What you wouldn’t want to hear from your adviser

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.

No one?

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?

More about...Investing, Retirement

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Beth
Beth
6 years ago

I enjoy your posts, Jeff! I hope you’ll keeping writing for GRS.

One of my new year’s goals is to find a good financial planner and find ways to make the money I’m saving/have saved work harder. I think my portfolio is afraid of the dark!

Jeff Rose
Jeff Rose
6 years ago
Reply to  Beth

Thanks so much, Beth!

I’ll stick around as long as they’ll have me. 🙂

Matt Becker
Matt Becker
6 years ago

None of this would be fun to hear, but I would much rather get this kind of honest and helpful assessment than hear my financial advisor promise something like double-digit returns with no risk. An advisor who’s willing to give it to you straight is well worth the cost. There are many advisors who would rather sell you on their pie-in-the-sky “expertise” and will end up basically just stealing your money.

Jeff Rose
Jeff Rose
6 years ago
Reply to  Matt Becker

Ahh….I refer to his advisor as the “12% advisor”.

Had a potential client that had previously met with another advisor. This advisor flat out told the person that he could get them 12% return with little risk.

And this was after 2008!

There was nothing special about what the advisor was pitching. Just regular mutual funds (that also were A share loaded funds mind you) that he claimed could generate this return.

This advisor made my “Financial Advisors I would like to punch in the face” list. I think you might enjoy it: http://www.goodfinancialcents.com/7-financial-advisors-i-would-like-to-punch-in-the-face/

Jonathan Cowan
Jonathan Cowan
6 years ago

Good article Jeff. As a former Investment Adviser myself this all sounds too familiar – and the issues are just the same in the UK. Not all Financial Advisers are equal, but the money spent on having one will be returned many times over the years.

Matt YLBody
Matt YLBody
6 years ago

That all sounds terrible. It seems that saving for retirement is something that SO MANY people do not do, however. Out of my group of friends I feel like I’m the only one that has been thinking about that when I was in my 20’s. Now I’m in my early 30’s and I still feel I’m one of the few that think about that.

Jeff Rose
Jeff Rose
6 years ago
Reply to  Matt YLBody

@ Matt

I still see this with my friends, too; and I just turned 35!

People don’t care about the future. Period.

I get that you only live once, but there has to be a balance.

Consider yourself one of the lucky ones for “getting” it early and not losing sight.

Your friends will eventually see the error of their ways and wish they would have listened to you.

Beth
Beth
6 years ago
Reply to  Matt YLBody

I think there’s this attitude that saving for retirement is something you do after your student loans are paid off, after your wedding is paid off, after you buy a house, after you kids are born… and it goes on and on…

It’s scary.

Ross Williams
Ross Williams
6 years ago
Reply to  Beth

It’s not scary. Its the correct approach. Investing money for retirement at the expense of investing in the rest or your life is a bad idea. Most people will have more money later in life both because they will be making more and because they can reduce their expenses if their kids are grown and their house is paid for. Its silly to set aside money at 25 for retirement when you have 40 years to live before you get there, if you get there at all. I’ve known people who spent their whole lives wanting a fishing boat and… Read more »

Mom of five
Mom of five
6 years ago
Reply to  Beth

Well, we didn’t start saving until our student loans and credit cards stopped being oppressive. I think I was about 25 (before I met my husband) and my husband was 35 or 36 (after we’d married). We’ve got healthy millionaire next door retirement accounts. I don’t think it’s good to put off retirement for trivial reasons, but sometimes current issues (e.g. student loans, credit cards) are more pressing.

Ross Williams
Ross Williams
6 years ago
Reply to  Mom of five

Well, tax-deferred retirement accounts (IRA and 401K’s) are already taxed at normal income tax rates when the money is withdrawn. People often seem to ignore this when talking about their retirement contributions being “tax free”. Three million dollars would allow you to withdraw $120,000 dollars to start and adjust that amount for inflation throughout your retirement. That size withdrawal will also make your social security subject to taxes. If that is another $30,000 then you end up with around $113,000 to spend after taxes, assuming an effective 25% tax rate. If that will support your lifestyle, then the rest of… Read more »

Kali @ CommonSenseMillennial
Kali @ CommonSenseMillennial
6 years ago

It’s stuff no one wants to hear, but some people NEED to hear in order to get their finances in order. Most people aren’t going to make a change to their budgets, savings contributions, or lifestyles off a whim – they need a serious reality check!

FI Pilgrim
FI Pilgrim
6 years ago

Yikes, I’m glad I don’t have to have those conversations with folks. As an IT guy people usually want my input BEFORE they’ve touched anything or screwed it up. 🙂

Jerry
Jerry
6 years ago

Good read Jeff. I have a question about the statement: “Unless you’ve got millions socked away, you must have a portion of your nest egg in the market…” What is a reasonable portion to put in the market during retirement for someone who is EXTREMELY risk averse at that point? My goal is to have amassed $2-4 million in retirement/savings account by retirement, precisely so I can just draw down and never, ever have to worry about the market again. (Note: that amount is meant to provide for living 30-40 years with a modest yearly income; if inflation occurs, then… Read more »

Jeff Rose
Jeff Rose
6 years ago
Reply to  Jerry

@Jerry Great question. Let me first with the cop out answer: “It depends”. A few factors that I’m dealing with my clients now: -Uncertainty with healthcare (big concern) -Raging bull market that has to simmer at some point -low interest rates with the reality that rates will rise -and so much more Personally, I think a sweet spot for clients that have done a great job savings and don’t need market like returns, but also want to keep up with inflation is somewhere in that 10-20% stock range. This would then further be diversified between U.S. and international stocks. In… Read more »

Jerry
Jerry
6 years ago
Reply to  Jeff Rose

10-20% seems reasonable. If your client absolutely does not need market-like returns and only needs to keep up with inflation, could the remaining 80-90% then simply be put into something “guaranteed” such as TIPS or I-bonds (or what would be the cons of doing that)?

Thanks for your insight!

John S @ Frugal Rules
John S @ Frugal Rules
6 years ago

Good article Jeff! These would all be things you wouldn’t want to hear from your advisor and the unfortunate truth is many will be. The one I dealt with very regularly when I was in the industry was #4. I understand after 2008 that many were afraid they’d lose everything and moved everything to something fixed and savings accounts. I totally get that, but for most that is just not the solution they need. Sure, they need some of it, but not as a whole. I generally found the problem was encouraging many to have an appropriate mix as opposed… Read more »

Ross Williams
Ross Williams
6 years ago

One luxury to start with in cutting back is your financial planner. You likely don’t really need one. You need to take your investments and put them in index funds. You will find all the advice you really need to determine and manage you asset mix on the Vanguard web site or the web site of practically any other index fund you choose. While inflation may average 3%, many people are paying 2% and more in fees to their financial planner and/or mutual funds they invest in. At that rate, fees on that $500,000 in retirement investments is costing you… Read more »

Ramblin' Ma'am
Ramblin' Ma'am
6 years ago

Thanks, Jeff, good article.

“When it comes to retirement saving, you have two choices: enjoy the money now or enjoy it (plus potential growth) in retirement.”

Well…or, enjoy it now AND put some away. I really think balance is key. I have heard too many stories of people who put off traveling, etc. until retirement and then dropped dead in their 60s. Of course, I hear more stories about people running out of money…

Money Saving
Money Saving
6 years ago

Life would be so much easier if we all knew exactly when we were going to croak! Because we don’t, it’s pretty hard to plan for circumstances when you could live anywhere from 55 – 105 years of age.

Because of that, I feel like people really need to err on the side of caution. Hearing one of these things may be just the thing someone needs to ground them in reality!

cheapcookies
cheapcookies
6 years ago

Disagree in #4, you must be in the market. Baloney. At retirement, there are plenty of reasons to be out of the market, the first being you don’t want to play that game anymore. Second, it’s risky. People lose money even with the best advice sometimes. Third, CDs, MMarkets can be spread out and are FDIC insured, something you don’t get at the stock market craps table. Inflation? 20 years? Who cares? I will still have some money rolling in every month regardless. I’ll take my chances. Oh, did I mention how burned I got in the tech market boom… Read more »

Jeff Rose
Jeff Rose
6 years ago
Reply to  cheapcookies

@cheapcookies In a perfect world where you saved exactly how much you need to fund your entire retirement and bonds are paying a decent rate, then I could possibly agree with you. You mention CD’s, money market, etc….. You are familiar with what banks are paying nowadays, right? I have retirees that were used to getting 4-6% on short-term CD’s and how they’re lucky to get 1%. Even in FDIC insured investments there is risk: interest rate risk. “Oh, did I mention how burned I got in the tech market boom and bust?” Sounds like you invested too heavily in… Read more »

Scott
Scott
6 years ago
Reply to  cheapcookies

I understand that you got burned once and are now scared to invest. However, it sounds like you did not diversify. Look at the stock market for the last hundred years. There are a lot of ups and downs. There is a crash or correction every 5-8 years. If you are diversified this will not bother you. In fact in a crash you could make a lot of money by buying while everyone is selling.

stellamarina
stellamarina
6 years ago

Some retired friends heard the following from a good friend/financial advisor….”Your money ($100,000) is all gone” They thought they were just making their house payments with the interest from the investment…instead the investment money was all used up because of sour investments.

No one cares about your money like you do.

Trace @ Independence Investor
Trace @ Independence Investor
6 years ago

Jeff,

I totally agree with your comment about small adjustments that could have been made decades ago. The power of using annual pay raises to increase 401k or Roth IRA contribution deferrals is incredible. A person can go from saving 6% of annual income to 15% in a hurry. The long term implications of making this change can be exponential. Thank you for your service in the military.

Jeff Rose
Jeff Rose
6 years ago

@ Trace

Thanks for the acknowledgement!

Mom of five
Mom of five
6 years ago

We’re afraid we’ve saved too much for retirement. If we assume a 6% return on the money we’ve already got in IRA’s and 401K’s, we’ll have well over 3 million by the time we retire. I heard the President say something like, “Nobody needs more than 3 million” to retire. I figure that means they plan on heavily taxing larger retirement accounts. Seeing how low everyone else’s retirement savings is in comparison to our own tells me that a heavy tax on large accounts will be a politically popular one. And so, we’ve decided not to do IRA’s this year… Read more »

Jeff Rose
Jeff Rose
6 years ago
Reply to  Mom of five

@ Mom of Five Great question! Here’s one thing to consider though: Been doing this for 10 years and I’ve still yet to encounter anyone that saved too much for retirement. If you do, then it will definitely be a good problem to have. Plus, a lot can happen in the next 15 years. If you feel you are saving too much, then I would have to ask are you taking time to enjoy mini-retirements in the present? I have had clients that were saving a ton but they weren’t really enjoying life because they were so dead set on… Read more »

Mom of five
Mom of five
6 years ago
Reply to  Jeff Rose

It’s not that we feel we’re saving too much for retirement, it’s that we’re worried we’re saving too much in tax advantaged retirement accounts. If the government takes everything over 3 million, what’s the point of having more than that in those specific types of accounts? The way I see it, the government may say they have more of a right to 401k/IRA money over a regular brokerage account because there were tax benefits to the retirement accounts over the years. We’re going to continue to save, just not in our 401k’s. And we do live well, including a vacation… Read more »

Snarkfinance
Snarkfinance
6 years ago

I am very young, and so have a lot of time to consider various retirement strategies and paces. I actually do use a financial adviser sometimes, usually once a year to double check my logic and pacing. You guys are a-ok with me. I currently have forgone some retirement savings in favor of building a large, large savings for a down payment on a place to live. The goal is to pay the mortgage off in five-seven years after buying… which would drop my annual cash needs to near nothing. The idea is to reach a point where work becomes… Read more »

Jeff Rose
Jeff Rose
6 years ago
Reply to  Snarkfinance

@snark

Woo-hoo! Glad I made the “a-ok” list. 🙂

I think how you’re using an advisor is spot on. Not everyone needs an advisor 24/7 but it’s get to check-up to make sure everything is going OK.

Same concept applies in getting your annual health checkup or getting your car looked it.

It typically never hurts to get a second opinion.

I love what you are doing right now with your savings. More young people should follow in your footsteps.

Great work!

Business Accountant
Business Accountant
6 years ago

Great post Jeff- we’ve been told here in the UK that people are going to most likely be expected to work to the age of 70- which means a lot more people will now be working harder and saving harder to give themselves a better chance of that early retirement!

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