It’s time for people who pay for financial advice to raise their expectations.
I have little doubt that, at least starting out, most investors appreciate putting a priority on growth. Everybody wants to make money.
But there’s so much more that matters when it comes to managing someone’s assets, and too often it seems folks get too little advice or they get it too late to make good use of it.
We’re no longer living in a suitability world, where salespeople can simply push products. Clients need help negotiating a complicated financial landscape, and financial professionals should be acting as stewards and educators.
No matter how much you have in your portfolio; no matter how aggressively or conservatively you’re investing it; and no matter where, when or how long you see yourself living in retirement, here are five topics your adviser should be covering when you talk about your money.
When advisers finally flip their focus from accumulation to preservation, they spend a lot of time talking about risk — mostly with an eye toward market volatility. But inflation is also a risk in retirement, and it can eat up an unprotected portfolio. Because inflation hasn’t been that high (2.5% or lower) since 2000, investors tend to underestimate the impact it has over the long haul.
But you shouldn’t assume it’s going to stay this way forever. And even at this low rate, we’re seeing some effects. If you’ve been to the grocery store lately, you may have noticed your hot dog buns are the same price … but they’re smaller. Same with your bag of chips and your tub of ice cream. (All of which might be better for your bottom, but not your bottom line.)
In retirement, when you’re paying yourself, retaining your purchasing power is critical. Your Social Security benefits come with a cost of living adjustment, but other income streams may not — so you’ll have to build in your own protections.
2. Sequence of returns risk.
This is a tricky one. Many clients who come to us have been working with another adviser for years, but they say they’ve never heard the term “sequence of returns risk.” Maybe that’s because it isn’t a factor during your accumulation years. But if the market just happens to go into a tailspin in the first five years of your retirement — so that you’re losing money in your investments at the same time you’re taking distributions from them ¬— it can devastate your nest egg. And you might not be able to recover those losses.
It’s all about good or bad timing, and you have no control over that. But you do have control over your plan, and you can manage your risk and move toward other financial vehicles that can provide a more stable income stream and less volatile returns.
3. The 4% rule.
Times have changed, and if you (or your adviser) haven’t updated your conversation about the 4% withdrawal rate guideline, you should. This outdated rule of thumb says retirees should make it through retirement without running out of money if they withdraw 4% annually from the funds they have available. While many still stick to the equation, and defend it, there’s some debate as to whether it can hold up in modern times, with market volatility and longer lifespans. Many believe the starting point should be lower — more like 3% or maybe 3.5%. Or you can use other products and strategies to boost your income stream so you can take some pressure off investments that are at risk.
4. Tax planning.
Of course, you and your financial adviser should be discussing your taxes every year to be sure you aren’t missing any opportunities to save any money. But your retirement plan has to cover this year and all your future years — even after you die if you have loved ones you want to take care of.
To start with, you’re going to have to deal with all that tax-deferred money in your 401(k) or IRA, and plan for required minimum distributions. And you may not want to bank on being in a lower tax bracket in retirement. You may have to draw enough income to pay for the lifestyle you want — travel, hobbies, etc. At the same time, you’re likely going to lose a lot of the deductions you count on now — your mortgage interest if you pay off your house, your dependents when they grow up and move out, your business if you close up shop.
It’s crucial that you include tax-efficient strategies in your retirement plan — and that means working with your adviser, your tax professional and maybe your attorney, together, so that everyone has a complete picture of what strategies will work best for you.
5. Health care costs.
A lot of people first become aware of the high cost of health care and long-term care when their parents or grandparents grow old. The question is, are you planning for your own expenses? More important, is your adviser planning for them?
There seems to be a lot of optimism out there when it comes to illness or injury in old age. But besides the usual eye, dental and other health issues, many people will require some kind of specialized long-term care in retirement — whether it’s going to rehab after a joint replacement or moving to a nursing home. And few are probably prepared for the expense.
These days, there are several options to consider, including different types of life insurance policies and annuity contracts. And the younger you are when you look into them, the more alternatives you may have.
I know it’s tempting to put off these conversations until retirement is top of mind — maybe when you’re in your mid- to late 50s, or even your 60s. Don’t. If you delay, and if your adviser doesn’t broach these topics with you, you may be playing catch-up when you should be preparing for the retirement you’ve been waiting for.
If you’re in your 40s or early 50s, think about scheduling a meeting to discuss making these potential retirement impediments a priority. You can start by asking, “Other than just growing my money, which I obviously want to do, what would it look like if I retired at 65?”
Once you’re satisfied your plan is on course — and let me emphasize here the importance of a comprehensive retirement plan — you’ll know that every choice you make is working toward that end goal.
Kim Franke-Folstad contributed to this report.
Michael Martin is the co-founder of South Florida-based Legacy Financial Partners, where he is the director of investments and insurance. He is a fiduciary and holds his Series 7 and Series 66 securities licenses. He also maintains life, health and variable annuity licenses in Florida, West Virginia, North Carolina and Illinois.
Securities and advisory services are offered through, Madison Avenue Securities, LLC ("MAS") Member FINRA/SIPC and a Registered Investment Adviser. MAS and Legacy Financial Partners are not affiliated entities.
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