Eliminate Pre-Retiree Mistakes by Following this Principle

Eliminate Pre-Retiree Mistakes by Following this Principle

October 15, 2022

An important rule we teach our clients is, “Don’t do anything you don’t understand!”

This seems obvious, doesn’t it? Of course! But you would be surprised how many pre and post-retirees don’t have a good grasp or understanding on the direction of their financial lives. Consequently, we uncover a lot of anxiety and worry in my early client meetings. We observe a collective sigh when we share our commitment to education and the importance of looking at one’s whole financial chessboard. Some may have a background or acumen in financial matters, but most do not, so a genuine yearning for clarity is real.

The financial industry is laden with an endless barrage of media talking heads telling Americans what to do with their money. The problem is those giving advice are rarely objective and unfortunately few are rooted in core principles. In addition, they don’t know your very unique situation. Maybe you have found yourself equally frustrated trying to navigate a sea of half-truths and what may seem like facts laced with self-serving opinions.

So remember, “Don’t do anything you don’t’ understand!”

 All of the paralyzing discussions surrounding the Department of Labor’s Fiduciary Standard Rule in recent years, highlights the need for more transparency and advisors who put their clients first. Makes sense, doesn’t it! We smile at McKell Partners because our moral and ethical center has always been rooted in putting our client’s interests first. Therefore, we constantly preach, “Don’t do anything you don’t understand!” For anyone, but especially a pre-retiree, this one principle, if you stay true to it will serve you well. A determined quest for the truth is a powerful weapon in what sometimes may seem like a game of take-away. 

Let’s consider for a few minutes why is it so easy to be confused? 

Often, accumulation phase financial strategies preached by the Wall Street crowd need a new set of eyes when pre-retirees transition to the distribution or preservation phase of life. When in the accumulation phase we save and build assets. Conversely, in the distribution phase, we spend or distribute assets. News Flash! Assets react very differently when amounts are withdrawn for income given what can be a volatile market environment. Hence, the importance of learning about sequencing of returns risk and how to combat it.

Retirement income planning can be an area of confusion. Remember, it’s not the size of an asset in retirement, but how the asset converts to income that is most important. And what about when you are in the retirement red zone? That’s the period-of-time five years before and five years after retirement. Sometimes an advisor may not recommend repositioning assets to a more guaranteed safe money strategy, because he is simply not licensed to do so or is unaware of the suitability of these financial instruments. 

I am not suggesting all pre-retirees should move assets in pre-retirement to actuarial or fixed-type instruments (life insurance, annuities, etc…). But, advisors should at least be balanced and objective in understanding these tools and teaching clients about their features and benefits. In practice, often the best results can be obtained when combining both actuarial science and investments. But, because many advisors are not schooled on both sides, the public is left with less than optimal results.

Remember, “Don’t do anything you don’t’ understand!”

Another reason that may color advisory advice is the way advisors are compensated. Many accumulation based advisors, meaning advisors who primarily manage money, are paid a fee or percentage based on the assets they manage. This is common in the industry and at McKell Partners we manage assets this way. However, because of a desire to protect asset management fees, some advisors resist assets leaving their managed accounts for fixed strategies even when it might be better for the client. 

We have seen this first hand when clients seek to develop hybrid type long-term care strategies to protect assets and income from the devastating effects of a long-term illness or cognitive decline. When we explain these strategies, clients often respond, “How come I’ve never heard of this?” Obviously, their previous advisors are either ignorant or in an effort to protect their own compensation, have not educated the client on how to reposition assets into these potentially more efficient care strategies.

Is it any wonder why the public might be confused?

Take the challenge to slow down and don’t do anything you don’t understand!

In our opinion, a financial professional worth engaging is one who exhibits some elevated communication skills that foster a spirit of education and clarity with those they serve, putting their interests ahead of their own.   Consider the following:

  1. Slow Down – A financial professional should welcome the opportunity to slow down with you and go at your own pace.  If you feel like the planning sessions are moving too quickly ask for a “time out.”
  2. Non-Financial Language – He or she should do their best to check their financial advisory language at the door. Some advisors seem to talk in code and financial acronyms, If you can’t understand what he is saying then say to yourself, “Is there a quicker way out of here than the way I came in?”
  3. Listening – In short, a financial professional should listen. He should seek first to understand before being understood. This listening should not begin and end with some sort of sales pitch. A true planning professional is also interested in life planning and how your financial life overlays on the rest of your experience in retirement.
  4. Education – A great financial professional should have the heart of a teacher or educator. You should be saying or feeling, “Oh, I get that now.” or “That makes sense.” or “Now I see why those two things connect.”

But remember, part of learning is ownership. You must be honest with yourself and acknowledge the financial risks and economic realities you face. Unfortunately, many do not seriously engage until they have experienced market losses or have made a serious mistake. Their awareness also tends to spike when faced with a weighty financial decision forcing them to become a responsible part of their own financial plan. Hey, whatever it takes to get on track is good.  But, no matter the motivation, we must not procrastinate preparedness!  We need to own where we are and take responsibility for learning. 

Remember, the average 65-year-old could live 20-30 years in retirement. We have many clients in their 80’s who frequently say to me, “Mark, we didn’t think we would live this long!” and yet they are living vibrant, active lives. Understanding this should encourage pre-retirees to become better financial students.

Remember, “Don’t do anything you don’t’ understand!”