should take Social Security at age 70,” that’s planning in a vacuum. If they say they never use annuities or life or long-term care insurance policies to solve issues, then they are planning in a vacuum. If they only use a certain financial vehicle to solve issues, they are planning in a vacuum.
• Find a licensed fiduciary investment adviser representative willing to explore and use all the financial tools possible to help you stay in control of your income needs as life brings changes.

Norgay was an expert on Mount Everest and knew the weather patterns and the terrain. Hillary wanted to make sure he had all the help he could get to climb to the summit. He was smart enough to hire a person to help him navigate what he did not know. Consider doing the same when it comes to your financial climb.

Investment advisory services offered through AE Wealth Management LLC (AEWM). AEWM and Strategic Estate Planning Services Inc. are not affiliated entities.

Neither the firm nor its agents or representatives may give tax or legal advice. This article was written for informational and entertainment purposes and should not be construed as advice designed to meet the particular needs of an individual’s situation. The topics discussed may not be appropriate for all individuals and cannot guarantee specific results. “Advisor of the Year” is an annual award given by Senior Market Advisor magazine. Nominees must meet certain criteria relative to experience, sales volume, background check and community involvement. The winner is chosen by editors of Senior Market Advisor who are not clients of Mark Pruitt or Strategic Estate Planning Services. The award is not representative of any one client’s experience and is not indicative of future performance. Investing involves risk, including the potential loss of principal. 190288