There are plenty of things in life that are complicated, but retirement planning shouldn’t be one of them. Don’t get me wrong, I’m not saying that the calculations, data analysis, and other back-office activities are simple. My point is that the process isn’t as complicated as many advisors make it. Some financial professionals struggle to find a way to present a financial plan in a client-friendly way. As a result, people may leave the presentation feeling confused. Is it any wonder that these clients can’t make decisions and implement the recommendations?
I’ve discovered that most of my clients have the same basic questions: What kind of financial shape am I in? Will I have enough money to live on in retirement? Will I run out of money if I live a long time? These straightforward questions deserve simple answers. Instead, they’ll hear “We’ve run a Monte Carol analysis that tells us you have a 92% chance of living to age 94, and you won’t outlive your money as long as volatility isn’t 10% or more on the downside.” This answer may be accurate, but what client will understand it well enough to feel confident about their financial future?
At my firm, we’ve found that a traditional financial plan, which is one-hundred or more pages long, is rarely effective in helping clients. Experience has shown us that a very short, simple plan is the best way to help people.
You can also be pro-active in reducing financial complexity. Here are a few easy-to-implement ideas that can make a difference.
Consolidate your assets
Have you set up many different retirement accounts for the purpose of diversifying your assets and lowering your risk of loss? Unfortunately, this strategy usually has major drawbacks. Owning many accounts makes it difficult to conduct a thorough risk analysis of your holdings and determine just how much you’re paying in total fees. There may be overlaps in your investments that go undetected, leaving you with an unbalanced portfolio that’s subject to above-average volatility.
Having many accounts also involves handling more statements, which makes it harder to stay organized and manage money. It’s not unusual for people who’ve changed jobs many times to lose track of their retirement savings. The proposed SECURE Act 2.0 hopes to address the problem by establishing a national database of 401(k) plans that investors can access to locate all of their past and present accounts.
Understand the financial products you own
Many of the new clients I talk to don’t fully understand the products they’ve purchased, especially life insurance, long-term care insurance, and annuities. These products have the reputation of being complicated and difficult to understand. In my opinion, they’re not inherently complex; they’re merely challenging to explain. As a result, some people never get a good explanation, and because they don’t ask questions, they never know what they bought.
In general, it’s inadvisable to surrender or cancel an insurance policy until you understand the coverage you have and are sure you no longer need it. Unfortunately, some people take action before they come in to talk to us, then discover their older contracts were better than anything they can buy today.
Be honest about what you know and don’t know
If you don’t understand a financial concept or product, it’s in your best interest to admit that and ask questions. This isn’t something to feel self-conscious or embarrassed about, and no advisor will think less of you for asking them to repeat or clarify a point.
On the flip side, thinking you know everything about personal finance can also be problematic. I’ve met people who truly believe they’re savants because they exited the market at the right time and sold their stock just before The Great Recession. Are these folks brilliant market timers or did they just get lucky? I believe luck has everything to do with it. They, however, may not be convinced of that until their luck runs out.
“KISS” became a popular acronym for a reason. The principle is applicable to all aspects of life, including money matters. If you simplify the process of retirement planning, both the journey and the outcome may be better than you imagined.