Six Tips to Avoid Financial Abdication

May 18, 2015

One of the first rules I teach my clients is, “Don’t do anything you don’t understand!” I introduce this principle early on in my educational seminars and interactions with clients. As a professional, I must know that my clients understand this rule and are willing to live by it before moving forward.

This commitment means a willingness to raise one’s hand if he or she is confused or has a question. Its adherence requires a willingness to engage in critical thinking. It also requires a financial professional to have the heart of a teacher and to deeply understand one’s needs and goals. It requires a professional to explain and articulate related financial decisions, options and strategies simply in an understandable and relatable manner. It requires compassion and empathy. Unfortunately, my industry is not awash with professionals who exhibit these attributes, but there is hope.

Being committed to the concept of learning regarding any facet of one’s life is categorically centered in personal responsibility. Whether it is our health, personal or family relationships, spiritual well being or the development of one’s profession or career, personal responsibility is paramount. Unfortunately, the level of personal ownership and accountability exhibited in our culture today is wanting. America is in desperate need of leaders who will exemplify and tout this virtue. Notwithstanding, taking responsibility in our financial lives is essential not only for peace, but for economic survival!

Embracing the concept of “Don’t do anything you don’t understand?” is an important principle we intuitively know to be true, but one many have not followed. Consequently, many are pursuing a course not really understanding the financial realities, complexities and ramifications of their actions. This leads to a host of problems.

Case in point! Given the dramatic reduction of defined benefit pension plans in the private sector, the need to personally shoulder the responsibility of one’s own retirement has become even more important. Private sector workers must prepare and provide for themselves economically. I would caution those believing a government institution can provide this function. Oh, there are many who will express such intentions, but there is no historical model that has proved successful in this effort.

The American safety net of Social Security and Medicare, which we all know are struggling, were never designed to be the sole source of our “golden years” financial and healthcare support. Unfortunately, we are progressing toward an environment, because of the abdication of financial responsibilities, where millions of Americans are potentially yielding their financial control to others. Hence the need for an increased level of understanding of one’s financial course and the need to guard against abdication.

When I use the word abdication I often get a furrowed brow. Websters tells us that the word abdication means to fail to do what is required, to cast off or to relinquish formally. When we yield our financial responsibilities to someone else or ultimately to government institutions, we can find ourselves in a position of dependence. This is contrary to the American spirit of self-reliance, personal freedom and independence.

So, let’s turn the corner. Here are six tips to avoid financial abdication.

First, commit to a process of on-going learning. Admittedly, the subject matter surrounding the financial decisions we make is complicated. But, it’s not so complex we can’t grasp the issues relevant to our financial lives. I pride myself in making the complex simple. It’s one reason why I spend so much time writing helpful publications and conducting educational seminars to increase awareness and understanding.

Second, take ownership to understand where you are in your financial life. Are you in the accumulation or distribution phase of life? Are you in the retirement red zone? That’s the period of time five years before and five years after retirement. Your current station is a helpful determining factor of where you should go next. We are all in different places. One size does not fit all!

Third, understand your goals and objectives. What do you want? What is important to you? What is your vision for the future? Whether you are a pre or post retiree, own these questions and be honest with yourself about them.

Fourth, quantify the economic risks you face and be sober regarding the strategies needed to combat them. These risks include but are not limited to market risk, sequencing of returns risk, withdrawal rate risk, survivorship risk, inflation risk, long term care risk, legacy risk and of course longevity risk.

Fifth, look at your financial life like a chessboard. One move is not a move unto itself. Take a comprehensive view. Don’t buy financial products that are not coordinated and integrated with your overall plan. If you succumb, all you end up with is a financial junk drawer.

Sixth, find a financial professional who has the heart of a teacher and will listen to the core of who you are and where you want to go. A person worth engaging should welcome the opportunity to slow down with you.

Being an active learner and participant in one’s financial life is essential to success. Remember, abdication is not an option! Yes, our financial world is complicated, but it’s not too complicated if one has a teachable spirit. As we take ownership to acquire a better understanding of our financial lives we will have a more credible claim on inner peace.