What questions to ask your financial advisor about retirement planning
Are you ready to retire? Are you on the right path?
A lot of folks are approaching retirement or may have been forced into early retirement with more questions than answers.
Have you tried this yet? Go to any internet search engine and type in “how to create a financial plan”. I tried this on Google and received 1.7 billion results in 0.69 seconds. Great, now what? The experience was like having someone dump a 10,000-piece puzzle out on the table with no picture of what the completed puzzle should look like.
Retirement Planning System
What a mess. Naturally, we would start asking questions. However, many times the answer to one question creates more questions. This can lead to frustration, agitation, anxiety, and the desire for a retirement “easy button” to solve all the issues without having to spend a lot of time, money, or effort.
I created this list to pull back the curtain on many issues surrounding retirement. While this list is not meant to be all-inclusive, my hope is it will help you wrap your arms around financial planning and help you start getting your ducks in a row.
Let’s begin!
1. What investment strategy should I be using to withstand stock market volatility?
Pardon the industry jargon. Let’s break this down a bit more.
Stock Market Volatility
The term “stock market volatility” refers to how rapidly the markets move up or down. Historically speaking, if the markets are “doing well,” volatility is low, and the markets are moving positively most days. This is sometimes called a “bull market.” You may have a few negative days in the mix, but not a bunch of negative days in a row.
The down days are not huge, 1-3% and the up days are not huge either, 1-3%. When volatility is high, that means the markets are swinging more wildly, having 3-5% days or even greater in EITHER direction.
Another way to put it, low volatility is a simmering pot and your noodles are cooking nicely; high volatility is a rolling boil spilling over the pot and all over your stove!
History of the Stock Market
Now, why is this important? We have all been told “the stock market performs over long periods of time at 8-10% per year on average, depending on what resource you are looking at. This historical measurement is over the ENTIRE history of the market which is over 100+ years. So, who cares if the markets are volatile sometimes? I’m certain your investment timeframe is less than 100 years, so the “history of the market” has little meaning.
What really matters is how the markets behave during YOUR investment timeframe. If it evens out over a relatively short term like 25-30 years, why should you care? The answer is simple: You shouldn’t! unless of course you plan to withdraw your money in the next 5-10 years, and here is why:
High Volatility and Large Swings
When we experience periods of high volatility (large swings) and you try to take money out to live on, you could be selling low which can greatly reduce how long your nest egg will last. This problem is known as “sequence of returns risk” and “reverse dollar cost averaging.”
What that means is if you get poor returns at the wrong time such as when you are trying to take money out early in retirement, it can have DRASTIC results on your long-term outcome.
Dow Jones Industrial Average
The other challenge we face is with the “historic 8-10% return of the markets” statistic. In 1966, the Dow Jones Industrial Average hit 1,000 points; an all-time high. In 1982, the Dow Jones was at 1,000 points. 16 years of up and down, good years and bad years but essentially no growth. In 2000, the markets hit a peak but after the tech bubble popped and the ’08 financial crisis; fast forward to 2013 and we are at the same level as the year 2000. 13 years the market returned 0%.
Now I know what many of you are thinking, “Jason, I made money in my 401k or other accounts during that period of time, so why does this matter to me?” The reason is simply that if you were working during that period of time, and putting money in, you were BUYING when the markets were low.
If you were retired during this time, you would be SELLING when the markets were low. This is why having a strategy to control volatility is important if you are within 10 years of your desired retirement date or already in retirement.
ETPs and ETFs
There are several methods to lower volatility. You can actively trade ETPs (exchange-traded products) that combat volatility or use minimum volatility ETFs (Exchange Traded Funds) such as iShares® Smart Beta series.
This may result in lower returns in certain environments, but many studies have shown that an investment account with a high rate of return with high volatility while withdrawing funds will give you a poorer result than an account with a lower return and lower volatility.
2. What is the best way to withdraw from my investments in retirement?
Here we go again! Ok Google, “what is the best way to withdraw money in retirement?”. 151 million answers, some of them ads for financial firms, a few calculators that do not ask for enough data to give a meaningful output, and half-ass articles that do more harm than good.
Forbes says: “Take money from non-qualified (non-retirement) accounts first, then start withdrawing from tax-deferred accounts, such as your variable or fixed annuities or retirement plans such as a traditional IRA or 401(k), where your gains incur tax as ordinary income.
The Next Step
Finally, withdraw from tax-free accounts such as Roth IRAs and Roth 401(k)s.” 1 WRONG!! This answer is NOT the best for EVERYONE! It is a broad generalization that leaves a TON of considerations on the table. Blindly following this advice without performing an analysis could leave over $100,000 or more on the table. They don’t even talk about Social Security! Ridiculous!
The answer to this question is actually quite simple: It depends! Every person is unique and therefore there is no straight answer that applies to all. While there are some general “rule of thumb” guidelines that exist, those anecdotal examples and generalities are often OK, but not the BEST for you. To find the answer that applies to your specific situation requires more than a calculator or some spreadsheets.
Social Security and Tax Laws
Tax laws are very complex, Social Security is it’s own animal. It’s part art, part science to produce the best outcome over time. If a calculator or software program existed that could answer this question, financial planners would cease to exist. The reality is the human element is required to achieve the best results, and that person must possess the skills and expertise to not only identify the most efficient path but also monitor, maintain, and adjust the withdrawal strategy over time.
3. How do I minimize taxes leading up to and in retirement?
Most individuals have accumulated the bulk of their wealth in pretax accounts like IRAs, 401(k)s, 403(b)s, and so forth. Great skill and understanding of the tax laws are required to reduce the amount of taxes paid over time, resulting in more of your hard-earned dollars being spendable rather than shipped off to the US Treasury Department.
Big Refund Little Taxes
CPAs (Certified Public Accountants) are facing tremendous pressure from clients to “get as big a refund as possible and pay as little tax as possible TODAY”. This creates an inherent problem because paying a dollar less in taxes today could result in hundreds of dollars in extra tax later.
Does that mean you shouldn’t do pre-tax savings like IRAs and 401(k)s? Of course not, each situation is different.
The key here is to understand the 4 money types and utilize all 4 (if allowed per IRS rules) to maximize your situation. The 4 types are pre-tax deductible, pre-tax non-deductible, post-tax (non-qualified), and post-tax tax-free (ROTH). Using the 4 money types lay out a strategy that gives you the most tax benefit and flexibility.
4. How do I create a sustainable income for my lifetime?
If you ask this question and are pitched a financial product, RUN! Products are not the answer, planning is.
Cash flow
It’s all about cash flow: the movement of money from one place to the next. When we are working, we have cash flowing into our household in the form of wages. Some of that money gets spent (cash flow out), and some of it gets saved.
When we retire, our wages typically go down or shut off completely. At retirement we are left with the obstacle of replacing that incoming cash flow from the sources we have available; Social Security, pension (if you are lucky), savings, investments, and/or part-time work.
Misnomers with Online Calculators
Online calculators can be very misleading and only give you a snapshot based on the assumptions you make when inputting data. These calculators do not automatically run multiple scenarios to determine the best course of action, you are left on your own to figure that part out assuming you have a deep understanding of the 70,000 pages of IRS tax code, and assuming the calculator is even capable of letting you “tweak” things.
The best place to start is determining what amount of spendable dollars are needed and wanted. Then you start working backwards to determine the best way to generate those dollars from all the sources you have available, without ignoring taxes.
5. Do I really need a financial plan? Do I have enough money to need one?
Everyone can benefit from some form of financial planning, even if you don’t think you have a lot of money or have no money at all! For some folks, general guidance is all they need, others require more sophisticated work to be done. That is one reason my team offers multiple levels of financial planning, from pro-bono (free) to very sophisticated (not free). Not every office is like that, some only do the free stuff, and some only do the very sophisticated stuff.
Financial Planners
When considering hiring a financial planner, ask about their specialty and level of financial planning expertise. Today the buzzword is “fiduciary”.
While I do believe being a fiduciary is REALLY important, by no means does being a fiduciary make you a good financial planner. That takes years of training, studying, continuing education, and experience. I’m sure there are a few DIY (do it yourself) folks reading this that think they know what they are doing and don’t need a professional.
I adamantly challenge that notion. The CERTIFIED FINANCIAL PLANNER™ certification requires a significant investment of time and application of knowledge to obtain. According to the CERTIFIED FINANCIAL PLANNER™ practitioner website, prior to sitting for the 8-hour exam you must complete the education requirements—.
CFP Board Registered
There are two main parts to the education requirement: completion of CFP Board-approved coursework, and a bachelor’s degree in any discipline from an accredited college or university. As part of earning your CFP® certification, you’ll need to complete college or university-level coursework through a CFP Board Registered Program. You’ll become well-versed in these major personal financial planning areas: Professional Conduct and Regulation, General Principles of Financial Planning, Education Planning, Risk Management, and Insurance Planning, Investment Planning, Tax Planning, Retirement Savings, and Income Planning, Estate Planning, Financial Plan Development (Capstone Course).
The stack of books for the education is almost 2 feet tall, and the pass rate for the exam is not very high. I’m not saying this to brag or show off, I’m sharing this because I hope you understand that there is way more to financial planning than most individuals can possibly know if they don’t do it for a living. In fact, many “financial professionals” don’t know a lot of this stuff.
Still have retirement and financial planning questions?
These 5 top questions were taken from my ebook, 15 Answers to the most critical pre-retirement questions. To learn the remaining 10 questions and answers, click the button below to download the full 15 Answers to the most critical pre-retirement questions ebook or schedule a call with Silvertree to answer any of your financial planning questions today.