Retirement income planning is crucial if you don’t want to work forever. Most of us aren’t “do it yourselfers” so we hire financial advisors to tell us what to do. We assume that if they have the title, they must have the knowledge and the integrity to help us build wealth. But many advisors aren’t actually wealthy. And many advisors aren’t following the advice they are giving you. So what are they saying that could be hurting your ability to take income in retirement? And why are they saying it? Read on to find out what you might need to avoid.
- Always max out your 401(k):
The first thing most financial advisors ask you to do is max out your 401(k) plan, which can reduce your current income tax burden. That sounds good on the surface, but… you are deferring your taxes, not erasing them, so you will have to pay them when you withdraw your money in retirement. This could be a good thing if you are behind on saving money. If you know for sure that you cannot possibly end up in the same tax bracket in retirement, it could make sense to follow this traditional advice. But if you want to retire early, or you could be in a higher tax bracket in the future, you might be better off in other tax-efficient assets like rental property or individual stocks.
To be clear – I am not saying 401(k)s are bad – just that there might not be any tax savings because you are really opting into a tax deferral, despite the language your CPA or financial advisor might be using.
For example, the highest tax bracket today is 37%. Historically, we have had decades where the highest marginal tax bracket is more than 90%. If you think tax rates will go up again, it might not make sense for you to defer.
Keep in mind 401(k)s didn’t exist before 1978. That’s when they first entered the tax code. If you were 22 in 1978 you would be 67 in 2023. That means the first case study for maxing out a 401(k) as the solo means for providing income in retirement hasn’t been proven yet. Read that again. That means the most commonly recommended retirement strategy in America today is in its experimental phase. Do you want to be the experiment? I sure don’t.
- Pay off all debt:
Your financial advisor may encourage you to pay off all your debt before you start investing. This may make sense if you have high-interest credit card debt, but for lower interest rate debt, it could actually make things much harder. For example, if your mortgage is at 4% and you can invest money in the stock market and earn a 7-9% return, the spread between the two is profit in your pocket. In some cases, investing the money you would put toward paying down the debt could actually be invested, then applied all at once to your balance, paying off the debt much earlier. Same goal, more efficient way to get there.
While it may feel great to be debt-free, it may not be the best use of your money when you have the option to invest and grow. Your advisor should do the experiment for you. They should do the math to show you the results if you apply extra payments to your debt versus if you invest the money. That way your decision is based on the facts, not on someone’s opinions.
- Only buy as much life insurance as you "need":
Some advisors think that life insurance isn't essential and will tell you only to buy enough coverage to pay off your debt, give your spouse a few years of income, and pay for your kids’ college. This is a needs based approach – what is the minimum you need to make sure you aren’t destitute? I don’t know about you, but I’m not a fan of living a minimum lifestyle. We work so we can afford the things we want.
The true job of a financial advisor is to make sure your plan works no matter what happens during your lifetime. To be sure both you and your spouse can complete your plan, regardless of what happens, death benefit is essential. No insurance company is going to insure you for more than you are worth. That’s not a profitable business model. What they will do, is insure you with an amount that can replace your income for the remainder of your working years. That means, if you or your spouse pass away – arguably the absolute worst thing that could happen – their income still comes in and you aren’t forced to change your lifestyle or find a new partner. If you have kids, this is even more important.
Life insurance can be a crucial part of your retirement income planning. When done correctly, it can even increase the amount of money you can safely spend each year. It can act as a permission slip to spend all of your other assets because the death benefit will replace them for your spouse. Or, the cash value of a whole life insurance policy can act as a market shock absorber – because it is guaranteed and doesn’t fluctuate in value. Recent research has proved that having the right balance of investments and whole life insurance can actually increase your retirement income by 30-70%, without you saving a penny more or working any harder, or taking additional risk.
- Avoid all annuities:
There is a misconception that annuities are terrible products because they have high fees and limited access to funds. Many times that is true, but sometimes it’s not. Any blanket statement like that throws up reg flags that should trigger questions from you.
Did you know that there are annuities that will give you 100% participation in the S&P 500 as well as 20% downside protection if you will leave your money with the annuity company for a set period of time? Did you know that there are annuities that will guarantee you income for your entire life – even if you run out of money – no matter how long you live? That you can simulate an old-school pension with modern insured products? Did you know that annuities can allow you to defer taxes on otherwise taxable assets? Or that in some states they are completely protected from lawsuit judgements and creditors, even in the event of a bankruptcy?
An annuity product could be a great solution for your long-term savings – as long as you have plenty of liquidity. It is vital to assess whether the fees associated with annuity products outweigh the benefits and consider them cautiously as part of your overall retirement portfolio.
- Put all your money in the market:
Your advisor may want you to invest all your money in the stock market, but this is unwise. While stocks can provide a high rate of return over a long time horizon, they are also a volatile asset class, which can lead to significant losses, especially if you experience a market downturn or a sudden shift in the economy or political landscape. Many advisors get paid for managing those assets, and because they don’t get paid for money you put into insurance, real estate, private equity, or other private placement investment tools, they want you to consolidate the assets under their control. Isn’t it interesting that your advisor wants you to diversify until you diversify into places they don’t get paid? And they tell you not to invest in lower return vehicles because you can get a better return with them? But aren’t there investments with higher returns than a market based portfolio? Yes. Yes there are.
To balance out your portfolio, consider investing in other assets like bonds, real estate, whole life insurance, venture capital, or commodities.
In conclusion, while advisors are essential for managing complex financial portfolios, some common advice can be misguided. Many advisors follow the rule of thumb or general financial advice, which may not be suitable for your specific financial situation. Thus, it's essential to take a step back and review your finances carefully and work with your advisor to develop a retirement plan that best suits your wants and aspirations. And if your advisor doesn’t have a good understanding of what your ideal life looks like, how can they possibly help you structure a plan to help you achieve it? Most of us don’t want more money just to have it sit in an account. We want it to help us live a fuller, more robust life with feelings of security while we are off on our adventure. Remember, the right retirement plan and investment strategy can help you achieve your long-term financial goals, without sacrificing everything you want today, so plan ahead and invest wisely.