Retirement planning advice often falls into the category of assumed credibility. One of the truisms that I was told is that your asset allocation should be 1- your age. That being the case, you would expect to see that in every retirement target date strategy. As you expected that is not the case.
Faulty retirement planning advice
Often we look for rules of thumb that simplify our lives. Some financial professionals exploit that and throw out rules of thumb like saving 10% of your income for retirement. This 10% number is often quoted. I have not met someone that can give me the assumptions behind that 10%. If you save 10%, what does that accomplish?
Some financial professionals seek to make a profit and serve the client second. Recently I spoke with a pastor that met with a financial professional. He told me that after he told the professional about his recent double digit investment returns, the professional turned the conversation to the wonders of annuities. I asked him if the professional was a CERTIFIED FINANCIAL PLANNER™ professional. He said the professional said he was a financial planner. Given that this pastor was under 50 and had not maximized his retirement savings in tax –deferred vehicles, it appears that the annuity conversation was not in the pastor’s best interest. Having a license to sell investments and insurance does not mean that the recommendations are in your interest.
Sometimes the advice thrown out is short-sighted. Many recent graduates feel that their financial focus should be paying off debt and not retirement planning. Delaying saving for retirement means that they will have to save more later. If they had the benefit of a working with a qualified financial planner, such as a CFP®, they could include that in their future plans before the money was spent on other lifestyle choices.
Fiduciary retirement planning advice
If a plan sponsor needs an actuary to help determine savings, rates of return in order to provide a benefit in the future, why do we think a less astute employee can D-I-Y?
The Pension Protection Action allowed employees to receive investment advice that was in their best interests. Fiduciary investment advice should be done in the context of finding the appropriate risk adjusted return given the goal and assumptions surrounding it. More employers have embraced the Qualified Default Investment Alternative than fiduciary retirement planning advice. While there are 3 QDIA strategies, balanced, risk based and target date, most plan sponsors have adopted target date strategies. I believe this choice has been marketed by investment firms touting their sophistication. Target date has the ring of set it and forget it simplicity. However, it does not suggest what savings rate(s) should be paired with it to offer the ending balance employees will turn into retirement paychecks.
Instead, using a fiduciary retirement planning advice model, an advisor would help them calculate how much to save, at what allocation until what time. I call this the retirement SAT. Everyone’s passing grade is different. A novel approach is to start by determining the employee’s comfort with risk. Asking no potentially belittling questions, we simply find out how much they are willing to lose in order to gain an amount they define. You can test out this approach here. The advisor converts this answer into a portfolio with an equivalent expected risk level. We then see if the accumulated balance they need at retirement is possible with this portfolio and their current savings rate. If not, we work with them to find a combination that gives them a fight chance to achieve retirement sustainability.
Given the mixed financial messages and the general inclination to enjoy life today, most of us would benefit from an accountability coach. One that could help us question our assumptions before we got too far down the wrong road. This kind of retirement planning advice can be an integral part of your retirement plan. You are welcome to take a test drive of how this relatively simple approach focuses on retirement paychecks, rather than enrollment simplicity. This approach seeks to help you live up to your fiduciary role- making decisions in the best interests of your employees and their beneficiaries’ future retirement income. Learn more about risk assessments and get a free portfolio risk analysis. You don’t even need a portfolio to get started.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.