This article is by contributor Jeff Rose, CFP. He blogs at Good Financial Cents.
My role as a financial adviser sometimes feels like a fortune teller. (Get it?)
I’m peering into the crystal ball of your finances while trying to take everything into consideration: how much you’ve saved for retirement, how long you have until retirement, how much debt you hold, and historical trends for your asset allocation.
I’ve had the privilege of sitting down with countless individuals and couples to review their finances. The easy clients have a plan, have worked the plan, and are on track for a healthy retirement. I might need to give a nudge here or there, but in general their future looks good. Those are fun meetings.
Then there are the not-so-great meetings. Some people want me to look into my imaginary crystal ball and find nothing but unicorns and rainbows amid a reality of storm clouds. I hate to be the bearer of bad news, but sometimes that’s reality. Sometimes it’s a case of bad luck, other times it’s due to poor choices, but in many circumstances I end up splashing a dose of reality on people.
Whether retirement is right around the corner or decades away, whenever you sit down with a Certified Financial Planner you want good news. If you get bad news instead, try not to overreact.
Trust me, I understand. You’re worried. You’re stressed. You see your Caribbean vacations and vast wine collection disappearing. But making financial moves based on emotion is always a bad move.
Here are the five things you don’t want to hear from your financial adviser as they peer into the crystal ball:
1. “I see you old, gray, and still working…”
Raise your hand if you want to be told you need to work longer to be able to afford a basic retirement.
Unfortunately, this is reality for many couples on the verge of retirement. If your nest egg has taken a hit due to a sudden market downturn (Hello, 2008!) or simply because you didn’t set aside enough in your retirement during your peak earning years, this can be a sad truth to face.
The last thing you want is to retire now and run out of money when you need it most. Inflation marches on regardless of the size of your nest egg. Healthcare costs in particular continue to go up, and I think we all plan to have more healthcare expenses in the future than we do now.
Your employment income allows you to leave your nest egg alone for another year or two. Delaying retirement by just a few years can boost your nest egg by tens (or hundreds) of thousands of dollars… just by leaving it alone. Plus every year you wait to retire means a slightly larger Social Security check during your retirement years. (Couples can also use the 62/70 strategy to maximize Social Security income while still getting some money early.)
By working just a little bit longer, your employment income can also help you tackle #2…
2. “I see a lot of fat to trim…”
You can avoid having to delay retirement by socking away as much money as possible now. When it comes to retirement saving, you have two choices: enjoy the money now or enjoy it (plus potential growth) in retirement.
Don’t get me wrong, cutting back now isn’t fun. Not at all. And it will look different depending on your circumstances. Trimming the fat might mean not taking a long vacation this year and instead electing to just do a simple weekend away. It might mean not turning your deck into a sun room or eating out just once per month.
The money you are able to cut should be funneled into paying off any debt you have first — you don’t want to carry that into retirement. If you have no debt, you can drop it into your emergency fund or your retirement accounts like 401(k)s or IRAs.
Thankfully, the regulations around retirement accounts make it easy to stash away a large amount of cash each year. Someone age 50 or older that completely maxes out a 401(k) and IRA could set aside $29,500 per year. (That’s $59,000 for couples.) You are allowed to set aside a ton of money for retirement if you get creative with the types of accounts you use.
3. “I see you eating rice and beans…”
Many of the people I talk to both in or near retirement assume that their lifestyle will remain the same once they stop working. Six out of ten workers believe that their standard of living will not change at all when they reach retirement.
Many fail to calculate exactly how much money they will need and for how long they will need it. Saving up $500,000 won’t give you a significant income to live off of for 25 years. We underestimate how long we will live (and require an income) and overestimate how far our money will last.
It can be a tough wake-up call to sit down with a professional to do the math. Realizing that your Social Security, nest egg, pensions, or some combination of the three will not be sufficient to cover your monthly living expenses during retirement is a tough pill to swallow.
If you can’t add to your nest egg significantly, you will have to find ways to cut back — and that makes it paramount to put together a realistic retirement budget so your money doesn’t run out during your golden years. (A common rule of thumb is 4 percent annual withdrawals from your nest egg. That’s a good starting place, but you might discover that 4 percent doesn’t come close to providing the lifestyle you want.)
4. “I see your portfolio is afraid of the dark…”
You’ve saved, scrounged and cut back time and time again, but finally made it to retirement. You don’t want to have to go back into employment so your instincts tell you to keep your portfolio safe and sound.
I’ve talked to too many people that shift their entire retirement portfolio into 100 percent bonds, certificates of deposit, online savings accounts, and/or money market accounts once they hit retirement age. They want to avoid as much risk as possible.
This can be disastrous.
It isn’t a question of whether inflation will erode the value of your retirement nest egg or not. It’s just a matter of when and how big of an impact it will be. If you never give your portfolio an opportunity to grow, it will slowly lose spending power.
If you had $1 million today and held it for 20 years with 3 percent inflation each year, the value of those dollars would erode 45 percent to $553,676. (You would need $1,806,111 in 20 years to equal the buying power of that $1 million today.)
Unless you’ve got millions socked away, you must have a portion of your nest egg in the market — yes, in stock-based investments — to battle inflation, or that money you worked so hard to save for retirement will have far less purchasing power in the years to come.
5. “Wait… I see you working two jobs…”
I really don’t like bringing this up again, but this point is usually the one thing that people don’t want to be told.
You’re so close to retirement you can taste it. You’ve put in decades of work at various employers. You’re on the cusp of finally hanging it up. It’s so tempting to just jump on in to the refreshing waters of retirement.
For whatever reason — a down market setback or simply not saving enough — your dreams of enjoying strawberry daiquiris on your own private island are just that: dreams. Then reality hits, you open your eyes, and you’re staring at the gray walls of your office cubicle wishing you had done something different.
Significant amounts of pain and frustration could have been avoided by being more proactive with your finances earlier in life. Sitting down with a qualified financial planner early in your career can help you navigate the choppy waters of life so you can stay the course to the tropical lagoon of retirement. Sadly, many people put off retirement planning until it is far too late.
A study showed that 43 percent of workers who did an analysis of retirement needs (essentially how much money you will need when you enter retirement to make the money last while enjoying the lifestyle you want) did make changes to their portfolios. The most common adjustment: saving more money. (Here are 70 easy ways to save more money.)
How to avoid getting bad news from your financial pPlanner
When I put away my crystal ball (and awesome fortune teller hat) and get to work reviewing portfolios with clients, I regularly see small adjustments that could have been made decades ago that would have made a significant impact on the portfolio today.
The lesson here: Don’t wait to save for retirement. Don’t put off sitting down with a professional. Compare your savings to the average retirement savings amount for your age — and don’t accept the average as enough for you. Remember, most people don’t save enough for retirement.
You should also review your retirement savings and financial situation annually to make sure you are on track. It can be hard to keep your whole portfolio picture clear if you have multiple accounts. A couple might have two IRAs, a 401(k) and a 403(b) together. Determining whether you have too much or too little exposure to a certain asset class across the whole bunch is difficult.
I use Personal Capital to get that nice 30,000-foot view of everything. It makes seeing my true asset allocation simple. It also shows how much you are paying in fees: An average 1 percent compared to 0.20 percent will cost you dearly over decades of investing.
Keeping tabs yourself and making course adjustments along the way can make your next meeting with a financial planner that much better. Instead of hearing “Okay, we need to have a serious talk…” you could hear, “Congratulations, you are now ready to retire.”
Doesn’t that sound better?