DIY Retirement

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 and what they will need, commonly known as the “retirement gap.” The survey found that only 47 percent of DIY investors were comfortable with handling their own 401ks, IRAs or other outside retirement accounts.

A good financial advisor can provide counsel to reduce the “reality gap,”
• the difference between retirement expectations and savings
• the gap in investing knowledge/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 strategy and 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 reality gap begins.

Avoiding Knowledge Gaps

There are many different investment alternatives that DIY investors are unaware of or don’t use to their full advantage. This is the “knowledge/understanding gap,” a void that can be filled by a knowledgeable advisor because this lack of understanding can result in sub-par investment results or unintentional risks. 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.

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 investment managers have considerable experience in doing. Have DIY investors determined how unexpected events can impact their portfolios?

  • What about the impact of nursing home costs that on average run $92,000 per year?
  • How will multiple bear markets impact their portfolios and the ability to fund a retirement over multiple decades?
    How has inflation been factored in to their 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? Is the allocation too risk adverse, which will not be able to generate the returns necessary? As most professionals know, 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.

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Korving & Company, Investment Management, Suffolk, VA

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