Seven Retirement Planning Traps a Financial Professional Can Help You Avoid

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1 Seven Retirement Planning Traps a Financial Professional Can Help You Avoid By Eric D Griessel, CPA Financial Advisor 86 percent of Americans believe the nation faces a retirement crisis (National Institute on Retirement Security, March 15, 2015) 49% of Americans do not even have a formal retirement plan. (The Deloitte Center for Financial Services) Being an investor today is a lot like being a little league athlete. The little leaguer plays in front of a crowd of uninformed and self-centered parents instructing the young athlete on every potential move. The result is a paralyzed athlete too afraid to make any moves. The wise and prudent advice of the coach is drowned out by the crowd, scoring opportunities are missed, and the game is on the verge of being lost. In 2014, S&P 500 was up 13.69% compared to average equity mutual fund investor return of 5.5%. (21 st addition of Qualitative Analysis of Investor Behavior, DALBAR) In the same way, investors are bombarded with messages from the sideline shouting the supposed best ways to plan and invest for retirement. Have a diversified portfolio! Don t pay for financial advice! The cheapest investment is the best! Only own the index! Active investment management doesn t work! You can do this on your own! This is the investment for you to own now! The market is going to crash by 50% by the end of the year! Stocks are too risky! Interest rates are going to rise! The Federal Reserve controls the market! The market is rigged! Investors are scared they will be unable to retire because the conflicting advice; not knowing the sound advice from the quackery. Seemingly every other commercial during major sporting events has a message about how you should invest, plan for retirement, or what pill you should take while investing and planning for retirement. The financial media is a biased, multi-billion dollar business only concerned with their bottom lines and not yours. Eric D Griessel, CPA Page 1

2 We have a problem because the suppliers of this information have no real interest in helping you develop effective retirement plans. Their main goal is to discourage you from seeking help, apart from their message, so that you will continue watch their ads, buy their magazines and invest in their funds. Ultimately, the confused investor freezes and gets stuck in place letting valuable game winning opportunities pass them by. This article will cover seven potential traps made in retirement planning and why it may be time to consider delegating this area of your life to a financial professional. Trap #1 -- Low cost investments are always best A few prominent financial companies have created marketing campaigns solely based the cheapness of their fees. Can you think of any other product or service that the cheapness of the product is the primary selling point? How does buying the cheapest toilet paper work for you? Since your money is high on what is important to you, why be willing to put so much emphasis on the cheapness of the investment. Shouldn't the focus be on the results regardless of the cost? I think it's fair to say the cost isn't what matters; it s the advice behind the cost. Let's look at a simple example using the most well-known US stock market index: the S&P 500. Did you know you can invest in this index in two different ways? You can invest in the traditional, capitalization weighted version marketed as the lowest cost way to own the stock market (read: cheap, cheap, and cheap) or you can own a higher cost version of the same 500 stocks that is equally-weighted. The equally-weighted investment manager higher fees over since 2000 but the investor had a significantly larger account balance. Instead focusing significant time & effort to find the lowest cost investment, perhaps you should engage a financial advisor who has a process to discern where low fees are relevant and where they aren't. The right advisor should be able to guide you into the investments best suited for the current environment regardless of their cost. Over a long time horizon, this type of approach should neutralize any advantage a low-cost investment may have. Eric D Griessel, CPA Page 2

3 Trap #2 -- No tax diversification in your retirement plan Has your CPA ever throw his or her arm out of socket to congratulate themselves for saving you a few dollars in taxes this year by recommending you fully fund that tax deductible retirement plan? Do you really want a CPA that only focuses on this year ignores your unknown future tax bill on the retirement plan? Based on average tax rates, most taxpayers receive less than a 10% tax benefit for contributing money to traditional retirement plans. This means for every $10 contributed to a 401k plan you only save $1 in taxes this year. However, at retirement your distributions are taxed at your marginal tax rate; the rate of tax you pay on your last dollar of income. By default, this rate will almost always be higher than your average tax rate when you contributed to the plan. Additionally, this future rate is also unknown, so how will you plan for that? Taxable retirement plan distributions can potentially make tax-free income sources like social security taxable up to 85% of the amount received. This is a form of double taxation that potentially can be avoided with proper planning. Perhaps instead of following that advice to save a few dollars today, you should create a strategy that saves can save you thousands of dollars in retirement. A competent financial advisor will be well versed in this tax discussion and design plans to best handle this future ticking tax bomb. Trap #3 -- Believing your current or former 401k plan is free The 401k is the primary retirement savings vehicle for employees. A 401k plan has an investment advisor, plan administrator, plan custodian, and pooled investment options. Each is paid a fee because they couldn't be in business if they weren't. With all the parties involved in the plan, have you considered how much your plan costs you each year? As long as plan is not government sponsored, you do receive an annual cost disclosure where this information can be found. You should closely examine this annual cost disclosure and decide if the cost for that current or orphan 401k plan is worth limiting your investment options. Assuming your 401k plan is free because you don't write a check for the costs may cause you to miss out on better investment opportunities. A financial Eric D Griessel, CPA Page 3

4 professional will help analyze what you do have and compare it to other options that could have better long-term benefits for your retirement. Trap #4 -- Diversification is achieved with many different investments Many investors believe buy owning many different investments they are properly diversified. However, the may not have been informed about the risks in their portfolio. If you own Coke, Pepsi, and Dr. Pepper/Snapple are you truly diversified or do you just have three cars in the same burning garage? A financial advisor has the tools to design a portfolio that includes a variety of asset classes that have the ability to react differently in the same market environment. At the same time, a financial advisor should be actively managing the portfolio with small periodic changes so that the investment strategy does not become stagnant. A financial professional understands diversification is achieved by owning the right investments in the right amounts and not just by owning a large number of different securities. Trap #5 -- Not saving enough money A Google search on the phrase "under saving for retirement" returned 86,900,000 hits in less than one second. Perhaps this may be a topic of concern in the USA? We may find it easy to point at our relative or neighbor as the one who isn t saving enough to retire but we still have three fingers pointing back to us. A valuable role a financial advisor can plan is calculating your numbers for what it may take for you to realize your retirement dream. Regrettably, most investors have not performed this analysis for their own personal situation. If you have no struggle to understand what you need to do today to prepare for tomorrow s retirement, you may have been failed by your current advisor or the free financial media you follow. Not having a defined retirement plan is akin to driving cross county without a GPS or map to guide you. Eric D Griessel, CPA Page 4

5 Trap #6-- Following the government s retirement advice Excluding public safety, national defense, and the park service, how long would the book be titled "Government's Best Practices for Your Life?" My guess it would be a really short book. However well-intentioned our government may be they have missed the market for years on things like nutrition, climate, oil reserves, interest rates, recessions, etc. So help me understand why investors are so willing to follow the government s advice when it comes to our own financial wellbeing? Do you want a retirement plan where your partner is the IRS? Or would you rather have the potential for a retirement plan that you or your family keeps 100%? Many investors aren't even aware tax-free retirement options are available? Think long and hard before you act on advice given from an entity that has racked up over $18 Trillion in debt. That advice may have a lot of strings attached. A well skilled financial advisor will navigate you through the alphabet soup of retirement planning options to make sure you keep as much of your own money as possible. Trap #7 -- No true retirement strategy The lack of a cohesive retirement strategy is woven throughout these common traps. A life well planned includes detailed strategies for saving, investing, spending, and debt management. Additionally, a robust risk management program must be in place to hedge or eliminate the risks posed by taxes, inflation, the financial markets and your own personal health. Lacking a strategy in one or more of these areas could derail your entire plan. Unfortunately, most outlets for traditional retirement planning take the road to least resistance and settle for cookie cutter strategies just to collect subscriptions, fees, and commissions. They may be unwilling to have the tough conversations required to craft a solid retirement strategy. The right financial advisor can assist in developing a personalized plan for you. Not only do you deserve to have a plan, you deserve one that gives you the highest probability of succeeding and is easy to understand and implement. Retirement planning is a highly personal and emotional part of your life. If you have ever questioned you are on the path to retirement or you believe you need Eric D Griessel, CPA Page 5

6 a second opinion on your current plan, please click this link to contact me or call (417) to schedule an appointment. About Me After several years as a Certified Public Accountant (CPA) and corporate financial executive, I decided to specialize in working with investors with financial situations similar to yours. I have used my expertise for the last 14 years with Wealth Partners, LLC (Raymond James Financial Services) to provide purposeful retirement planning for investors who have struggled to find success. I have developed and refined a process to develop a personalized strategy to provide solutions not be found in the mainstream financial media. I received my undergraduate degree in Accountancy from the University of Missouri and a Master's in Business Administration from Marquette University. I actively fulfill my continuing education requirements to maintain my CPA licensing even though I don't perform the duties of the typical CPA. Now, after 25 years, I know I am well-positioned to be the last financial advisor you need. Eric D Griessel, CPA Page 6