11 Dec Planning for retirement when you don’t have investment know-how
Jane is single, but she hasn’t always been single-minded about saving for the future.
Well, she saves, but she admits she knows very little about investing, nor does she have the time to get deep into the strategies she will need for a successful retirement.
“My biggest concern is planning for retirement,” says Jane, 44. “I don’t know how to maximize or make the most of my savings.”
She imagines she’ll have to work until age 70, and after that, she plans to live simply.
“I would hope to enjoy simple pleasures such as eating out, treating myself to things and being able to travel.”
Jane’s home is valued at slightly more than her mortgage balance. She’s saved $63,400 in 401(k) plans, $90,000 in IRAs and she has $59,000 in checking.
She will also be eligible for a pension when she retires, and what that will be worth depends on how long she stays employed.
Brian Power, a certified financial planner with Gateway Advisory in Westfield, reviewed Jane’s retirement prospects for NJMoneyHelp.com.
He had some good news for Jane.
“With the pension she has already earned, her projected Social Security benefit and her modest lifestyle, she is very much on track and doesn’t need to make any major changes,” Power says.
But that doesn’t mean her plan couldn’t use some tweaking.
RETIREMENT CASH FLOW
For his analysis, Power assumed Jane’s retirement expenses would be $48,000 after taxes. He included her current mortgage payment, and kept her spending level the same through retirement, even though the mortgage should be paid off by the time she retires.
“Keeping the mortgage expense item of $18,000 a year in her budget would allow Jane more flexibility in retirement to spend on other things like traveling and health care costs,” Power said.
Another important factor in Jane’s retirement outlook is her pension. The amount of yearly income she’ll have will depend on how many years she works at her current job.
Jane said she doesn’t expect to stay in this job until her full retirement age, so Power ran three different scenarios using different pension assumptions so Jane could see the difference that future income could make for her retirement plan.
The first scenario assumed Jane works just two more years at her current job, which would get her to 15 years under her pension, and an annual income of $22,470 from the pension. Power also assumed Jane would continue to save $3,000 to her employer-sponsored retirement plan, and that she’d continue to save that amount every year until age 65.
That scenario gives Jane an 86 percent chance of not running out of money by age 92.
Jane would get a higher pension amount if she works longer.
If she stays 17 years, she’d get $25,654 per year, and if she stays 20 years, her annual payout would be $33,454. Both of those scenarios increase her chance of not running out of money to 99 percent.
But those extra funds won’t make a real difference to her overall retirement financial health — as long as she doesn’t significantly change her spending.
ASSET ALLOCATION
Jane describes herself as a conservative investor, but her investments are more aggressive, with 50 percent in stocks and 50 percent in fixed income.
Power says he recommends, for his conservative clients, an asset allocation of 20 percent in stocks and 80 percent fixed income, with 5 percent of that in a cash position.
Power says although Jane’s current allocation appears to be appropriate for her age, it’s not the way to go for someone who says they’re not knowledgeable about investing.
“In a very bad market like we experienced in 2008 through March 2009, Jane could see her portfolio go down by 25 to 30 percent, or %40,000,” Power says. “This may not be something she could stomach.”
When Jane moves her investments to a more conservative asset allocation, Power recommends she also further diversify her holdings. A large portion of her investments are in U.S. large-cap stocks — too narrow a bet for anyone’s holdings.
“She could benefit by owning additional asset classes such as, emerging markets and high-yield bonds,” Power says. “By combining these asset classes in the proper mix, she can potentially lower the volatility of her stock portfolio and keep her projected stock market returns on track.”
GETTING PROFESSIONAL HELP
Jane’s self-proclaimed ignorance of financial planning and investing strategies, and the fact that she says she doesn’t want to spend the time to manage investments, makes her a prime candidate to work with a professional.
Power recommends she interview two to three independent financial planners, who have their Certified Financial Planner designation. She should look for someone who will give advice, but also help with the oversight of her investments, he says.
Jane can find a listing of planners in her area through the Financial Planning Association of New Jersey, under “find a local planner,” or she could ask friends and family for a suggestion.
Power gives these tips for interviewing a financial advisor:
Ask to see their ADV
A form ADV is a legal document that ensures you are working with a person who is a Registered Investment Advisor (RIA), who is registered with the Securities and Exchange Commission. This document also acts as a disclosure document and includes advisor’s educational background, fee structure and past history of any client complaints.
What educational background do you have in the financial planning field?
First, consider planners who have been working in financial services for at least five years, or are directly supervised by an experienced professional. You will want to look for a planner with the CFP designation. It’s the most prestigious designation a financial planner can have.
What services do you provide?
A company with a broad range of services allows you to select what you need now and expand or upgrade your services as your circumstances change or get more complicated.
How do you get paid?
There are three basic ways a financial advisor can be compensated. Two are fee-based: a management fee based on a percentage of the assets under management, or an hourly rate. The third way advisors get compensation is by selling financial products that generate commissions (such as annuities or life insurance). The way a financial advisor gets paid can have a lot to do with their investment suggestions and their service model. Lastly, the price you pay should be affordable and in line with the service you receive.
Who will be watching my portfolio?
Your portfolio should be monitored proactively – not only when you make a call to your advisor.
How am I protected against losing my money if you take off with it or go bankrupt?
Your money should be held with an independent custodian, even as your advisor provides the active investment management of your accounts. In addition, the custodian should offer insurance, if the custodian is closed due to bankruptcy or other financial difficulties.
This story was first posted in December 2014.
Money makeovers offered by NJMoneyHelp.com should be treated as general advice about personal finance and money decisions. Before you make any changes to your personal financial plan, see a professional who can consider your entire financial situation. If you’d like a free money makeover, email .Net Worth:
Assets:
- Checking: $59,000
- IRAs: $90,000
- 401(k): $63,400
- Primary Home: $180,000
- Personal Property: $35,000
- Autos: $7,500
Total Assets: $434,900
Liabilities:
Mortgage: $174,200
Total Liabilities: $174,200
Total Net Worth: $260,700
Budget:
Annual Income:
- Salary: $86,365
Monthly Expenses:
- Income Taxes: $772
- Housing: $1,916
- Utilities: $183
- Food: $290
- Personal Care: $121
- Transportation: $241
- Medical: $316
- Entertainment: $43
- Vacations: $150
- Charity: $50
- Gifts: $50
- Misc.: $56