The Risks of Do-It-Yourself Retirement Plans
Do-It-Yourself Retirement Planning?
A report recently published by the Federal Reserve Bank on the economic well-being of U.S. households discusses what people have saved for retirement versus what they will actually need, commonly known as the “retirement gap.” The survey found that only 47 percent of DIY investors were comfortable with handling their own 401(k)s, IRAs or other outside retirement accounts.
A good financial planner can provide counsel to reduce the “reality gaps:”
• the difference between retirement expectations and savings
• the gap in investing knowledge and understanding
• the gap in investment behavior
• the gap in planning
Each of these gaps needs to be bridged to achieve a successful retirement, and this often starts with an advisor who carefully lays out a strategy and the steps to execution.
Many investors need to determine what their retirement goal is, and then convert those goals into budget dollars. The goal of “a comfortable retirement” is meaningless unless you can pin a dollar amount to that desire. Once the amount has been determined, filling the other reality gaps begins.
Avoiding Knowledge Gaps
There are many different investment alternatives that DIY investors are typically unaware of or don’t use to their full advantage. This is the “knowledge and understanding gap,” a void that can be filled by a knowledgeable advisor because a lack of understanding and experience can result in unintentional risks and/or sub-par investment results. Investor behavior is another significant gap that must be bridged by DIY investors, and where professional management plays a strong part. Many investors are either too conservative in their investment decisions or too aggressive. From the report:
Historically, individual investors tend to react emotionally to moves in the market. They tend to focus on short-term events over long-term fundamentals. Overreacting to market, economic, or political events results in ill-timed changes to their portfolios.
Avoiding Planning Gap
The “planning gap” may be the most important aspect of forming a financial plan, and something professional financial planners have considerable experience in doing. It’s important to determine how unexpected events – a.k.a. life’s curveballs – can impact a financial plan:
- What about the impact of nursing home costs that on average run $92,000 per year?
- How will multiple bear markets impact your portfolio and the ability to fund a retirement over multiple decades?
- Has inflation been factored in to your retirement budgets?
- What about cognitive decline?
As we all know, seniors are the number one target of scammers. Is their asset allocation more aggressive than necessary to reach their retirement goal, and taking on undue risk? Is the allocation too risk adverse, which will not be able to generate the returns necessary? The ability to discuss multiple investment scenarios, stress-test the portfolios, and factor in “what if” situations is critical for any investor to bridge the gap, and is often best done with an advisor they trust.
Financial planners and wealth managers can find the right solutions for investors to effectively address challenges and bridge the retirement gap. Creating a diversified portfolio at the appropriate risk level is only the beginning. Focusing on the multiple retirement gaps is critical to meeting the various challenges to an enjoyable retirement.