Does Your Retirement Plan Answer These Three Questions?

It seems that with the market downturn in 2008-2009, there has been concern over folks ability to retire. One of the probing questions I receive from new clients is “When can I retire?” Sounds like a simple question, and for the most part (at least on my end) it is. The difficulty usually stems from a lack of preparation by the client or a non comprehensive view. Here are a few things that often get over looked from the client’s standpoint when performing retirement projections:

1. What will retirement look like for you?
Transitioning from a full time employee or business owner to the life of leisure is a big step. It’s also a step that fewer retirees are taking in today’s world. The old picture of retirement has changed for many Americans….and not necessarily for the worse. The new picture of retirement involves a higher degree of engagement in life’s activities, whether it be part-time employment/business ownership, volunteerism, increased family involvement, or simply a schedule of engaged activities. This new picture is farther from the rocker chair on the front porch.

Understanding what retirement may involve will help to ascertain the needed nest-egg to take you to the next stage in life. While the market’s tenuous past put a damper on many retirement dreams, it doesn’t have to. There are many options to transition into a new phase in life, but this requires a little forethought and is essential to proper retirement planning.

2. What about Health Care Costs?
Now I bet I have your attention. This thought certainly drives fear into most people, especially since the media and advertisers do a wonderful job of painting a dark picture. While Medicare and Medicare supplements (Medigap policies) can do an adequate job for those 65 and older, younger retirees face the road of individual coverage. While challenging, this should not be a deal breaker for most folks. There are cooperative plans, high deductible plans, and high deductible plans tied to health savings accounts that deliver options.

Health care costs are on the rise and should absolutely be considered when planning for retirement. Living a healthy lifestyle and proactively addressing health care needs should be a critical part of the any pre-retirement plan.

3. How much will you pay in taxes?
Taxes are the single largest recurring expense most people have in their lives. Properly managing taxes during the accumulation phase of life can get you to retirement ahead of schedule. Preparing and maximizing retirement taxation can be a real difference maker when it comes to the bottom line need for retirement. Tax efficient withdrawals can save big dollars, especially for those in lower tax brackets. For example, the current ability of those in the 10-15% tax bracket to utilize a 0% capital gain tax (up to the 15% tax bracket max) can save thousands of dollars in taxes. Through proper tax planning and strategies many retirees can drop into lower tax brackets during retirement….even after populating higher brackets during pre-retirement.

A retirement plan without a solid tax plan is a mistake waiting to happen. Simply estimating what tax bracket you may fall into is not enough. A comprehensive tax picture that takes into account maximizing withdrawals by efficiently juggling the taxable and retirement account ( IRA, Roth, or other qualified plans) can mean the difference in retiring sooner than later.

The days of our grandparent’s retirement picture are dwindling, and, hopefully, the days of improper retirement planning is, as well. The simple calculation of yearly need multiplied by years of retirement (mix in inflation) is not enough. Utilizing the standard withdrawal rate of 4% against your nest-egg is not the answer either. A true retirement plan incorporates a comprehensive view to include the above topics and more. By utilizing a comprehensive view to develop a tax-efficient retirement plan that incorporates a realistic retirement picture may show you that you are closer to retirement that you realize.

If you are struggling to paint your retirement picture, you may want to seek guidance from an advisor. An organization of advisors that does a wonderful job in this area can be found on the internet at www.acaplanners.org. ACA is an organization of fee-only planners that specializes is holistic financial planning, and, yes, in full disclosure I am an ACA member!

Why I'm A Fee-Only Financial Planner

If you read my last blog post, you recall I discussed the different types of planners and how they are paid. Today, I will tell you why I am a firm believer in fee-only financial planning.

Fee-only financial planning is a wonderful way for clients to receive advice in a fiduciary manner. As a fiduciary, the planner puts the clients’ interest first. Fee-only planners receive their pay directly from the client, which virtually eliminates conflicts of interest. As a fee-only planner, I don’t sell anything, except maybe a good night’s sleep. I don’t receive any commissions, referral fees, or kickbacks, so, therefore, I don’t have a conflict with the advice I give to my clients. What I recommend to my clients is in their best interest….not mine.

Another wonderful aspect of fee-only planning is the ability to practice from a holistic viewpoint. This is my favorite part of my job. Financial planning is a process…not an event. Life changes, therefore I love having the flexibility to assist my clients as their lives change. It’s not about one particular piece of the planning puzzle: it’s about the entire puzzle and maximizing every piece. As a fee- only planner, my fees don’t change whether I am discussing investments or insurance, estate planning or cash flow, business planning, or tax planning. It’s all part of the big picture.

My business model allows me to serve my clients in a comprehensive fashion. With my simple retainer billing method, my clients pay me a fee, and I am their planner. I’m able to see the big picture and guide the client along life’s journey. This is why I am a fee-only planner, and I love my job.

What is a Fee-Only Financial Advisor?

While the push for consumer education regarding financial planning has grown over the last ten years or so, many folks still are confused about how financial planners are paid. Essentially, there are three types of planners: commissioned, fee-only, and fee-based.

Commissioned Advisors receive their pay from products they sell. This type of business model can create a conflict of interest. The dilemma starts when an advisor makes a recommendation of a product that will benefit his or her personal earnings. Is the product offered in the client’s best interest or in the interest of the advisor’s back pocket? This model can be extremely confusing for the client due to the lack of transparency of what the advisor is truly earning for the services rendered.

A fee-based advisor is an advisor who receives some commissions and charges a fee for other services. For example, a fee-based advisor may charge a flat fee for a comprehensive financial plan but may receive commissions for investment products sold. This business model is not conflict free. Again, confusion over the total fees earned by the advisor can be created by this model.

Fee-only advisors offer the easiest model when it comes to understanding fees. What the client pays the advisor is what the advisor earns for services rendered. This creates a clean and understandable relationship between client and advisor when it comes to fees. The client can rest at ease that the advisor is making a recommendation that is in the client’s best interest and not the advisor’s pocketbook. This model also allows the advisor to make referrals to outside professionals with the client’s best interest in hand.

Fee-only advisors don’t sell products, period. This knocks down walls between the client and advisor and allows for a better understand from a transactional view. This means the client will always know where they stand with the advisor in terms of fees. This puts the advisor in a fiduciary position and allows advice to be delivered with the client’s best interest in hand.

The National Association of Personal Financial Advisors (NAPFA) is a champion of fee-only financial planning and is a great place to get more information regarding fee-only planning, as well as finding a planner in your area. WWW.NAPFA.org