#financialplan

(This is the fourth article in a four-part series. Click here to read Part 1, Part 2, and Part 3.)

By:  Henry VanBuskirk, CFP®, Wealth Manager

Everyone’s had that story of their friend or family member that said they got shafted by some seedy financial advisor. However, there is a huge difference between what is legal and what is ethical. The majority of these “seedy” financial advisors are still following the law as constructed, but unfortunately, most of the time it’s up to you to ask questions and know what you’re buying even when buying a product as intangible as financial advice. It’s important to work with a team that is legally required to act ethically and know that they are in danger of losing their business and professional licenses if they don’t put your interests ahead of their own.

Take, for example, Mr. and Mrs. Impulsive. They are emotionally driven decision-makers that have $200,000 across investment accounts and bank accounts and spend $100,000 per year. Mr. and Mrs. Impulsive make $120,000 per year but are under duress since they want to pay for their 5-year-old’s college tuition in the future and aren’t sure how. On a whim, Mr. and Mrs. Impulsive meet with a financial advisor her friend recommended and he recommends buying a $750,000 cash-value life insurance policy and paying for the future college tuition through cash-value loans on the life insurance policy. There are no mentions of alternative savings vehicles for minors, such as 529 plans or UTMA accounts, just a life insurance illustration. The specifics on why the life insurance recommendation is not appropriate are not important for purposes of this whitepaper, but what is important is to illustrate why the recommendation may have been made in the first place (the example I am using is based on a real client we met with recently). Here are two pages of the illustration that illustrates why:

If your eyes glazed over these diagrams and the Charlie Brown Teacher “wha wha whaaa wha” started going off in your head, don’t worry. The reason this recommendation is most likely not appropriate is simple. Notice the TP and Target Premium numbers of $20,078. That’s how much the financial advisor would be paid upfront in gross commissions if the client agreed to move forward with the life insurance recommendation. The insurance agent would then get a residual gross commission of around 2% ($401.56/yr.) or so after the first year. Not a bad payday for a couple of hours of work and usually explains why it is generally hard to have ongoing life insurance servicing 5+ years later. Also, Mr. and Mrs. Impulsive would have to pay $53,018.81 for 7 years to fund this policy and they won’t have the liquid cash available to do so. Some other alternatives to save for college are a 529 plan or a UTMA account, which can be done for a fraction of the cost. Note: BFSG does not sell any product, nor do we receive any compensation from any source other than our clients. This helps us strive to always put our clients’ interests first and to remain objective. 

Annuities:

Mrs. Impulsive knows that she needs to talk to her husband before signing the paperwork.  Mr. Impulsive during their conversation thinks about their plans to retire in 10 years but is concerned about the current market volatility.  He likes the sales pitch by the financial advisor and decides to meet with him to discuss this. The financial advisor asks, “Did you want to move forward with the life insurance recommendation?”. Mr. Impulsive says, “Mrs. Impulsive and I need more time to think about this. I wanted to ask you about our retirement plans in 10 years, but I am concerned about market volatility.  Do you have any suggestions?”. The financial advisor then proceeds to recommend moving $200,000 to a Fixed Indexed Annuity and taking withdraws from it in 10 years. The financial advisor exclaims, “The withdrawals of $10,935 would be guaranteed for the rest of your life. Keep in mind that you would be subjected to surrender charges if you took more than 10% of the contract value in any one year within the first 10 years (this is called a surrender schedule).”. Here is an illustration (again a real client situation).

Again, the reasoning why the recommendation may not be appropriate is just as important as why the recommendation may have been made. A fixed indexed annuity commission is paid out in schedules that the advisor chooses. Since the annuity is a 10-year annuity, the commission schedule is 10% over that 10-year period and most likely would be one of the following schedules (as permissible by the insurance agent’s brokerage firm). The annuity commission over a 10-year period is 10% regardless of what Schedule is chosen:

1. Schedule A: 10% upfront gross commission and no trailing gross commission
2. Schedule B: 7% upfront gross commission and 0.333% trailing gross commission starting in year 2
3. Schedule C: 3.5% upfront gross commission and 0.667% trailing gross commission starting in year 2
4. Schedule D: 1% upfront gross commission and 1% trailing gross commission starting in year 2

The calculus on which Schedule the agent wants to choose is frankly dependent on how long the agent actually wants to work with the annuity purchaser. Annuities, like cash value life insurance, are not inherently bad recommendations, but they are typically oversold since they are easy money for the agent or advisor selling them. The financial advisor didn’t mention that annuities can come in the form of advisory annuities, where no commissions are paid out and the advisor is paid based on an agreed-upon percentage of the annuity’s account value and there is no surrender schedule.  The financial advisor might not be properly licensed to sell advisory products, so this might be the reason why this was not mentioned. In any case, Mr. Impulsive stops thinking with his amygdala and starts utilizing his frontal lobe. He tells the financial advisor, “So let me get this straight.  For meeting with us for 4 hours, you’re about to make at least $40,078 off of us if we sign this paperwork. Thanks, but no thanks. We will find a different financial advisor to work with.”.

Mr. and Mrs. Impulsive then learn that there are alternative methods for saving for retirement. They also learn that crafting a comprehensive financial plan can help indicate how to save for retirement in a realistic way and how aggressive or conservative you want or need to be. The issue with annuities is advisors that pigeonhole everyone nearing retirement to make them buy an annuity or obfuscate the story to make it seem like the prospective client has to be conservative near retirement in order to make their financial plan work. This leads to advisors who overuse and oversell the annuity, leading to upset prospective or current clients that may have never needed an annuity in the first place. This is not illegal, just unethical from our point of view. To distance ourselves from this potential conflict of interest, BFSG does not sell annuities or life insurance.

Key Takeaways from this Series:

The problems that we’ve addressed in this series are:

• Advisors sometimes do not know the ramifications of the advice given.
• Clients sometimes do not question the validity of advice received.
• Clients not understanding how the person giving the advice gets paid. 

Comprehensive financial planning is a meticulous, collaborative process between planner and client. If you’ve seen yourself in one of the examples we listed in this series, we offer you to reach out to us for a complimentary financial planning meeting so we can discover what your unique needs are, what assets you have to work with, and how realistic your financial goals are. We offer objective advice and are a fee-only RIA. We do not sell any product, nor do we receive any compensation from any source other than our clients.

We are a team of CFP® professionals, CPAs, CFA® charterholders, and PhDs ready and willing to help you on your journey.  We look forward to working with you to help you achieve your financial goals and grow our wealth of financial planning knowledge with you.

Disclosure: BFSG does not make any representations or warranties as to the accuracy, timeliness, suitability, completeness, or relevance of any information prepared by any unaffiliated third party, whether linked to BFSG’s website or blog or incorporated herein and takes no responsibility for any such content. All such information is provided solely for convenience purposes only and all users thereof should be guided accordingly. Please remember that different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment or investment strategy (including those undertaken or recommended by Company), will be profitable or equal any historical performance level(s). Please see important disclosure information here.

By:  Henry VanBuskirk, CFP®, Wealth Manager

When you google “Biggest Enemy of Retirement” you will get around 20 million results with answers such as (1) inflation, (2) lower interest rates, (3) higher interest rates, (4) procrastination, (5) taxes, (6) overspending, (7) whatever politician a talking head doesn’t like that day and (8) you.  The answers to your questions, “I’ve saved and saved my whole life.  How do I retire?  Can I ever retire?  Do I need to save more?”, can be very daunting to think about and still might be unanswered.  This may lead you to continue your google search, leaving you overwhelmed and unsure of where to start.  Spending your whole life accumulating and hiking up “Retirement Mountain” might leave you frozen at the summit, not sure how to get down.  We don’t want you to spend the rest of your life in fear, ultimately ending up like Preston Blake (pictured above) from the 2003 movie Mr. Deeds. 

Our goal is to help you get down “Retirement Mountain” safely and understand the biggest enemies you might face on your descent (the deaccumulation phase).  This will tell us what your deaccumulation phase realistically looks like and how you can get there.  The most common retirement foes we’ve faced when helping clients over the years are: (1) Taxes and spending, (2) Volatility, and (3) Emotional decision making.   

Taxes and Spending

This one might seem obvious, but how much you spend and how much you give Uncle Sam are big indicators of how well your financial future is going to look.  If most of your retirement income comes from social security, pensions, and/or annuities, you are mainly on a fixed income.  A large unplanned expense (i.e., home maintenance, medical bills, or car repair) can put a damper on your monthly budget, but you still have to get the money to pay for that unplanned expense somewhere.  To illustrate this, I have the following example:

Clark and Ellen Griswold have the following sources of income each year:

• Clark’s Social Security – $20,000
• Ellen’s Social Security – $20,000
• Clark’s pension – $10,000

They spend $4,000 per month, live in Florida (no state taxes), and also have the following investment accounts:

• Clark’s IRA – $100,000
• Clark and Ellen Joint Investment Account (JTWROS) – $100,000

The joint account has the following positions:

They have no other assets. 

Clark and Ellen have a sudden roof leak that they need to repair, and it will cost them $35,000.

Clark and Ellen have two options:

Option 1 – Take the money from the IRA  

Any distributions received by the IRA owner are taxable at ordinary income when received.  They withdraw $40,000 from the IRA, pay $5,517 in federal taxes, and receive a net amount of $34,483.  Just enough to pay for the roof repair.

Option 2 – Take the money from the Joint account

As referenced previously, the joint account has ABC stock, DEF stock, and XYZ stock.  After talking with our team at BFSG, we recommended that Clark and Ellen sell ABC stock and DEF stock and withdraw $35,000 from their Joint Account.  They will realize a short-term capital loss of -$3,000 and a long-term capital gain of $20,000 but actually won’t owe any taxes this year.  They were able to keep their IRA intact and pocket tax savings of $5,517.  Maybe they should put some of those tax savings in the bank in case of a rainy day. Here is a summary from our tax planning software provider that illustrates the differences between these two scenarios:

Here at BFSG, we abide by Uncle Sam’s rules, but we like to make him work for his money.  Uncle Sam is not a charity, so don’t treat him like one. 

Another enemy that you will most likely face is volatility, which we are going to tackle next.

Sequence of Returns Risk

Volatility is a topic that we’ve all heard over the news lately and it is usually framed in a negative light, but volatility can also be a positive depending on where you are in your life.  If you are a young working professional with 30 years left until retirement, you are able to continue contributing to your 401(k) and history shows that markets tend to go up more than go down.  If you’re reading this article, you’re probably closer to retirement than not.  How volatility can derail a retirement plan is when distributions from a retirement account occur during a time of bad market returns. A large market loss early into a person’s retirement can dramatically decrease the financial plan’s success.  This is referred to as “sequence of returns risk” and is discussed in the following example.

Example: Two clients, Mr. Jones, and Ms. Smith have $500,000 in an IRA and withdraw $15,000 at the end of each year.  The IRA returns repeat every 5 years and is illustrated below:

Mr. Jones and Ms. Smith have the same average return.  Let’s assume that each client’s retirement lasts 30 years.  At the end of the 30 years, Mr. Jones’ IRA is worth $72,407.70 and Ms. Smith’s is worth $234,336.  Here is the math behind those figures:

Where we are in a market cycle and where you are in your lifecycle are two variables that we need to clearly understand.  If Mr. Jones had a large unplanned expense of $100,000 in Year 27, he couldn’t afford to do it.  On the other hand, Ms. Smith most likely could. 

If you say that you are an aggressive investor, we may need to dial the risk down if you are retiring next year and we continue to have negative stock market performance.  This is where distribution planning becomes important, and we can help address any concerns you may have by having a comprehensive financial plan done. 

Now that you have a comprehensive financial plan in hand, the last major hurdle people face in their retirement is themselves.  Rash emotional decisions that are made in the short term can derail your long-term retirement success and is akin to throwing that comprehensive financial plan that you had in the trash.             

Emotional Decision Making

Many people believe that people in the finance and investment industries know everything about the stock market and can time the stock market.  However, that is not true and any financial advisor that says otherwise is in our opinion lying.  If you or I could time the stock market, you wouldn’t be reading this article and I wouldn’t be writing this article.  You would be on your yacht, and I would be on mine.  Where I add value as a financial planner is by making sure that you don’t make any rash, short-term emotional decisions that impact the long-term success of your plan.  In this case, you can be your own worst enemy when it comes to your retirement plan.  When you get nervous and make an emotional decision, the below chart illustrates what the consequence of doing so can be: 

As you can see, thinking that anyone can time a stock market downturn can be detrimental.  We don’t know when those top 10 days over a 20-year period will occur, but we know that if you’re invested every day during that 20-year period, you will (by default) hit those 10 best days.  Getting out of the market (regardless of when or what the talking heads are saying) runs the risk of you missing out on those good days.  Half of the S&P 500’s best days in the last 20 years were during a bear market.  Where our firm adds value is keeping you level-headed and focused on your long-term financial plan. 

In Summary

There are a number of other retirement enemies that we haven’t addressed and some of them might not apply to you.  The only way to know which foes we need to help you face is by determining what your retirement picture looks like.  This is done by crafting your comprehensive financial plan, having continued conversations about it throughout your lifetime, and updating it throughout life’s ups and downs.  Get the process started by giving us a call or by emailing us at financialplanning@bfsg.com.  We look forward to helping you get to and through retirement.

Additional Sources:

1. GMO “Who Ate Joe’s Retirement”, 2015. (https://www.nebo-gmo.com/insights/whitepapers/who-ate-joes-retirement-3)
2. Hartford “10 Things You Should Know About Bear Markets”, 2022. (https://www.hartfordfunds.com/practice-management/client-conversations/managing-volatility/bear-markets.html)

Disclosure: BFSG does not make any representations or warranties as to the accuracy, timeliness, suitability, completeness, or relevance of any information prepared by any unaffiliated third party, whether linked to BFSG’s website or blog or incorporated herein and takes no responsibility for any such content. All such information is provided solely for convenience purposes only and all users thereof should be guided accordingly. Please remember that different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment or investment strategy (including those undertaken or recommended by Company), will be profitable or equal any historical performance level(s). Please see important disclosure information here.

By:  Paul Horn, CFP®, CPWA®, Senior Financial Planner

Most people look forward to the day that they can have independence and no longer have to work 9 – 5. In my experience, while everyone wants to retire, most are truly not ready to retire. I am not referring to having the financial ability to retire but most are not emotionally ready for retirement. Retiring before you are emotionally ready often leads to feelings of sadness and not feeling fulfilled. As a result, many people will return to work since they were not ready. This is especially true with individuals that retire early.

With any major transition in life, it takes time to prepare emotionally and become comfortable with the new reality. Major changes are difficult and below are some things to consider helping gauge how emotionally prepared you are for retirement.

Why do you want to retire?

Retirement is more than just watching tv or sitting in a rocking chair waiting for the Grim Reaper to arrive. Retirement is about pursuing passions and finally having the time to do the things that you want to do. For many retirees is about traveling, time with friends and family, or other passions like golf or charitable work. If you want to retire because of a bad job situation or are feeling burned out, then you may not be ready to retire. Remember that retirement does not have to be an all or nothing proposition. Many people will move to part-time work or a less stressful job to help ease them into retirement.

Visualize your retirement.

This is similar to the first question but an important step. What do you see yourself doing in retirement?  Take some time to daydream about the things you want to do in retirement. Allow your mind to wander and no idea is too crazy. This is a time to experiment and really let down your guard. I had a couple that retired and never owned an animal. They decided they wanted a dog and chose the breed. One thing led to another, and their retirement became traveling the country doing dog shows and becoming well-respected breeders. For another client, this was simply being able to go out to breakfast with her husband or friends daily and having time to be more involved in her church. Whatever retirement looks like for you should energize you and get you excited.

Write it down

Studies have shown that you are far more likely to accomplish a goal if you write it down. Take the time to write down the timeline and steps you want to take to retire. If you want to travel, then begin to plan out your first trip and develop an itinerary. By writing it down you can come back and look at this if you feel overwhelmed or unsure about retirement.

Be patient and have realistic expectations

Retirement is a major life event and for most is a difficult transition. Your habits will need to change to adjust to retirement and for most people, this transition is slow and takes about six to twelve months. The important thing during this time is to be patient with yourself and allow yourself some time to find fulfillment and meaning. Begin with small tweaks and experiment with different habits to find what brings you the most satisfaction. During this transition make sure to communicate challenges or difficulties with a friend or family member. Just communicating your emotions can help you feel better about the transition.

Give your retirement a dry run

As clients get closer to retirement, I strongly encourage them to begin some of the things that they are planning for in retirement. If you plan on travel, take some time off before you retire and take some smaller trips to make sure you are happy with the lifestyle and decision you are making. If you are considering a major purchase like a boat or RV, then rent one on the weekends and make sure you enjoy it before making the purchase. Starting some of these habits before retirement will make the transition easier and allows you to experiment without repercussions. If you are concerned about retiring, then take the process slowly by working part-time or in a less stressful job and make the transition to retirement when you are good and ready.

Being mentally and emotionally prepared for retirement is one of the biggest topics that people forget to discuss before retirement. If you do not know where to start or would like to talk with us, you can reach us at financialplanning@bfsg.com.

Disclosure: BFSG does not make any representations or warranties as to the accuracy, timeliness, suitability, completeness, or relevance of any information prepared by any unaffiliated third party, whether linked to BFSG’s website or blog or incorporated herein and takes no responsibility for any such content. All such information is provided solely for convenience purposes only and all users thereof should be guided accordingly. Please remember that different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment or investment strategy (including those undertaken or recommended by Company), will be profitable or equal any historical performance level(s). Please see important disclosure information here.