We’ve been talking a bit about some things you might consider with your current advisor and when to get a second opinion. You may have an advisor who helped get you to retirement. They probably focused on growth and accumulation. The harsh reality is that this advice is not what I would suggest using for getting you through your retirement. Retirement planning requires a different skill set than when you were working and investing. When my kids were little, they went to a pediatrician. As they got older, they “graduated” to a regular doctor. There was nothing wrong with their pediatrician, but they had moved on to a different stage of life.
A similar idea is true in the financial world. Believe it or not, many financial advisors tend to have large egos so they might not tell you when it’s time for you to move on to a different advisor. A pediatrician will say, “Hey, you’re 25 years old, maybe it’s time for you to see a different doctor.” In the financial world, many advisors aren’t willing to do that.
We talked about some different indicators to determine if your advisor is the right one to get you through retirement. If you do your planning yourself, then the biggest danger is that you don’t know what you don’t know. When you’re working, and you’re trying to grow and accumulate a portfolio, there is a lot of information available. If you have the time and desire to do it yourself, go for it.
Once you retire, things change, and doing your own planning becomes kind of like writing your own legal documents. If you were to write your trust even though you’re not an attorney, you could do a lot of research and still make one little mistake that could invalidate the whole thing. By the time you die, it’s too late to do anything about it. When it comes to financial planning in retirement, one little mistake can leave you wondering where all your money went. At that point, it’s often too late to go back to work and earn more. Your time horizon is so much shorter and that makes things so much more important.
Today I’m going to introduce indicator number two. In real estate, there’s a saying that successful real estate investing is all about three words: location, location, location. When it comes to retirement planning, we have three words as well. Those three words are income, income, income.
Retirement is not about how much money you have in your investment accounts, or how much equity you have in real estate. It’s about the cash flow that they generate. Retirement is an income game, not a game of how big your account is. I cannot stress that enough because I see that mistake all the time. I have people come to me and tell me that they’ve got a great investment in real estate. I’ll ask them how much they’re getting in net income, and they’ll tell me something like 3%. You may be making money in capital gains, but you can’t spend those capital gains until you sell. If you think that it’s a great investment and you don’t want to sell, then you’re living on a 3% income, which quite frankly, sucks. A 3% income is not good. It’s a losing proposition.
Think about it like this. You’ve been working for 30-40 years and let’s imagine all of those years have been at the same company. Every two weeks you got a paycheck directly deposited into your bank account. In 2013 the market was up 30%. Did your boss come to you and give you a 30% pay increase because the market is up? No. It would be nice, but that’s not what happens.
If you look the other way, in 2008 when the market was down 37%, did your boss reduce your income by 37%? Probably not. You got the same paycheck regardless of what the stock market was doing. Over time, you might’ve gotten a little raise for inflation adjustment or a promotion that came with another raise. Over the years, your income grew, and your paycheck got larger. In a typical scenario, when you’re working, you have a stable and likely growing paycheck that lasts as long as you’re working.
When you choose to retire, don’t you want the same thing? Don’t you want to still get a regular paycheck? Maybe that paycheck comes from Social Security or investments, but either way, you’re going to want a regular stable paycheck that lasts the lifetime of you and your spouse, if you have one. You’re also going to want that income to grow and to be unaffected by the ups and downs of the stock market.
Here’s the second indicator; if you are retired or nearing retirement, did your advisor put together a simple, clear income plan that shows how you’re going to get your income?It also should show how that income will increase over time, how it will stay steady and stable, and how it will be unaffected by the stock market.
I would add that it is not your responsibility to ask your advisor to show you this. If you’re nearing retirement, your advisor knows that, and it’s their job to bring a plan to you. Five years before you retire, they should come to you and put an income plan together. Has that happened? Indicator number one was focused on whether your advisor is protecting your assets. Indicator number two asks if you’re advisor is helping you develop an income plan that is stable, growing, and will last your lifetime. What does your written retirement income plan look like? I’m guessing many of you don’t have one.
An income plan ishould not be just a diversified portfolio where you just take 4%. That’s not an income plan. That’s hoping. A real income plan will leave you ok even if the market crashes. If you’re sitting there and you’re not sure if you have an income plan, give us a call. We’d love to help you get on track!
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