Preparing for retirement can be a daunting task, and is one that begins at the start of a career. It can be very straightforward for many people, as they simply try to add more to their TSP. For others, though, there can be a lot of questions and anxiety.
There are professionals who can help you navigate those waters, but deciding to go that route is a big decision. It is important to be honest with yourself and to realize how much you know and how much you don’t, and get help where it is beneficial.
Working with a financial advisor can also mean letting go of some control over your life savings, which is difficult. Provided you aren’t talked into purchasing insurance products, though, you still retain the ultimate decision-making ability. You want to be completely comfortable with any move you make before you make it, and should never be pushed into anything.
A good comparison when considering hiring an advisor is that of a plumber adding a new fixture. If you know how to sweat copper pipes and have the necessary tools, you can save a lot money by doing the work yourself. If you take the project on without the knowledge or tools, though, you may end up paying much more in the long run to fix it after there is a bigger problem.
The same concept applies to financial advice. You should recognize the knowledge and tools needed, and understand where you fit along the scale.
What can an advisor help with?
A financial advisor can help with many aspects of your overall financial planning, including:
- Navigating the complicated federal benefit system (look for someone with experience with federal employees!)
- Giving peace of mind to a spouse that their needs will be covered as well even after you are gone
- Retirement income planning, including which sources of income will be used each year
- Allocation determination, to best fit your projected needs
- Tax efficiency planning, including utilizing different account types and tax efficient investments
- Withdrawal strategies to maintain a consistent income over time
- Goal-oriented planning for specific needs
The benefits of an advisor can also be broken down into two more general categories:
Preventing mistakes
One obvious benefit of professional assistance would be to keep you from doing things you shouldn’t do. There are many different examples of this type of situation:
- Are you missing out on market gains because you are in an inappropriate investment allocation?
- Did you put everything into the G fund after a market drop and now don’t know how to get back in, having missed recent gains?
- Did you use your partial TSP withdrawal for a small purpose, consequently limiting your flexibility going forward?
- Are you basing your investment decisions on recent market trends and financial news, instead of your own personal plan and long-term goals?
Missing opportunities
The second category of advice is that which helps you take advantage of every opportunity available, even if you didn’t know about it. How many times have you been in a presentation and heard an idea that you were not aware of. How many more similar ideas are out there? This is where it comes down to knowing what you don’t know.
- Do you have a comprehensive financial plan to base your decisions on?
- Are you aggressive enough with your TSP?
- Are you fully utilizing your Roth TSP option?
- If you are maxing out TSP, are you also doing an outside IRA or Roth IRA?
- Do you have a large amount in savings that is un-invested, or an investment account that isn’t getting favorable tax treatment?
- Are you overpaying for FEGLI coverage, or do you have more coverage than you need?
- Do you know which accounts to pull retirement income from, and tax implications of the decision?
- Do you regularly rebalance your investments to keep them on track, both within accounts themselves and between different account types?
- Have you considered Roth conversions, especially after retirement?
How much value can an advisor bring?
The first question when considering hiring a financial professional is to determine how much value they can bring to the table. There are several ways to look at the potential benefits.
- One of the most important benefits is often demonstrated in terms of better decision making, not necessarily in better returns vs. the market. This comes with a psychological or behavioral coaching aspect, helping to utilize more logic and take emotions out of the equation. It is often much harder to stick with a long-term plan through turbulent markets and life changes than it is to create one in the first place.
- Studies have shown that over a long period, active manager and mutual fund pickers do not beat the index averages for similar allocations, and doing better than you can do with the TSP investment options is not a good reason to look for assistance. A good advisor can put together a plan to deal with the market, not control the market.
- The focus of an investment evaluation is on typically on larger returns, but should also include volatility and the reduction of investment risk. That is harder to quantify, but just as valuable.
- Value added does not always show up on a statement, and it is hard to quantify. What is it worth to relieve anxiety over financial decisions and have peace of mind? You never want to completely turn over your decision making, but the assistance of a trusted expert has a lot of psychological benefit.
- How much time will you save in research and the decision-making process. What is that worth, especially in retirement?
- Does your spouse participate in any of the financial planning and decision making? Would they be vulnerable if something happened to you and they were left to make very important decisions without trusted assistance?
How much does financial advice cost?
A long-term relationship with a financial advisor will always have a cost involved, just like you would have to pay the plumber to add a faucet. The costs can vary significantly based on what you do, though, and that can have a large impact on the decision process.
- Some advisors will give you an initial review and planning session for free. That can be a very wise thing to take advantage of, even if you don’t feel like you will need help after that. This is especially true if that planning can encompass how to maximize the benefits from the federal retirement system.
- Fees can be paid to advisors in several ways. Those include up-front commissions to product salesmen and hourly or asset based fees to a fiduciary advisor. There may also costs inside of any recommended investments. When evaluating the cost, it is important to consider all components. If you can’t get a straight answer or are told there aren’t any costs, it is a bad sign.
- It is important to make sure any fees paid are reasonable, and to limit them as much as possible. Make sure their interests are aligned with yours before going forward, with as few conflicts of interest as possible.
- Understand what you are paying for. Costs for comprehensive financial planning and overall portfolio management can be well worth it. Costs for stock picking among similar companies, as compared to an inexpensive index fund, are much less likely to be beneficial.
- The cost of advice must also be weighed against the value already discussed. Consider the example of someone who got out of the market after a 10% drop, and didn’t get back in until after the rebound had already occurred. That 10% realized loss would have covered a 1% fee for 10 years to an advisor who could have advised them to ride out the market fluctuation.
- You don’t need to empty your TSP to get advice. You can work with someone on a small outside account, a smaller TSP transfer, or even a planning only fee. You can also get planning and advice while putting off any investment management or account transfers until a more appropriate time later.
How to decide?
There are several questions you should ask yourself as you go through the process of deciding whether or not to seek the assistance of a financial advisor:
- Do you know enough to do it yourself? Are you tempted to get out of the market every time it drops, or have you already done so? Do you know you should get back into the market, but don’t know how or when? Do you know the difference between traditional and Roth accounts, and when a conversion would be appropriate?
- Have you ever been to a federal retirement seminar, and come across a rule or strategy you didn’t know about? How much could your situation be improved by using that idea? How many other ideas or strategies are out there that you don’t know about?
- Are you in a phase that needs a lot of advice? If you are young, still working on maxing the TSP out, in an aggressive allocation, and using the Roth option, there isn’t much value that can be added. It is a very different situation if you are about to retire and start making withdrawals.
- Can you get the maximum value for the minimum cost?
Not everyone needs help, and this article is not intended to imply that they do. Everyone has a different financial situation, knowledge base, and comfort level.
Many devoted FedSmith readers will reject the idea of going to someone for help with their retirement planning, because they tend to be very involved, well-informed, and with definite opinions on the best tactics for managing their affairs. If that describes you, keep in mind that you aren’t likely to be a beneficiary of this discussion.
There are many other feds out there, though, who have much less time, willingness, or ability to take on the same tasks. For those people, getting the needed assistance can be very valuable. Situations can also change over time, and someone who was fine managing on their own eventually gets to a point where there is a benefit from getting assistance.
