Everything You Need to About Hiring a Retirement Advisor
In a perfect world, your retirement plans begin with your first job as an adult. The logical reason is that if you set up a retirement plan as soon as possible, you will build a substantial “nest egg” for later. If you can harness the power of compounding, your retirement account will grow substantially if you start putting something away when you are in your twenties.
Everything You Need To About Hiring a Retirement Advisor
A retirement planner (another name for an advisor) will discuss your life goals and analyze your current financial condition to determine what adjustments can be made to help you reach retirement goals. Part of the calculation is to determine how much monthly money you will need to maintain your lifestyle at a certain level upon retirement.
A retirement planner considers the strategies that help with tax deferrals so that your retirement account(s) take advantage of the best tax strategies. This means you will want to fully fund your investment retirement account (IRA) for the tax benefits. The current limits for funding an IRA account in 2023 are $6,500 per year ($7,500 per year if you are older than 50).
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How Much Does a Retirement Advisor Cost?
There are five ways that professional financial advisors charge for their services, which are:
A percentage of the assets under management (AUM) ranges from 0.25% to 0.50% annually for a robo-advisor* and 1 to 2% annually for a human advisor
A flat yearly fee of $2,000 to $7,500
Hourly fees of $200 to $400 per hour
Per-plan fees of $1,000 to $3,000 for plan administration
Per services requested
Some robo-advisors do not have any fee. They are part of an investment brokerage company’s offering that is included in customer service. Use caution and conduct due diligence (read the fine print) to uncover the possibility of high fees for the investments that are recommended by these services.
Do you need a retirement planner?
There are two reasons for using an advisor for retirement. The first one is to set up a plan to save and invest for your retirement. The second reason is if you are already retired and need to manage your investment funds to live from your monthly income that can be taken from the investments.
How To Hire a Retirement Advisor?
If you need advice only about your 401 (k) plan, there may be free investment advice included in the plan. Ask the plan administrator or the human resources department if investment advice is available to take advantage of the free services.
If you need to hire a financial advisor, prepare a list of your needs and goals and then search for an advisor that meets your qualifications. Ask for recommendations from people you already trust, such as an attorney or accountant.
Conduct due diligence and run a background check on any potential candidates to determine if they have a license in good standing. Be sure that there are no serious complaints with the Better Business Bureau and on review websites.
Consider using a fee-based advisor to remove any conflict of interest, rather than using a commission-based advisor who makes money on the investments you make.
Here are some critical considerations when you hire a retirement advisor:
Are you going to manage the funds yourself based on the recommendations, or will you give your advisor management control through a custodian account? Independent advisors work under their own business name; however, all funds are kept in a larger account of a custodian that is a major bank or investment brokerage firm.
Some advisors have a minimum deposit for accounts that they manage.
Claims of extraordinary returns that seem too good to be true are a gigantic red-flag and are not a sign of fantastic investment expertise but is likely a clear sign of fraud.
Do not put all your investment account with a single financial advisor. Instead, allocate a portion to more than one. This is the second-best way to prevent losing everything if your advisor turns out to be another Madoff. The best way to guard your funds is to become very financially proficient and manage your funds under your control with advice from others that do not control your money.
Bernie Madoff, who ran the largest Ponzi scheme in history that stole billions, promised investors ridiculous returns. Madoff’s supposed historical trades showed nearly perfect market timing, which is impossible. He backdated the trades after he already knew what happened and never held the actual investment positions.
Over about 17 years, Madoff “made off” with tens of billions of investors’ investment money. He is in prison for the rest of his life now with a net worth of minus $17 billion.
“Buy-and-Hold” Retirement Strategy
One way to reach your retirement goals is to set up an automatic investment plan that funds your investment account from your paychecks without any effort on your part. If you are in your twenties now, you want to set up a tax-deferred retirement fund with the investment profile, which you think will do well over the very long-term of 50 years. This is called a “buy-and-hold” strategy.
How powerful is the buy-and-hold retirement strategy?
If you automatically invest $100 per month starting at age 20 and earn an average of 10% annual return on your investment by your retirement age at 70, your account will have $1,408,429. That’s right! You will retire a millionaire. Whatever you make each month, subtract $100, and take it out to add to your investment account before you spend any of your pay.
This money put is away, so you can forget about it until you need to use it later. You can use a retirement savings app as part of a wealth-building strategy to accomplish this effort. This is a terrific way to “pay yourself first.” You automatically fund an investment account before you spend money elsewhere.
If your retirement plan is automatic, then you will hardly notice it, and the $100 per month will magically build your investment fortune. If you can follow this simple plan, you do not need a retirement advisor. You will be better off in your retirement than 85% of others your age.
At What Age Will You Retire?
Many are delaying retirement now because they cannot afford to stop working. The retirement age is getting older. Officially, for Social Security, the full retirement age is changing in America from 65 years old to 70 years old. The Social Security trust fund will be depleted by around 2034. After that, if no changes are made in the system, the Social Security monthly benefits will likely reduce to 75% of the previous amounts.
Americans are living longer, so making sure there is enough money put away is more challenging.
Is there a difference between a retirement advisor and a financial advisor?
A comprehensive financial advisor may give retirement advice but may not specialize in retirement. If your focus is solely on your retirement plans, it is better to hire a retirement advisor who specializes in the field of retirement plans.
Does a Financial Advisor Need a License?
Yes, if the adviser is not an attorney, a certified public accountant (CPA), or a stockbroker. A certified financial planner (CFP) needs to have a license if they recommend investment products or handle client funds.
To get a license, CFPs need to have a bachelor’s degree and pass many exams. They must register with the state(s) where their clients live and where they conduct any business. They must register with the Financial Industry Regulatory Authority (FINRA). Any company that CFPs work for must also register with the SEC.
Other specialists have similar license requirements, which include a Retirement Income Certified Professional (RICP), a Chartered Retirement Plans Specialist (CRPS), or a Chartered Retirement Planning Counselor (CRPC). These professionals focus on retirement issues exclusively.
Why you should not use a financial advisor?
What is the difference between Johnny Depp and Brad Pitt? About $100 million. Johnny Depp’s net worth is around $200 million. Brad Pitt’s net worth is about $300 million. Depp earned more on his movies with a cumulative box office of over $3.5 billion compared to Pitt’s cumulative box office of $2.5 billion. Moreover, the big difference is Depp is a wild spender who does not manage his finances well. Depp sued his manager for defrauding him and stealing some of his money.
Relying on a financial advisor can be a huge mistake. I think everyone should learn about these topics, so they can manage their finances. It is actually much easier when using the comprehensive online tools that are available. Online tools are part of the Goalry system to help manage budgeting, cash, bill paying, credit history, debts, real estate valuations, insurance, loans, taxes, and most importantly, to build wealth.
Even if you do not take care of everything on your own, you should stay informed about personal finances.
Is it worth having a financial advisor?
In my humble opinion, if your net worth is less than $5 million, I think you should be very “hands-on” and always know your financial condition and how well you are following your retirement plan.
However, if you cannot add two plus two without using a calculator, you might benefit from at least having the help of a financial coach.
Can You Reduce Your Taxes By Deferring Them With Retirement Accounts?
Start your financial education by learning the IRS rules for IRA contributions and how you may get a tax deduction for your IRA contribution. Funding an IRA reduces your current income, so you pay lower taxes. An IRA allows you to accumulate tax-free earnings in your IRA account until many years later, when you will likely be in a lower income tax bracket. This is very helpful for your retirement plans.
If you get a 401 (k) plan from your work, a retirement planner will help you manage a 401(k). This is a type of retirement plan offered by many employers. Both an employee and the employer can contribute to a 401 (k). The money used to fund the 401 (k) is taken out of your paycheck (or contributed by your employer) as pre-tax dollars. Any earnings on this money are tax-deferred until you make withdrawals. There are penalties for early withdrawals, and you will have to pay taxes on the withdrawals as earned income.
The current (2022) annual 410 (k) contribution limit for an employee is $20,500. An employer may match 50% of your contributions up to a maximum of 6% of your annual salary.
The IRS gives information about many other types of retirement plans.
What is a financial coach?
A financial coach offers fewer services than a certified financial planner. The focus of a financial coach is like a personal trainer for financial matters. The work is as much psychological as practical.
Just like working out at a gym with the help of a personal trainer to get in better physical shape, a financial coach helps you get in better financial shape.
A financial coach can help you to do the following:
Understand and adjust bad spending habits
Help you create a budget
Organize a financial plan (including retirement)
Help you get your emotions out of money decisions
Teach you how to build an emergency fund
Help you understand debt management
Financial coaches do not make investment recommendations or give tax or legal advice. They do not need a special certification or license in most jurisdictions. They may have accreditation from the Association for Financial Counseling and Planning Education (AFCPE). They function more in a counselor's role and should not have control over any of your funds. A financial coach's fees may be negotiated on a per-project basis or $100 to $300 per hour. You can use them on an as-needed basis.
Conclusion
It is never too soon or too late to start thinking about retirement if you are still working. The sooner you make a retirement financial plan, the better. There is no point in working your “you know what” off unless you can look forward to a comfortable retirement. If retirement funds are constrained, consider for your retirement moving to a country with a low cost-of-living where your money will go further.