Retirement planning is a dynamic process that involves decades of managing your life savings in various investment vehicles until you retire. While many invest in 401(k)s, real estate, bonds and stocks, doing so without knowledge of the underlying principles of these asset classes often lead to mediocre returns and even losses. Furthermore, impulsive selling and buying assets during market upheavals could take a well-planned retirement map to the ground.
There are bigger questions that many Americans don’t have answers to. How much do you need for retirement? When should you start saving? When can you actually retire? Some say saving 10 times your annual income by the age of 67 is decent enough for sailing smoothly in retirement, but this estimate could wildly change in the next two decades. Many aspire to retire by 55 years of age, but the actual average retirement age is well above 60. This tremendous gap between reality and retirement expectations could be attributed to several factors:
Getting a Late Start at Retirement Savings
The U.S. personal household debt almost reached a record $15 trillion in the second quarter of 2021. Student loans, credit cards, and personal loans have single-handedly prevented Americans from saving early in their lives, costing them valuable years of compounding interest on investments. The pandemic possibly played a role in the sharp rise in personal debt. TheBalance estimated that 50 percent are left with only $250 in disposable income after paying their monthly bills and installments.
Over-Reliance on Social Security
Thinking that Social Security benefits will have your back in retirement could create an illusion of financial safety throughout your working years. While the Social Security Administration (SSA) allows eligible individuals to claim benefits starting at the age of 62, you actually receive a lower monthly income compared to those claiming at the age of 66. An SSA report stated that the average monthly benefit in 2021 stood at $1,544 with over 65 million workers to be paid a staggering $1 trillion cumulatively in benefits this year.
Additionally, the report mentioned that the number of Americans aged 65 and above is estimated to increase from 56 million at present to a whopping 78 million by 2035. This scenario could compel SSA to slash benefits or increase taxes in order to accommodate a growing population claiming SSA benefits in the future. The bigger picture is that an assured income stream after a certain age could lead many to a comfort zone where they might not strive for higher returns through different investment vehicles.
Attaching Emotional Value to Money
Watching your life savings dip during market downturns isn’t an easy ordeal. Unguided investors with little knowledge of market dynamics often fall prey to market swings, where they sell investments out of fear that they might lose more money during a bearish run. If you prematurely withdraw from your 401(k), for instance, you could break the momentum of compounding interest. This could push back your retirement goals for years.
Moreover, a National Financial Educators Council survey revealed that Americans cumulatively lost an astronomical $415 billion in 2020 due to lack of financial knowledge. While emotional money moves certainly have a role to play, several factors like hidden fees that grow with your assets or attempting to time the market among others could add to your existing financial crisis.
Importance of Guided Retirement Planning
An April 2020 Betterment survey revealed 52 percent of the respondents felt they needed to tap into long-term savings in the upcoming twelve months. Over 36 percent of those within 20 years of retirement expected a delayed retirement due to the pandemic, whereas 37 percent of those aged between 45 and 64 didn’t know how their investments fared in the market crash.
In contrast, 650 billionaires grew their collective worth by $1 trillion during the COVID-19 pandemic, taking their cumulative worth above $4 trillion. The takeaway here is that the right financial planning could grow your retirement funds over time irrespective of the momentary but inevitable market fluctuations.
When planning for retirement, people tend to think about picking the right mix of stocks and bonds, exploring different asset classes, and monitoring and adjusting their portfolios to create a fortune that they won’t outlive. It is crucial to understand that an important aspect of financial planning is to protect your money during recessions as much as aiming for high returns when the market is booming.
Today, fintech companies are using artificial intelligence to create robo-advisors that can create customized portfolios based on your life goals as input. These complex algorithms are capable of stock selection, asset allocation, and even making investment decisions on your behalf. Although robo-advisors are gaining tremendous popularity due to their ease of use and low fees, in-house financial advisors still have intuition and experience that robo-advisors cannot provide.
An in-house financial advisor can create a roadmap covering the entire spectrum of personal finance such as investments, savings, and taxes. Certified financial planners (CFPs) undergo 1,000 hours of coursework where they are trained to understand your risk appetite, spending habits, long-term goals, and even your fears that could lead to emotional money moves. When something goes wrong in the market and you can’t make sense of it, a financial advisor can objectively assess the situation to guide your investment decisions so you won’t regret them later on.
Misconceptions About Financial Advisors
Although a financial advisor could make a huge difference in your long-term financial gains, there are still some misconceptions. SmartAsset, a billion-dollar fintech company that connects individuals with vetted financial advisors, conducted an online survey where 57 percent of 159 financial advisors mentioned that clients felt advisors are “too expensive” or “cost too much”.
Generally, financial advisors charge from one to two percent of assets under management (AUM). Assuming that an advisor charges two percent of AUM and is currently handling $100,000 worth of assets, the annual fee comes out to $2,000. Since the average S&P 500 stock returns stand at 10 percent, however, these fees could be insignificant to long-term gains.
On the other hand, some investors refrain from partnering with financial advisors fearing biased investment choices that benefit the advisor. A simple solution is to find advisors with a Certified Financial Fiduciary (CFF) certification that is awarded by the National Association of Certified Financial Fiduciaries (NACFF). This certification implies that the financial advisor is legally and ethically bound to recommend investments in your best interests.
Financial advisors generally follow suitability standards and fiduciary standards. While the former requires advisors to find investments that suit your portfolio, the latter ensures that an advisor works to give you the best possible investment advice.
How to Find Financial Advisors
Many people start by consulting friends and relatives to see how their advisors handle their investments. A 2021 Bank of America survey stated that 45 percent of the of 2,000 respondents turned to financial advisors to manage their investments better. The report mentioned that many check out advisor reputation, fees, and even personal recommendations to narrow down their search. While this might sound simple, finding advisors you can work with for decades might become time-consuming. If you prefer the online route, you may also be bombarded with confusing advisory-matching services.
New York-based fintech SmartAsset can help expedite your search for financial advisors by connecting you with up to three vetted fiduciary advisors near you within minutes. Over 65 million people use their wide array of award-winning tools and precision calculators to manage personal finances, including retirement planning, investments, debts, taxes, and real estate. Their intelligent financial modeling simulation also offers insights into how your financial future could look based on the decisions you make today.
Additionally, SmartAsset’s financial advisory services are headed by a dedicated concierge team that connects you with vetted advisors. All you have to do is complete a brief online quiz about your financial goals and retirement expectations. Financial advisors will then be recommended to you based on your responses, and you may interview them and verify their credentials to see if they are a good fit for you.