Category: Retirement

Where do you get advice on your 401(k)?

In the corporate world, the “defined benefit” pension plan is dying.  This is the old pension plan that promised you a specific dollar amount each month for as long as you lived.  Even in local and state government, the cost of pension obligations has exploded to the extent that retiree benefits are threatening the solvency of cities and states across the nation.  “Defined contribution” plans like 401(k)s, 403(b)s and TSPs have already begun to be incorporated there, and it probably won’t be long until they are the only retirement plan option offered by municipalities.

401(k) plans often represent the biggest financial asset that an individual has.  Yet, often very little guidance is given to workers who make contributions to these plans.  Most employees simply get a list of mutual funds that are available in the plan and are asked to select one or more of these funds.   Further, due to liability concerns, corporate benefits departments are not equipped or allowed to advise employees on an appropriate mix of investments.

However, these employees do have a source of information and advice available to them.  RIAs (Registered Investment Advisors) can provide investment guidance on retirement plans.  If you or someone you know would like advice on how to invest the money in your 401(k), 403(b), TSP or other retirement plan, simply click on this link and send us a message.  We’ll get back to you within one business day.

Role of the Advisor during the investor’s life journey

If we view retirement planning as part of a three stage cycle it helps define the role of the financial advisor at each stage of life.
The pre-retirement stage is one where wealth accumulation is the primary focus.  At this point the primary responsibility of the advisor is to

  • Build portfolios
  • Grow investments
  • Discuss retirement and education (college) goals.

As we get to the point of actually retiring the role of the advisor changes:

  • Know the retirement date
  • Develop income plan
  • Refine estate plan

After you retire the advisor is responsible for:

  • Manage income plan
  • Facilitate legacy plans
  • Develop ties with heirs

Things a Financial Plan Should Tell You – and Things It Won’t

A financial plan is like a road map.   A map will tell you where you are, where you want to go, and the route to take to get to your destination.  But the map is not the territory and sometimes the roads on the map are potholed or washed out, so alternate routes are required.  And sometimes you can’t get there at all.

So what should a financial plan tell you?

1.  What is my net worth?  A plan that doesn’t tell you where you are is no plan at all.  It’s the starting point where all plans begin.

2. What is my goal?  If you don’t know where you’re going, any road will take you.  Goals are usually described as the income it will take to provide you with the lifestyle you desire.

3. How much money will I need to retire?  Keep in mind that there are a lot of assumptions built into this number such as your other income sources, your estimated spending during retirement, the withdrawal rate that will not deplete your money during your lifetime,  the rate of return you can expect on your money during retirement, and many others.

4. What rate of return will I need to meet my retirement asset goal?  As you put money aside for retirement there are two components that influence how much you will retire with: the amount you put aside and the growth of those assets.   You have more control over the amount you save than the rate of growth you can expect.   That is one reason risk control is vital.  You don’t want investment decisions to negatively affect your savings rate.

5. What is a safe withdrawal rate?  There are academic studies that use historical data that provides some guidance.  But the rate your money grows at the beginning of your retirement has a disproportionate effect on on the amount of money in your retirement account.

6.  What is the probability that I will run out of money during retirement?     Some plans use Monte Carlo simulation to give you a probability of your running out of money, but beware of assumptions built into these simulations that may give you a false sense of security.

Where do you plan to retire?

I began looking at a list of “worst states to retire in” at Bankrate.com and it struck me then how badly people are misled by books, magazines and internet sites.  They chose the following criteria:

  • High life expectancy
  • Low crime rate
  • Where people are prosperous

Do these make sense as a way of choosing your retirement location?

First, average life expectancy is a statistic that is much more affected by the death rate of young people than old people.  Second, by the time you are ready to retire your lifestyle and heredity has the biggest impact on how long you will live and the average age of the people around has no impact at all.

The crime rate is another flawed statistic.  Detroit and Chicago are some of the most crime ridden cities in the country, but you can find areas in and around these cities that are virtually crime free.   To assign a crime rate to an area the size of a state, and make a retirement decision based on that is nonsense.

The prosperity of people in a state is another spurious reason for moving to an area for retirees.  In fact, there are good reasons for avoiding “prosperous” areas.  They are often associated with astronomical real estate prices, high taxes and high cost of living.  Want to live in Sausalito, Beverly Hills or even the better parts of Manhattan?  Bring big buck and prepare to spend them.

How do people really choose where they want to live in retirement?  The number one reason for choosing a retirement home is proximity to family, usually the children.  The other issues are climate (the reason so many Northerners move to Florida), the cost of living (including taxes) and access to medical care.  An interesting trend is retiring in low-cost parts of Mexico or Central America.

Choosing a retirement community is a big decision and we have seen a number of examples of retirees who changed their minds after moving.  Keep your options open, especially if you are moving to areas that are new to you.  Take time to settle in and decide if this is where you want to spend the rest of your life.

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