Whether retirement is 15 years away or right around the corner, it’s never too early to start your retirement plan. However, in my experience, people find it difficult to conceptualizing their retirement. Preparing for retirement is a lot like starting a 1,000 piece puzzle – each piece somehow fits to make the picture clear, but at first, it’s hard to see how and where each piece fits.
Retirement planning can be complicated, so many people turn to a financial advisor to help draw up a clear, easy-to-understand retirement plan that will save time and energy to research the thousands of options yourself. If you decide to partner with a professional advisor, you should look for these five traits when choosing your retirement planning specialist.
1. Are they Collaborative?
Your input matters. Make sure your advisor understands that it’s your plan, not their’s. A promising retirement plan must be molded to your specific need, and it will never be a one-size-fits-all approach. A collaborative advisor will help you:
● Identify holes in your current plan.
● Notice obstacles you may face based on your current plan.
● Capitalize on opportunities in the present to help set you up for the future.
A trusted financial advisor will provide meaningful guidance with your input, not preach to you about what you’re doing wrong.
A collaborative relationship will also lead to newfound trust across both parties. You, as the client, will understand that your advisor cares about your concerns, goals, and objectives. Likewise, the advisor will feel rewarded by your trust and belief in their ability and will ultimately find fulfillment in genuinely helping you retire the way you dream of retiring.
2. Are they Competent?
There’s nothing worse than trying to get help from a seemingly trusted professional who acts as if they have never seen your issue before. Financial advice is no different. There are a host of problems retirees often face that are very specific to utilizing ‘green’ financial advisors.
When seeking a retirement planning specialist, be sure to pursue someone with prior experience on the issues you face.
Things like taxation on Social Security, planning for Required Minimum Distributions, or preparing for the inevitable higher healthcare costs in retirement are at the heart of many retirement anxieties. It’s also important to look for an advisor with additional credentials like CFP, CPA, Enrolled Agent, or Chartered Financial Consultant. In the end, make sure the advisor you choose can provide meaningful guidance on the challenges you will face.
Another core competency that you should be looking for is an advisor who understands the impact of taxes on your retirement plan. Every year, April 15th is a day we rue after shelling out money to the government. In retirement, paying more taxes than is absolutely necessary may dramatically change the course of the future.
Many Americans are shocked to see their taxes in retirement are considerably higher than anticipated. This is often called the retirement “tax cliff” — an unintended result of maximizing tax-deferred accounts that may lead to an abrupt increase in income and income taxes down the line. Make sure to work with an advisor who is good at managing taxes effectively and efficiently and continuously looks for tax diversification opportunities.
3. Are they Thorough?
As a financial advisor, I see many situations where a retirement plan falls flat. Accounting for various cash flows will allow you to understand how you’ll spend your money in retirement. As with many things in life, the devil’s in the details. A lack of detail on a financial plan can mean you have a ticking time bomb waiting to explode. Properly planning how money comes in and how money is spent could save you from a retirement disaster.
The first thing to fully understand is how money is being spent. This includes fixed and variable expenses. Your advisor should also be able to understand this and build a plan around these expenses. A typical example of variable cost is the cost of healthcare. Currently, healthcare costs are increasing greater than average inflation. If your advisor isn’t accounting for a higher cost, you might not see an accurate picture of your retirement.
For fixed expenses, such as a fixed-rate mortgage, it’s important to make sure these are inflated over time. A fixed-rate mortgage may even end during retirement, meaning you won’t have to dole out that money each month. Ensure that your advisor is calculating the true impact of expenses throughout retirement and accounts for these details within your financial plan.
A strong retirement plan will properly analyze income sources in retirement and properly coordinate those income streams. Social Security planning is at the heart of a quality retirement plan. For many folks, their Social Security benefit is between 30% and 70% of their retirement income. Other income cash flows could include pension benefits, real estate income, an inheritance, or other retirement packages. A quality retirement plan will evaluate the best way to optimize your retirement cash flow across all sources of income.
Whenever we have income from investments, there’s always a fear of paying too much tax. Paying taxes in retirement is like the story about Goldilocks. Retirees don’t want to pay too much or too little; they want to pay just the right amount of taxes. This requires being thorough in accounting for the various income streams and expenses you may have in retirement and applying the best tax expense or credit to ensure proper tax planning.
Your advisor should understand your detailed retirement income budget so they can apply reasonable rates of inflation on various cash flows. A thorough retirement plan will coordinate investments, income streams, taxes, and expenses to provide you with a comprehensive retirement plan. This plan should have the ability to be altered, amended, or scrapped altogether to ensure it’s the best fit for you!
4. Are they Dynamic?
Over time, your financial needs change. With that, your retirement plan must be dynamic enough to keep up. During your working years, your objective is to accumulate your nest egg. But at retirement, your focus is on effective distributions. This requires your financial advisor to have a sounds understanding of how to spend assets wisely and shift to investments that are more suitable for your new stage in life.
Anticipating risks or events can mean the difference between retirement freedom and retirement failure. The famous hockey player Wayne Gretzky was known for saying, “I skate to where the puck is going to be, not to where it has been.”
Any good retirement plan will be able to help you identify possible financial potholes. Then, as changes occur, you can shift your retirement plan accordingly. This may mean changing investment strategies, adding additional layers of safety, or simply providing guidance on financial events such as downsizing a house.
Technology can drive how dynamic your retirement plan can be. Just having advanced planning technology isn’t enough. It’s how it’s used. Modeling various “what-if” scenarios side-by-side can allow you to make confident financial decisions that may impact you for many years to come. A dynamic retirement plan can change as your life changes.
5. Are they Compassionate?
Compassion is the key to a quality relationship with your financial advisor. Your financial advisor must care about you, not just your business. Retirement is about realizing the fruits of your labor and enjoying life as it’s meant to be. Retirement can also be an emotional time because you are thrust into the unknown. Many American’s define themselves by what they do, but at retirement, your world changes. The emotional side of retirement can be where your advisor provides the most value to your retirement.
If you think about it, retirement can last for a long time. Imagine you retire in your 60s and live into your 80s or 90s; that’s 20-25 years or longer in retirement. During that time, many things can happen. The market will see its good years and bad, a significant life event will occur – changes are inevitable. An advisor with a vested interest in your well-being, both emotionally and financially, will serve you well throughout retirement.
A financial advisor who can adequately assist you in planning for retirement can save you more than just money. They can protect you from financial hardship, help you avoid emotional strain, and even provide a legacy for your family. A financial advisor is only as good as the qualities he or she embodies.
So, when you look for a financial advisor to help build your retirement plan, think about these five pivotal characteristics. Compassion, competency, collaboration are core building blocks of a quality advisor-client relationship, and having a plan that’s dynamic and thorough will provide you confidence and freedom throughout retirement.
By Taylor Leary, Owner of Four Points Wealth Management