The #1 Mistake People Make When They Use A Financial Advisor

There’s one common mistake that people make when using a financial advisor. If you know what it is ahead of time, you’ll know:

  • what to look out for when you’re talking to advisors;
  • how to get the maximum benefit when working with an advisor; and
  • whether or not you found the right one.

Or, maybe you’re evaluating whether you need an advisor or not. This post will give you a clear picture on the value that they can provide and if the cost is going to be worth it to you.

Finally, if you already know that you’re looking for an advisor, this will help you find your ideal fit.

A First Meeting Reveals The #1 Mistake

Recently I was in a first meeting with a 60-year-old couple. They had seen a few of our videos and were thinking about retirement so they reached out. Most of the time on this first call alone, people get more clarity and they find out the next steps that they need to take to improve their financial life. I thought it was a great discussion. At end of the call, I asked how they were feeling? And they were quite honest and told me they were kind of embarrassed that they hadn’t been paying close attention to their financial life or plan for retirement. They had over a million dollars saved, but the husband felt like he was making wrong decisions when it came to a retirement. And there were a few decisions where he let emotions take over and it negatively impacted the plan.

As a side note, be aware that every financial decision is made up multiple parts. One is the financial side and the other is the emotional. As you get closer to retirement, that emotional part of money decisions, gets stronger and stronger. This is something to be aware of as you get closer to your retirement date.

Now, back to our couple: there was some embarrassment because they didn’t think they had made good decisions. And also some embarrassment because they felt like they should know more about the financial world, whether it was the main risks that they need to plan for, or the different types of investments they should have, or the right withdrawal strategy. They just didn’t understand it all. They were embarrassed because they felt like they didn’t know as much about their money or about their own retirement as they should. And they were feeling a little bit of intimidation too. This is common.

Advisors know more about the financial world than most of their clients. That make sense. But clients often hand over control to those advisors to implement their strategies and plans. Then the clients are trusting that it’s working out without ever really understanding the plan. A lot of people are okay with this, but I wouldn’t recommend doing it. I recommend finding an advisor who is able to clearly communicate and simplify the plan so that you can actually understand. When you understand the investments and understand the plan, that gives you more confidence that you’re doing the right things and not just taking a blind-trust approach.

You’re the CEO. You don’t have to be the CFO too.

When you’re starting a relationship with a new advisor, or even if you already have one, you can keep this in mind. Remember that this is your money. You’ve earned it. And now you’re the steward of it; you’re the manager of it. This doesn’t mean that you have to go to school and study the financial world all day. You can hire counsel to be the guide, but just remember to be confident because you’re the CEO. And you’re just going to try to find a CFO, a chief financial officer. You’re still the leader in your life. In a business, the CEO does trust the CFO with the financial side of things. But it’s up to the CFO to succinctly communicate these most important things to the CEO.

If you’re currently in the process of interviewing advisors, go to the meeting feeling confident, remembering it’s your money and this is how you’re managing it. You don’t know everything about the financial world. Frankly, you don’t want to know; you probably don’t care to study economics or markets all day and make decisions by yourself. It’s probably not fun for you. You have certain skills and abilities that you’re good at and finance doesn’t have to be one of them. Especially if you’re close to retirement and you’re starting to think about spending your time on the things you enjoy and less on the things you don’t enjoy as much.

What To Say To Your New Advisor

To help lessen that feeling of embarrassment about not knowing everything about money, here’s what to say to a new advisor to make sure that you’re on the same page:

I’m good at what I do, but I need someone to help me navigate this financial part of my life. I’d like you to anticipate and plan for some of the risks that I might face and create a plan that I can understand.

By sharing this up front, the advisor knows where you’re coming from. And if you still feel embarrassment or intimidation when you’re talking with an advisor, maybe it’s not a good fit. You need to feel comfortable and calm and good about this relationship.

Another Common Mistake

I received an email recently from a couple who were not clients of ours. They sent me a big financial plan from an another advisor who they had just met with and were seeking a second opinion. They connected with this advisor mainly because he was at a big firm––the kind of firm on TV commercials during sports games. So they sent me the plan and they wanted my opinion about if it would be good for their situation. I looked through it, and I noticed that the majority of the recommendations were to buy new insurance products and annuities. With these kind of products, the advisor usually gets paid a pretty big commission.

Now, if this was discussed with the clients and it was understood, maybe this could be the right path for them. But when I told them they were actually surprised. They were moving forward with the plan because they were feeling a little intimidated. They were just trusting that this first advisor was giving them good counsel. But when I asked if they knew how the advisor got paid, they didn’t know. And that’s another big mistake: not knowing how your financial advisor gets paid.

At Streamline, we work on a fee-only basis, not commissions, because we believe this is in the best interest of our clients. We don’t want to be a travel agent who creates and sells a vacation plan. We actually prefer to be the tour guide who goes on the vacation with the clients.

When you think about it, the financial industry is kind of like a foreign country where you don’t speak the language. But a tour guide who does speak that language can be a huge help. What if there’s a detour or the bus gets a flat? A local guide can more easily take care of the unexpected things that pop up while you’re on vacation, because they’re familiar with the area. That’s kind of how we see our jobs too. And if you think you’d benefit from talking with a financial guide, please reach out to me.

Warren Buffett Advice and Quotes on Retirement Planning

Warren Buffett is one of the greatest investors of all time. In this post, I’m going to see how we can use some of his advice to help plan a successful retirement.

“I do know that when I am 60, I should be attempting to achieve different personal goals than those which had priority at age 20.”

When you get closer to retirement age, you’re going to have to start withdrawing money from your savings and investments. Your goals are different than when you were in the middle of the savings or accumulation stage in your thirties and forties. Because time is shorter to when you’re going to start making withdrawals, make sure that you have some portion of your assets invested conservatively. At Streamline, we manage this by first creating an income plan for our clients. Then the income plan informs how we invest so that the plan will be successful. We don’t have to participate in or worry about the market fluctuations.

“Never ask a barber if you need a haircut.”

And for the same reason, you shouldn’t ask an insurance salesman if you need insurance. Be aware that most of the advisors that we come in contact with are really salespeople in disguise. One way to find out if they’re acting in your best interest, is to ask how they get paid. This is a common question to ask in the first meeting when you’re initially getting to know someone. Think twice about working with an advisor who gets paid a commission for recommending mutual funds, annuities, or other insurance products. Find an advisor who works on a fee-only basis, or a retainer model instead.

“What the wise do in the beginning, fools do in the end.”

Chasing the latest hot investment has burned a lot of people that come to Streamline looking for help. And after getting burned a few times, they figured out to just do the things that work. Now, the hard part about doing the things that work is that it’s boring. And the financial media doesn’t want to talk about boring things. If everyone used tried and true methods for successful retirement, financial channels would be out of business.

The good news is that the game the financial media plays, or the game of the guy hitting the buttons on what stock to buy or sell, or when to be in cash, or when to be invested, that game is not one that you need to play. You can competently ignore the commotion, knowing that you have a plan that works in both good and bad markets. That’s really the ideal goal: ignore the noise and just focus on the thing that works. It’s about having the income you need each month without having to worry about what’s happening in the market, while still achieving some growth to outpace inflation.

If you need help thinking through your retirement plan, reach out to me or check out the DIY retirement plan by clicking here.

Three Big Retirement Withdrawal Mistakes and How To Avoid Them

There are three big financial mistakes that we see a lot of retirees make. In this post, I want to share these mistakes with you. Then I’ll let you know how to avoid unnecessary worry about the success of your plan. The good news is that you can avoid these mistakes and it doesn’t have to take much extra work. Just being aware is the first step.

As you start to plan for retirement, you’re making a big transition from the saving stage to a withdrawal stage. And that alone is a big adjustment. It can be hard to get used to withdrawing money from these accounts where you had been saving for the last 30 or 40 years. With that in mind, let’s jump into the mistakes that we see when new retirees are setting up withdrawal plans.  

Following Rule-of-Thumb Assumptions

The 4-Percent Rule

This can be a great way to get an idea of what’s reasonable and sustainable and how much you can withdraw. But when you get serious about planning, this is not the best way to plan your withdrawal strategy.

If you assume 4 percent is coming out, what happens if there are a few bad market years? When you retire, the amount that you were assuming you’d take out, based on 4 percent, could actually be quite a bit higher. The dollar amount stays the same, but if there’s a market dip, the withdrawal percentage is going to increase. Now, the 4-percent rule does say that it’s supposed to account for market fluctuations, but we’ve actually seen retirees who are planning on retiring based on this rule and decide to work a few extra years during a bad market because of the worry that it brought.

This is actually related to another mistake that I’m going to bring up later, so stay tuned. But those who prepare for retirement using a bucket approach, or by assigning a purpose to each account, are much more confident in their plan, even during scary markets.

The Order Of Withdrawals

The rule of thumb says to take from your non-retirement accounts first. Then start Social Security when you’re not working any more, whether you’re under your full retirement age or not. And then the assumption is, don’t spend your IRA or your 401k money until you need to. Whether that’s when you need the money or when you get to the Required Minimum Distribution age, which is 72, currently. When we run the withdrawal models for our clients, we almost always see that following this order leads to paying higher taxes over the span of the rest of their life. There are ways around paying more tax than necessary in retirement. That’s why the tax plan is such a key part when we’re planning for our clients.

Waiting Too Long To Start Withdrawals

Like I said above, it’s common for people to believe that they should use their non-retirement and Social Security before the pre-tax money like 401ks and IRAs. And I understand that if you’ve got tax-deferred money, it seems to make sense. Why not keep it in the tax-deferred account so you don’t have to pay tax on it right now?

The issue is that you could be setting yourself up for more taxes over the rest of your life. When we model this out for our clients, depending on how much they have in IRAs or pre-tax monies, many of them are actually moving to higher tax brackets in their seventies because of the Required Minimum Distribution. It doesn’t seem right. But because the RMD amounts are going up as you get older, the amount people have withdraw goes up and the amount they have to pay on taxes goes up, shooting them into higher tax brackets. It also affects Medicare premiums because how much you pay with Medicare has to do with how much taxable income you have.

What if you don’t need the money from your IRAs because expenses are low? Talk to your retirement planner about Roth conversions. That could be a good way to reduce future tax bills. There are really a lot of factors here when it comes to the retirement plan. If your advisor is only talking about investments with you, and they’re not looking at all these different scenarios and models and they don’t specialize in retirement, please reach out to me. I’d be happy to talk with you.

Not Planning For Unexpected Withdrawals

Imagine that you’re planning on using a 4 percent withdrawal rule. What happens if the unexpected comes up? The unexpected expense, or worse, a series of unexpected expenses over a couple of years, can really put a dent in your withdrawal plan. In this scenario, the advice is to think about marking a certain amount that is set aside from your withdrawal plan, kind of like a retirement income insurance plan. It’s just there; it’s conservative monies that are available. If the unexpected comes up, you’ve got the withdrawal plan working, and then you’ve got this side fund. That’s one way to think about it. One strategy that actually has this built in is the Three-Bucket Strategy, which could be helpful as you’re starting to talk with financial professionals and see if it could make sense for you. Click here to see a video that explains the Three-Bucket Strategy further.

The First Step When Planning For Retirement

In this post we’re going to look at the first step to take when you’re planning your retirement. If you’re already retired, don’t worry, it’s not too late for you to do this too.

The first step to take when creating your plan is something that you’ve probably heard of. However, not many people put that much emphasis on this, or sometimes they skip right over it. And interestingly, most advisors skip it too because if you don’t take this step, your financial plan can usually still work perfectly.

But, if you’ve seen any of our other videos or talked to one of our advisors, then you know that we at Streamline care as much about the non-financial side of your retirement as we do about the financial side. We know you need both working together in order to live a fulfilled next stage of life, one full of joy and purpose and passion. Just focusing on the money piece of your retirement plan isn’t going to get you there.

The most successful retirees that we’ve seen took the time to get clear on their why.

They took the time to think about: why are we even retiring in the first place?

  • Is it because of I’m a certain age?
  • Because it’s the social norm that says I’m supposed to do it at this time?
  • Is there something I want to do more of?
  • Am I running away from something that I dislike?
  • Or am I running towards something that I enjoy more and want to have more time allocated to?

Getting clear on your why can help you find the answer to that almost impossible question: how much is enough? When you know your why, planning for retirement becomes a lot less daunting because you have a clear target that you’re aiming for. Then you can implement the retirement plan and the investment strategies that will give you the greatest chance of reaching that target.

A Story About Susan

Susan called me up one day and she was looking for a second opinion. She was 58 at the time, and she had just received a plan from another advisor that said she and her husband had to work until they were 70 if they want their plan to be successful. If they wanted to continue their lifestyle, then they would have to work another 12 years. But the advisor didn’t take the time to listen to Susan and her husband’s story and figure out their why. He didn’t find out what’s most important to them. What he did (which is pretty common in retirement planning) was take the numbers and the data, then he told her what’s possible with those numbers.

Just because that’s the way 99 percent of advisors create a financial plan, doesn’t mean it’s the best way. And it certainly doesn’t mean it’s the best way for you. What I’ve seen the best advisors do is listen to their client’s stories. First, by asking questions that the client maybe never thought about, getting really clear on what’s most important and where they want to be. And then fitting the numbers into their story rather than letting the numbers go first. If this advisor found Susan’s why first, he would have found out that the most important factors to their successful retirement would be proximity to their kids and their faith. Those are two of their main values that we uncovered.

Next, Susan and I walked through the Streamline System and we worked around those top two values. Their kids were in South Carolina and in the original plan, they had budgeted for four annual trips. They lived in Illinois and then they were going to go down to South Carolina four times a year. So we began looking at some of the what if scenarios of different expenses and costs and different ideas that they could apply in retirement. We weren’t making any decisions. We were just exploring and discussing the different options. What Susan and her husband really wanted to do was be together with their grandchildren more than four times a year, especially while those kids were under 10 years old. If they listened to the original financial advisor and followed that financial plan, this never would have been possible.

Letting Why Chart The Course

But once we discovered their why, we took them through a series of crucial questions to help design that ideal future that they were looking for. A few of the questions were things like: is your current home your forever home? They decided they loved it, but without their kids and grandkids, it wasn’t the same.

And would you really want to commit to South Carolina? They didn’t know; they couldn’t answer that right now. So we decided not to commit. What they decided to do instead was rent a condo in South Carolina for a year, take it for a test drive. They’d keep their Illinois home and not make too many big transitions. While this meant spending more money initially, it was for a short term only, with the knowledge that within five years they would have to make a decision.

In order to afford the condo in South Carolina while maintaining their Illinois home, they made a few adjustments to their planned living expenses, like club dues and entertainment in downtown Chicago. With this plan in mind, Susan and her husband retired from work two years later; 10 years before the original advisor’s plan. They started renting in South Carolina. After a year, they were ready to commit. They sold the Illinois house. They bought in South Carolina and they’ve never been happier. They’re close to their family. They’re creating a new community within their church and they’re doing great.

Your Next Steps

Now, what are the next steps for you? Bring this conversation up to your financial planner. Get clear on your why and make sure you incorporate it in your plan. Really, make sure you start with that.

If you need help, please reach out to me, I’d be happy to talk with you, or click here for a free DIY Retirement Plan.  

How Much Risk Should I Have In My Retirement Plan? Retirement Investment and Income Ideas.

How much risk should I take in retirement? It’s an important question, but I think that the financial industry has it wrong. And since they’ve got it wrong, this faulty method of risk management then gets passed on to investors and clients. In this post I’ll share a different way of looking at risk and what you could be doing instead.

But first, a story. A man sits down with his doctor and the doctor breaks the bad news that the man has cancer. The man is completely shocked. Then the doctor shows the man an iPad with a questionnaire to determine how much chemotherapy the man is comfortable with. The man looks up, even more shocked by this question, and says, “the least amount possible to get rid of the cancer, obviously!

While that’s just a silly anecdote, it’s kind of how we usually look at risk as well. It’s common in the early meetings with an advisor for them to ask you about risk tolerance or to fill out a questionnaire. They then use that to try and pinpoint how comfortable you are with risk. But I’m not so sure that’s the best way to determine the how much risk you should have in your portfolio. Your risk tolerance today is going to look a lot different than it did back in March of 2020, when we saw one of the fastest drops to a bear market in history, or back in 2008 or 2009, when we thought we were in the worst of it.

If risk tolerance isn’t the ideal method to figure out how much risk you should have, what’s a better way?

First, I’ll share how we think about it at Streamline Financial, and then I’ll share some other big risks that you might want to be looking out for.

Here’s how we look at risk.

Rather than try to identify your risk tolerance and build an investment plan from that, at Streamline we focus first on the key factor in retirement: your future income. The whole purpose of retirement planning is making sure you have enough money coming in so that you can keep doing the things you want to do. We believe that once you create a solid income plan, that will dictate the risk of your investment plan and your asset allocation, and how much risk you should be taking on. That’s why we work with our clients to focus on an income plan before creating the investment plan, tax plan, and all the other parts of the system. We have found that we have a much better chance at creating a successful retirement plan when we do it this way. And our clients think so too.

If that makes sense to you and you’re planning for your retirement, but you may not be ready to talk with an advisor, or you’re just more comfortable doing it yourself, click here for a DIY retirement plan.

Now we’ll move on to some of the other risks you may face in retirement.

Many people think that market risk is the biggest risk. They worry if the next market crash could ruin their retirement. Market risk is important, but it can be covered with proper planning. The risk that most people don’t think about as much is kind of a silent killer. It’s the fact that the US dollar loses value over time. This means that $100,000 invested in 1970 could be worth only $50,000 in a relatively short amount of time. We call this cash risk or inflation risk. The reason it’s a silent killer is because you won’t get a statement showing a negative percentage return. It seems like it’s holding value. But as everything else around us gets more and more expensive and inflation goes up, that dollar value is actually decreasing every year.

Another big risk has to do with the year you choose to retire and start withdrawing funds. Someone who retired in 2007 could have a much different outcome than someone who retired three years later in 2010. The first few years of your income plan and withdrawal plan are absolutely critical. There is a graphic in the video above that illustrates this comparison of two retirees who did everything the same, except for the year in which they retired, with drastically different results. It was just the first few years of retirement that made all the difference.

Working While Collecting Social Security. Avoid Losing Your Social Security Benefits.

In this post, we’re going to look at the pros and cons of working while collecting Social Security. Thought it’s not the best plan for everyone, there might be some instances where it could make sense for you.

Social Security usually considers full retirement age to be around 66 or 67. But if you’re around five years out and you are working and earning an income, and if you make over $18,960, then social security is going to deduct $1 for every $2 that you make over that amount of $18,960.

For example, if you make $28,960 ($10,000 over), divide that overage by 2 to see the deduction. In this case, $10,000 divided by 2 is $5,000. So, the Social Security Administration would be deducting $5,000 from your total benefits that year.

Know When Your Earnings Limit Goes Up

Be aware that in the year you reach your full retirement age, the earnings limit actually goes up to $50,520. As long as you earn less than that amount, then you shouldn’t have anything deducted from your pay. The SSA only counts your earnings up to the month before you reach your full retirement age, not earnings for the entire year.

Another thing to keep in mind when you’re looking at these calculations: once you do reach your FRA (full retirement age), you can earn whatever you want and you don’t have to worry about Social Security deducting.

Working Before Your Full Retirement Age

However, what if you retire at 63 and then go back to work at 64 with a salary over the aforementioned $18,960? What should you do?

Social Security says that the benefits they deduct are not lost forever. They also say that they will reconcile your benefits once you get to your full retirement age. However, we’ve seen the calculations that they use and it’s difficult to verify they’re actually paying you the right amount. It’s possible, but it’s just not a hundred percent clear. Every time we’ve tried to verify for a client, we really just have to take their word for it. And if you know anything about Social Security, you know that you don’t always get the same answer from two people in the same office.

For these reasons, I encourage people who are thinking that they might have a chance of working before they get to full retirement age, even if they already are retired, if there’s a small chance they might go back, I encourage waiting. But don’t just listen to me. Talk to your retirement planner and create your income plan. See what Social Security strategies make the most sense for you. If you don’t have a planner who specializes in retirement, reach out to me by clicking the link here.