If you’ve sat through a sponsored retirement course at work or a seminar at a local hotel, you may have heard shrewd arguments that allege everyone needs to work with a Financial Advisor. They may have shown charts and graphs or shared impassioned opinions intended to convince you that you shouldn’t pursue a Do it Yourself (DIY) retirement plan.
Their ardent message – Your foremost hope of financially surviving your retirement years is to turn over your retirement plan to an experienced retirement planner. But does this general assertion have merit?
Maybe you’ve heard adages, old wives’ tales, hyperbole, and myths designed to scare you into a specific behavior. On their surface, many (perhaps most) of these maxims are well-meaning. Yet, it seems others are only created to get us to do what “THEY” want us to do.
Could it be that a portion of these pro-Financial Advisor tenets are:
- Not true?
- Hyperbole?
- Only possibly valid for some?
- Covertly designed to elicit a desired action or response?
Examples of some old (non-advisor related) suspect axioms/hyping:
- “If you want something done right, you have to do it yourself”
- Possible rationale for voicing this notion – These are immortal words perhaps spoken (usually exuberantly) by control freaks throughout time, possibly created and used to encourage others to work harder/smarter. If the message engenders its desired effect, it may allow the manager/boss/parent to save money, effort, and time, resulting in the coercion of others to put in extra effort without those in charge needing to do it themselves after all. Devious, yet extremely clever.
- “Don’t sit so close to the TV; you’ll go blind”
- Possible rationale for voicing this notion – I was surprised to learn this ancient adage isn’t true. According to PSU.EDU, the distance from which a television is viewed does not affect eyes or eyesight. But, in the “olden days” of floor console TVs, if your kid was sitting in front of the “tele,” others in the room may not be able to see the newest episode of “Mannix.” So, it may not have been factual, but it benefited adults and other viewers in the room.
- “Stop cracking your knuckles, or you’re going to get arthritis”
- Possible rationale for voicing this notion – According to Healthline, cracking (or popping) knuckles doesn’t cause arthritis. However, the site and sound of this exercise could be unnerving to nearby observers. This would be a good myth to be promoted by those who just can stand to see or (perhaps worse) hear that routine in practice.
- Federal retirement is too unique and complicated for federal employees to manage on their own; they require a Financial Advisory to manage their financial plans.
- Possible rationale for voicing this notion – Federal retirement is unique and can be complicated. But, should that imply federal employees couldn’t make themselves adept at addressing this aspect of their income lives on their own?
Faye Garland
Recently I came in contact with a federal employee nearing retirement after 30+ years of federal service. Faye (not her real name) shared that through various accounts, she had a little over $3 million in retirement savings. Faye requested a quick pre-Federal Retirement Readiness Review (FRRR) phone call to ensure her upcoming FRRR could be personally focused on her needs.
During that call, Faye asked why a financial advisor would be necessary to manage her retirement savings to which I honestly replied, “I don’t know that you do need a financial advisor.” I explained that a financial advisor/planner/manager’s value would vary from person to person.
How might an Advisor add to a fed’s retirement planning?
A financial advisor’s most significant attributes are arguably their knowledge, experience, and focus, such as:
- Knowledge of federal retirement systems, numerous planning options, and design variables.
- Knowledge of investment options that could impact TSP, IRAs, SSA, pensions, etc.
- Experience in planning for goal-based and needs-based coveted outcomes.
- Knowledge of potential pitfalls that the federal employee may not have thought of and ways that may help mitigate them, either pre or post-event.
- The advisor’s ability to stay focused during turbulent market conditions. When it’s YOUR money, it is sometimes hard not to panic or overreact during sudden market fluctuations. A quick move is not always the best move.
- Knowledge of appropriate asset allocations and possessing the means to reach them – Asset allocations may often change during retirement. Improper allocations might lead to poorer than desired growth or perhaps excessive risk.
If we agree that no two people are the same, then no two people have the exact same needs. Success may depend on experience, understanding of the items listed above, and the federal employees’ requirements. Also, to be considered is the desire to DIY this critical piece of a federal employee’s financial life. Therefore, working with an advisor may be a good option for some and unnecessary for others.
How can I determine if I may benefit by working with an Advisor? Ten questions to ask (and honestly answer) yourself:
- Do you fully understand how to calculate inflation’s possible impact on a retirement plan?
- Can you identify an appropriate asset allocation mix by yourself?
- Do you know your risk tolerance and how to locate and measure an investment mix that matches your tolerances?
- Do you understand the math behind how your federal pension/annuity and potential Social Security income benefits may be utilized to stretch your TSP (or other retirement savings)?
- Are you good with math?
- Time management – Are you prepared to take on the daily control of your retirement assets?
- Within many retirement planning programs, assets are monitored at least daily. During your retirement years, will you need to, are you expecting to, and are you prepared to make this type of DIY commitment?
- Do you believe you can manage your retirement investments to a long-term performance level comparable to that of an experienced federally focused financial adviser?
- Forbes shares studies showing that working with a financial adviser could produce 3% greater annual returns (after fees) than a typical DIY investor. That could mean a 34.4% greater retirement nest egg in just ten years. (3% compounded for ten years) “The research identifies how good decision making can enhance sustainable lifetime income on a risk-adjusted basis,” according to Forbes.
- Can you identify a well-founded list of potential retirement planning pitfalls and have a plan to address them should they arise?
- Are you prepared to make practical provisions that will proportionately address goals and needs during retirement?
- Will you know how, when, and why to rebalance allocations?
If, after answering these questions, you feel good about the DYI, then you might seriously consider managing your retirement plan by yourself.
If you don’t feel comfortable with the DIY approach, then you may need an advisor after all.
How to screen potential financial advisors
Most advisors will be happy to take your money, but I urge you to seek one that undeniably understands federal retirement systems.
Here are some points to consider before trusting your money and retirement future to any financial planning practitioner (advisor, manager, planner, etc.).
Remember, knowledge is vital. First, find out: Do they focus primarily on federal retirement and federal employees? This one is huge. Federal retirement platforms and options ARE unique. Federal retirees ARE a “niche” unto themselves. Try to avoid working with wide net-casting, “we work with anyone,” advisors that aren’t immersed in the federal employee retirement world. They may be unaware that they don’t understand the differences between other retirement systems and your own. They might be great people with the best intentions, yet you should not subject your financial future to someone that simply doesn’t know what they don’t know.
Questions to ask potential financial advisors
These are five elimination questions you can ask on the phone to weed out some less qualified advisors. If they don’t have satisfactory answers, move on! You may be surprised how many advisors don’t know the answers to these simple federal retirement questions.
1. Can they explain the difference between FERS and CSRS retirement systems?
Among other aspects, their answer should include that:
- Employees receiving CSRS retirement income benefits (generally) do not receive SSA payments.
- FERS includes a 401k type (TSP) employer matching savings.
- The multiplier/calculations (used to determine the annual retirement pension) of each (FERS and CSRS) are different.
2. How is the FERS or CSRS (whichever fits you) pension/annuity calculated?
If they indicate that FERS is calculated at 1% annually of the “high-three” and CSRS is roughly 2% annually, I would say they have some knowledge of federal pensions. Note: For CSRS, the first ten years have some variations; it takes 41 years and 11 months of full-time qualifying service to reach the maximum 80% annual payout. Patient FERS employees may receive an improved (1.1%) calculation of their “high-three”.
3. What is the difference between the TSP G Fund and F Fund?
The G Fund is the only fund not managed by an outside firm. The F Fund is a Bloomberg aggregate bond index fund.
4. How is supplemental income calculated for FERS employees?
Years of creditable service (divided by 40) x age 62 Social Security income benefit = supplemental income. You won’t qualify if it is considered “early” retirement. Plus, the supplement ends when you turn 62 and qualify for the minimum SSA income benefit.
5. How long have they been working as a federal employee financial planner?
I have read that it takes 10,000 hours to become an expert in virtually any field. I don’t know if that is true, yet I do know that with experience comes knowledge and insight.
In a column on Advisory Perspective dated 02/15/22, the author shares that 80-90% of new financial advisors don’t survive beyond three years in the industry. I can’t attest to this percentage, yet from within this world, it does seem that the turnover rate is alarming high! The point is, don’t let some new person learn their craft at the expense of your financial future. I suggest you look for an advisor with a minimum of five years of experience working zealously with federal employees.
Ok, the Myth about all federal employees needing a financial advisor may not rank up there with the “MythBusters” boat made out of duct tape, but we did a fair job of shining a little light on this narrative.
We are all individuals with unique talents and needs. Indeed, some could handle DIY retirement management just fine. At the same time, others might benefit significantly by working with a qualified and experienced advisor focused on feds and federal retirement.
Do you know in which category you dwell?
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. Investing involves risks, including the loss of principal. No strategy assures success or protects against loss. Silverlight Financial, Infinity Financial Services, and its affiliates do not provide tax, legal, or accounting advice. This material is not intended to provide and should not be relied on for tax, legal, or accounting advice. You should consult your own tax, legal, and accounting advisors before engaging in any transaction. For a list of states in which I am registered to do business, please visit www.silverlightfinancial.com.
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