Always be Prepared
Retirement can and should be an enjoyable stage of a person’s life, a time to reap the benefits of a long career and pursue passions like traveling, relaxing or just being around loved ones. Of course, it is quite a challenge to reach that milestone, and multiple polls from within the past year show that more than half of working Americans think they are behind in their retirement savings, with more than a third believing they are significantly behind.
Whether they are fearful of a subject that can get complicated or simply overwhelmed with the day-to-day realities of raising a family and advancing in their career, they often overlook important steps in planning for the future.
“I think that’s something that everybody feels, because the truth is, no one knows if what they’ve saved is enough, even if what they’ve saved is a tremendous amount,” says David Haas, CFP, the current president of the Financial Planning Association of New Jersey. “They just don’t know what it will mean when they stop working.”
Daniel Folkinshteyn, Ph.D., a professor in the department of accounting and finance at Rowan University, has long been interested in money management and has taken the initiative to educate himself on financial markets and different investment tools. He believes that retirement planning doesn’t have to be so worrisome if people take the time to learn about the process and start early enough, and suggests taking advantage of organizations such as the National Association of Personal Financial Advisors (NAPFA) and reading books like The Psychology of Money by Morgan Housel, The Simple Path to Wealth by J.L. Collins and The Bogleheads’ Guide to Investing by Mel Lindauer.
“It’s like any specialization—it takes a little bit of effort to figure out what is the best thing to do,” he says. “Not all of us prioritize all of the important things in our lives. There’s a lot of complexity there if you don’t take the time to do some reading and think about it. Also, when you are 20, 30 or 40 years old, you’re thinking that retirement is a long way away, so you don’t really have to think about it right now. People who get to thinking about this earlier on and get the right advice tend to be in a much better position by the time they are older than people who let it slide until it becomes an emergency.”
The best retirement plans vary by individual, with factors like risk tolerance, life phase, short- and long-term goals, lifestyle and medical needs all playing a part. Even those who do have a good understanding of the topic may benefit from the services of a financial planner or advisor, while today’s technological advancements have made it easier to access and stay engaged in one’s portfolio.
South Jersey Biz spoke to Haas, Folkinshteyn and Amir Noor, CFP, a member of NAPFA, to learn more about planning for retirement and the resources that people can utilize to ensure their retirement dreams come to fruition.
Do you find that a lot of your clients feel like they are behind in their retirement planning?
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Amir Noor: Yeah, absolutely. It’s really a new thing that Americans have to do this. Back in the day, you would have a pension and it was kind of done for you. Pensions went away, and I think 401(k)s came out around 1978, and what that did is it shifted responsibility of saving and investing for retirement from the employer to the employee. On top of that, there was no increase in education or financial literacy to be able to take that responsibility. These organizations would have CFOs and people with finance degrees and they would manage the pensions for all of the employees and these big institutions. But the average person doesn’t have the skillset to do that.
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Amir Noor: Yeah, absolutely. It’s really a new thing that Americans have to do this. Back in the day, you would have a pension and it was kind of done for you. Pensions went away, and I think 401(k)s came out around 1978, and what that did is it shifted responsibility of saving and investing for retirement from the employer to the employee. On top of that, there was no increase in education or financial literacy to be able to take that responsibility. These organizations would have CFOs and people with finance degrees and they would manage the pensions for all of the employees and these big institutions. But the average person doesn’t have the skillset to do that.
Is your first piece of advice to someone to start retirement planning yesterday? In other words, it’s never too early to start thinking about?
David Haas: One hundred percent. Starting earlier makes it so much easier because of the power of compounding. Compounding over time is super important—it’s more important than what you’re invested in, honestly, unless you’re invested in something that’s giving you almost nothing. Everybody wonders about how much stocks they should have, how many bonds. If you start young, you should have more stocks, and you shouldn’t even worry about it. You should just be putting money into it early in your career.
David Haas: One hundred percent. Starting earlier makes it so much easier because of the power of compounding. Compounding over time is super important—it’s more important than what you’re invested in, honestly, unless you’re invested in something that’s giving you almost nothing. Everybody wonders about how much stocks they should have, how many bonds. If you start young, you should have more stocks, and you shouldn’t even worry about it. You should just be putting money into it early in your career.
Are there certain instruments you think people should be more aware of and using to their advantage?
Daniel Folkinshteyn: If your employment situation offers a match with your 401(k), it is literally like free money being given to you, so you definitely don’t want to leave that on the table. As far as investment instruments, a lot of research shows that our best bet is low-cost index funds, because you definitely want to control your investment costs more than you have to worry about what particular thing you are doing. One of my favorite quotes is, “Investment returns come and go, but costs are forever.” You know exactly what your costs are going to be and you can minimize those, and you’ll be doing better than anyone who is not thinking about it. So a diversified index fund should definitely be a core portfolio holding for anyone who has any investments and savings.
Daniel Folkinshteyn: If your employment situation offers a match with your 401(k), it is literally like free money being given to you, so you definitely don’t want to leave that on the table. As far as investment instruments, a lot of research shows that our best bet is low-cost index funds, because you definitely want to control your investment costs more than you have to worry about what particular thing you are doing. One of my favorite quotes is, “Investment returns come and go, but costs are forever.” You know exactly what your costs are going to be and you can minimize those, and you’ll be doing better than anyone who is not thinking about it. So a diversified index fund should definitely be a core portfolio holding for anyone who has any investments and savings.
And of course if your employer does not offer a 401(k), one can take advantage of an IRA. The contribution limits are a little lower than a 401(k), but one can still do pretty well. The important thing about those instruments is that you get a significant tax advantage from investing in these types of retirement accounts, because you can not pay taxes on the income that you contribute right now, and then the investment gains throughout are also not being taxed until the end when you start withdrawing, and then you’ll pay taxes on your contributions and returns. But in the meantime, money gets to compound without taking the tax hit every year. So it’s certainly a good idea to take maximum advantage of these retirement accounts.
Can a guaranteed income annuity be the smart move for some people?
DH: To me, annuities are often mis-sold. They’re a tool in a good financial planner’s toolbox, but I do not believe in annuities for tax management; I actually think they can be detrimental. Annuities can be very complicated, and the only reason to have an annuity is either current guaranteed income or future guaranteed income. They can be useful, particularly once you get toward retirement age, to create a guaranteed income stream. These are very simple, single-premium immediate annuities. They’re very inexpensive and they create a pension-like income stream. … Some of the more complicated annuities I find of less value. I think they’re over-sold and I think you can accomplish what the annuity accomplishes more efficiently without the annuity wrapper that causes all kinds of problems and costs a lot more.
DH: To me, annuities are often mis-sold. They’re a tool in a good financial planner’s toolbox, but I do not believe in annuities for tax management; I actually think they can be detrimental. Annuities can be very complicated, and the only reason to have an annuity is either current guaranteed income or future guaranteed income. They can be useful, particularly once you get toward retirement age, to create a guaranteed income stream. These are very simple, single-premium immediate annuities. They’re very inexpensive and they create a pension-like income stream. … Some of the more complicated annuities I find of less value. I think they’re over-sold and I think you can accomplish what the annuity accomplishes more efficiently without the annuity wrapper that causes all kinds of problems and costs a lot more.
What credentials should potential clients look for when searching for an advisor?
AN: Finance as an industry has changed so much over the last 100 years. You used to have a need … and you would find a financial advisor to solve that need. When it came to life insurance, you would find an insurance agent. If you needed some mutual funds, you would go find an investment advisor. But over the years, those lines really blurred, so you have salespeople who are selling products but they’re saying they’re providing financial advice. Sure, they might be advising you on the product to buy—but that’s not the same thing as a financial plan. So the most important thing for every consumer is to make sure whatever professional they’re working with is a fiduciary, meaning they’re legally obligated to work in your best interest. If they’re a CFP, a Certified Financial Planner, they have to be a fiduciary, otherwise they’re going to lose their CFP [designation].
AN: Finance as an industry has changed so much over the last 100 years. You used to have a need … and you would find a financial advisor to solve that need. When it came to life insurance, you would find an insurance agent. If you needed some mutual funds, you would go find an investment advisor. But over the years, those lines really blurred, so you have salespeople who are selling products but they’re saying they’re providing financial advice. Sure, they might be advising you on the product to buy—but that’s not the same thing as a financial plan. So the most important thing for every consumer is to make sure whatever professional they’re working with is a fiduciary, meaning they’re legally obligated to work in your best interest. If they’re a CFP, a Certified Financial Planner, they have to be a fiduciary, otherwise they’re going to lose their CFP [designation].
So fiduciary and CFP are very important … and the third thing, in my opinion, is your advisor should be fee only, which is not the same thing as fee based. Fee based means that they could charge you a fee, though they might not. If part of their analysis is the recommendation of life insurance and they sell you life insurance, they’ll get a commission, so that’s a little bit of a conflict of interest. With a fee-only advisor, you are paying them directly. There’s not a third-party commission coming in to offset anything—you’re the one paying them.
For someone who has the interest and the capability of managing their own finances, are today’s technological advancements beneficial?
DF: Of course. … The access to information has certainly increased greatly, and the costs for investing have also gone down dramatically. It used to be that you had to call your broker and say, “I would like to buy some shares in X, Y and Z,” and pay them a fee for the privilege of picking up the phone. Now, everybody has a website and you can go to Vanguard or E*Trade or whoever and get all the information, and move your money back and forth basically for free. We also have the robo-advisors in the past few years. You can’t ask them questions, but they’ll automatically allocate your money based on the preferences that you set out for them. They’re relatively competitively priced as far as ongoing investment management goes. So technology has been a big improvement over the past couple of decades.
DF: Of course. … The access to information has certainly increased greatly, and the costs for investing have also gone down dramatically. It used to be that you had to call your broker and say, “I would like to buy some shares in X, Y and Z,” and pay them a fee for the privilege of picking up the phone. Now, everybody has a website and you can go to Vanguard or E*Trade or whoever and get all the information, and move your money back and forth basically for free. We also have the robo-advisors in the past few years. You can’t ask them questions, but they’ll automatically allocate your money based on the preferences that you set out for them. They’re relatively competitively priced as far as ongoing investment management goes. So technology has been a big improvement over the past couple of decades.
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Published (and copyrighted) in South Jersey Biz, Volume 14, Issue 2 (February 2024).
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Author: Matt Cosentino
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