Ten key ingredients you should demand from your retirement plan and advisor
By Christopher P. Hill, RFC
Wealth and Income Group LLC and FuneralResources.com
If a client is working on their retirement plan, it is very likely they have not only personal goals and dreams, but also a minimum level of expectations from their financial planner. Heck, the truth is, a client shouldn’t have just a minimum level of expectations, they should have specific things from a retirement plan that they demand.
With life expectancies greater than ever, retirement could likely be the longest phase of their life. Therefore, it is absolutely imperative that you have a plan in place allowing you to not only spend and enjoy your retirement years, but also make sure you don’t make the mistake of living too long.
If you have any doubt that retirement planning needs to be an essential part of a financial planner’s practice going forward, take a look at these statistics:
- Nearly 80 million baby boomers are approaching or entering retirement
- By the year 2020, these baby boomers will control approximately two-thirds of the financial assets in the U.S.
- Seventy-five percent of investors switch or add investment professionals within 15 years of retirement because they doubt the professional who got them to retirement knows how to get them through retirement*
- Sixty-eight percent of investors surveyed between ages 55 and 70 consolidated their assets as a result of completing a retirement income plan; an additional 19 percent said they would like to consolidate**
Retirement planning is an extremely sophisticated process, and I strongly encourage retirees not to attempt this on their own. In addition to the risk of outliving your assets, you’ve got other money predators to stay away from such as taxes, inflation, stock market and interest rate volatility, health care, Social Security and much more.
So the point of this article is to review the 10 key ingredients to a successful retirement plan that every planner should focus on, and every client should demand:
1. Growth potential
It’s safe to say you want your money to grow. However, the real reason why you should want your assets to grow is not to become enormously wealthy, but to ensure that you can keep pace with things like inflation, taxes, planned obsolescence, technology changes, rising health care costs, long term care, etc. Just about every retiree I work with tells me they do not want to spend their principal, but would rather live off the income generated from their principal. Therefore, if you want your income to keep pace with inflation, then you should demand a well-diversified and well-balanced portfolio to allow you to keep pace with your changing lifestyle over the long term.
2. Safety provisions
The two biggest financial fears most investors and retirees have are losing money and running out of money. These fears are not only understandable, but also the most critical. I always tell my clients that 90 percent of my job is avoiding large losses.
If you are taking income from your retirement assets and suffer significant losses in your portfolio, it can be extremely devastating — and also dramatically increase the probabilities of running out of money. Therefore, every client should demand a retirement plan that contains clear strategies to properly insulate you against suffering large investment losses and outliving your income.
3. Tax efficiencies
Everyone’s least favorite uncle is a man named “Uncle Sam”. I have yet to meet someone who truly enjoys paying taxes — whether an ordinary income tax, capital gains tax, or tax on dividends and/or interest.
John D. Rockefeller once said, “The fastest way to accumulate wealth is to make sure you never pay tax on income you don’t use.”
That may be one of the most brilliant statements I’ve heard aside from Einstein’s theory on compound numbers. Therefore, a successful retirement plan should entail two pieces. First, your money should grow with as little (or no) tax consequences as possible. Second, your income should be received in the most tax-efficient way that is legally possible.
While we can’t beat the unbeatable opponent (the IRS), our job as financial professionals is to work as master technicians in helping our clients avoid unnecessary taxation.
4. Income we cannot outlive
With the explosion of baby boomers and the improvements in modern medicine, today’s life expectancies are greater than ever. When Social Security was first enacted in 1931, the average life expectancy for a male was approximately 59 years old, and yet Social Security didn’t start paying benefits until age 62. Today the average male’s average life expectancy is approximately 85 years old — so you can see why we are having such a tremendous battle with Social Security benefits.
Many studies show that by the year 2030, more than two-thirds of the living Americans will be above the age of 60. The message here is that retirement plans today should demand an outlook consisting of at least a minimum of 30 years. 5. Income growth potential
In order for your income to grow, your assets must grow at a rate that exceeds your withdrawal rate. This means, as much as some of you don’t want to hear this, investing a portion of your monies in the stock market plays a vital role in your retirement plan.
Many of you may think you can accomplish adequate retirement income by simply investing in bonds and CDs, but that is usually not the answer. For example, if you consider investing in bonds or CDs and you factor in inflation and taxes, using these income-producing investments may not accomplish the growth you need over the long haul in order for your income to grow (especially considering that interest rates over the past decade have been historically low).
Therefore, this is where the demand for professional money management plays a key role in a financial planner’s retirement strategy.
6. Maintain control
I mentioned earlier that a successful retirement plan should virtually guarantee that you not only have the income you need, but also that you never run out. In the old days, this could only be accomplished through an annuity. The huge downsides to these “old school” annuities were that you would give up the two most important things — control and access to your money.
In other words, an annuity would pay you a fixed income for life, but you would no longer have access or control to these monies. Not an option.
In a retirement plan, you should demand that you maintain total control over your assets, both during accumulation as well as distribution, so that you can choose how and where to invest or spend these hard-earned monies.
7. Maintain access
Similar to the previous demand for control, you also should demand that you have access to your monies in the event that you need them. Although every retirement plan should include setting some monies aside for unexpected events or emergencies, sometimes life brings about severe changes that no retirement plan is prepared for. Because there are so many moving parts in our retirement lives such as our health, interest rates, taxes, inflation, health care costs, long term care needs, etc., you need to be certain your money is not locked up in the event you might need to access it.
8. Full transfer to beneficiaries
Another common theme I hear from my retired clients is the importance of leaving a legacy. At a bare minimum, every retirement plan should demand that there is a plan in place to ensure that whatever money you don’t spend will efficiently pass on to your children, family, loved ones or charities. 9. Professional supervision
Retirement should be one big vacation, where you get to enjoy all of the things you love such as traveling, dining out, buying nice things, gifting or spending money with our families, donating, etc. The very last thing you should be focusing on in retirement is worrying over your money and your financial plan. In every important aspect of our lives, there are professionals out there who are passionate about taking care of you. Therefore, you should demand to enjoy your retirement, and leave the worries about your finances to the professionals.
One thing I have learned from my clients is that when you retire, the last thing you want to do is receive multiple statements from many different companies. A retirement plan should adopt Warren Buffet’s philosophy, "Put all your eggs in one basket. But first, make sure you know everything about that basket. Then, make sure someone is watching over it very closely.”
Having a consolidated financial life in retirement can not only lead to less stress and worries, but also greater success.
In summary, here is my strong recommendation: Use these 10 key ingredients as a challenge to put your current financial professional to the test. It is exactly what my clients demand from my retirement plans, and the truth is, they should not consider working with me if I cannot provide this for them. I think you’ll agree that these bequests are not only essential, but they really aren’t asking too much.
The Register, RFC® Copyright 2008