January 28, 2020

Our Top Financial Worries


I receive lots of comments on posts and in e-mails about financial planning and decision-making. Preparing to live without a regular paycheck is a critical part of the preparation for retirement that every one of us encounters. It is a stage of life that most of us enter with more than a little fear.

Over time readers have helped me develop a list of the top financial concerns that folks are most worried about when they search for someone to advise them. What exactly are they looking for? What do they want a financial advisor to address? 

These are the six basic concerns that are addressed most often:

1) Understand our tolerance for risk and respect it: This is probably the most frustrating problem readers continually bring to my attention. An investment or financial advisor who presents options that are simply not appropriate to the retiree creates tension and uneasiness. Even if an opportunity for a nice return may be missed, as retirees we have fewer opportunities to replace money that is lost.

Accept what makes us comfortable and work within those parameters. Understand that a client will sometimes pass on what you believe to be a great deal. He isn’t rejecting your judgment, rather he is staying within his comfort zone.

2) Avoid Complicated Explanations: For most of us, the world of finance has become something akin to a foreign language. We grew up with some simple concepts: certificates of deposit and savings bonds. We understand the basics of stocks and bonds, mutual funds, maybe even ETF’s.

When explaining a more complicated investment opportunity it is important to speak in a way that we don’t feel stupid or agree to something because we don’t want to ask too many questions. If an investment option is too complex to explain in simple terms, there may be problems.

3) How do we not outlive our money: Our biggest fear as retirees is that we will last longer than our money. No matter how prepared we think we are, another major recession or serious health calamity is all that stands between us and a big problem. We are looking for a plan that will do everything possible to protect our assets, while not violating our tolerance for risk.

4) Help us budget and simplify our lives: Understanding how to budget and save has allowed us to retire. But, now, what do we have to do? Do we live on 80% of our work income or is that more than we need to spend? What is the 4% rule and does it still apply? 

What about expenses? What should we budget for after retirement? What categories are likely to increase and which ones fall? We’d like to simplify our lives by downsizing our housing, but is it best to rent or buy from this point forward? Leaving an estate for the children may be important. If so, what is the best way to set aside part of our money? Retirees want some input.

5) Bring us options and allow us to make the final decisions: Retirees often suffer from a feeling of loss of control and influence after leaving the workplace. It becomes quite important that we have the final say in how our money is invested. Having a few legitimate options and letting us make the final choice is a good idea.

6) Mr. Advisor: Create a feeling that you care as much about our well being as we do: Everyone understands how business works: without a profit there is no business. But, some of the readers who contact me complain that the company they have put their trust in treats them like a number. Contact usually occurs only when a fee is being added or the government requires a privacy notice.

These retirees are aware that they are not the firm’s only client, and most likely not the one that produces the most profit. But, in their mind their financial future has been put in the hands of a company or person. There is a definite need for a feeling that the individual matters, that his or her financial well-being is important. 


If you are handling your own investments these concerns are likely to be yours, too. You want options, an understanding of the risks you are comfortable taking, keeping a close watch on expenses, planning so you are likely to not run out of money, and trusting the person or web site that actually executes your purchases.


Anything I have missed?


21 comments:

  1. Excellent list. Have you thought of opening each topic, giving pros and cons, and ask for kind discussion on each? I know that sounds more like a forum. It seems the more of my friends who enter retirement, the more often I end up in these discussions. It could be framed in "Comments are to inform or ask, not to convince or belittle."

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    1. Each point could be worthy of its own discussion. I will put on my thinking cap. Thanks, Janette.

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  2. I think your list covers the major concerns of most people, Bob. But I cannot stress enough that people educate themselves as much as possible, whether you intend to do all your investing yourself as many of us do, or whether you intend to use an adviser. If you refuse to become educated on the ins and outs of investing you can be easily taken advantage of by the large #s of shady advisers out there. I saw the opening minutes of a paid half hour "infomercial" here in North Myrtle this morning that featured a financial firm called JD Mellberg. I decided to look them up and sure enough, they are huge pushers of (wait for it) Annuities, which I detest as nothing more than a complete ripoff of retirees in particular. In fact, this is a piece of info on the "quality" of their investment advice in your home area of AZ:

    https://www.prnewswire.com/news-releases/national-wave-of-five-lawsuits-filed-against-middlemen-who-lined-up-victims-in-100-million-predatory-retirement-investment-scheme-300701845.html

    I cannot stress with people enough - get educated! It is not difficult and it can be mostly free. The Web is full of good sites like Yahoo Finance, Vanguard and Seeking Alpha. Kiplinger's is a good magazine; unfortunately Money went defunct this past year which was another option. You might just like it and feel empowered to make all your decisions after all. Good luck to all.

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    1. I couldn't agree more, Chuck. Financial literacy is a responsibility we all must accept. To outsource one's financial wellbeing to someone else without having a solid grasp of what is happening is foolhardy.

      As noted above, if you don't understand an investment, don't put your money into it until you do.

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  3. Beware of financial advisors! Those seemingly insignificant fees on "assets under management" undermine your long-term returns more than you can imagine. The following is from an article:

    You’re paying your money manager for his or her expertise, right? They know all the secrets and tricks to picking the right stocks and making the right investments. They know things you will never understand. Well, they don’t.

    According to the analysis, 99 percent of actively managed US equity funds sold in Europe have failed to beat the S&P 500 over the past 10 years, while only two in every 100 global equity funds have outperformed the S&P Global 1200 since 2006. Almost 97 percent of emerging market funds have underperformed.

    But what about all the markets ups and downs? You need someone with expertise to make sure you don’t lose all of your money when the market is volatile. You don’t.

    If you had invested $10,000 in 1990 in the S&P 500 and just let it ride until 2017, you would end up with $137,000, an average return of 11.3% per year. Those 28 years included two of the worst recessions in our lifetimes, 2001 and 2008.

    The total return in that time was 1,058%! You made $127,000. The only way you would have lost money would have been if you had sold.

    What’s So Scary About 1%?

    Okay, well what if in that scenario you were paying a 1% management fee?

    One percent is tiny; it’s nothing! It’s a single penny on each dollar. But just as exponential growth is the reason we invest, exponential growth is the reason we avoid high fees.

    In our above scenario, at 1% we would have paid $11,000 in fees. You’re not earning exponentially on the money you earn when fees are eating into it. With a 1% fee over that 28 years, we weren’t earning an 11.3% return. We only made $95,800. We lost 24%, nearly a damn quarter of our gains!

    If your advisor told you up front that his or her fee would be 24%, would you say yes? Of course not.

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    1. Advisors can prove to be valuable for some people. But, as you demonstrate, that oversight comes at a cost. So, if someone just is not comfortable with financial matters, I'd say go ahead and get help. But, do it with your eyes open and don't be afraid to ask questions, demand adjustments, or pull your investments and go somewhere else if things just don't seem right.

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  4. Like Chuck, I believe that one of the most important things you can do is educate yourself in reference to your finances. Even if you work with a financial advisor, it's critical to have a least a working understanding of the investment vehicles your financial future is riding on.

    That being said (and referring to point #6 above), the most important question to ask a financial advisor is, "Are you a fiduciary?" Fiduciaries are legally and ethically required to act in their clients' best interests - even if it conflicts with their own (such as whether or not they would earn a commission on your transaction). Although I handle our finances and investments, I feel so strongly about a fiduciary's responsibility, that I've left guidelines for Alan with our will on how to choose a fee-only financial advisor should I pre-decease him. Financial advisors can be paid by fees from clients only, commission only or a combination of the two. Personally, I believe that the best way to protect one's funds is to work with a fee-only financial advisor who can present credentials confirming his or her status as a fiduciary. For me, that would go a long way toward nailing #6.

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    1. You bring up an important point: fee-only versus commission-based advice. Common sense tells us that commission-based recommendations hold a real potential of being self-serving.

      I thought there was a push to get all financial and investment advisors to have to be fiduciaries, but the law was lobbied to death. Still, it is worth the effort to determine whether someone you are considering is legally required to protect your interests above his/hers.

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  5. This is a topic I'm so ill-prepared to think or talk about. The idea that I could outlive my money scares me and investment services have not earned my trust having lost money the first time I used one back in my twenties. Add to that is the fact that my husband never trusted investments brokers either. In the past three years I've had two continuing care facilities go over my finances and assets and they both came up with the same answer that I've got enough to move into one of those places. CCCs aren't cheap and they have a vested interest in you not running out of money because they have to pick up the tab if you do. I'm bookmarking your post to come back and study in depth.

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    1. This is a subject that is unsettling for many of us. It is one that requires either a particular bent toward financial matters or the dedication to learn enough to protect one's investments. We all live in fear of either running out of money or having our hard-earned savings decimated by an unscrupulous or bad advisor.

      Your proactive step of having CCC's check your financial foundation is a clever idea. They want you to be able to pay their charges after the initial investment to get in. They are not likely to take on someone who is statistically likely to have more life than money. Cold fact, but logical from their perspective.

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  6. Many of the issues you listed in today’s article stem from the retiree’s limited or no self-education about financial products available today and in the future. Self-education using the web has never been easier. Reading Retirement Finance, Retiree Blogs and related articles helps one stay attuned to ever changing financial world.

    With this self-education comes a greater confidence in one’s retirement course and a better understanding that there are no perfect answers or solutions to many retirement questions.

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    1. You are absolutely correct, Bill. In some cases I wonder if people have convinced themselves that understanding finances is beyond them. Yet, with some effort and research the basics of good money management and investing are not that scary or hard to grasp.

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  7. If your number one concern is outliving your money more people should be looking at annuities as they reach their 70s, though few people do. Annuities are guaranteed income for life, generally insured by government, and a way to manage longevity risk. Sure you give up control and there's always the risk that you'll die young(ish) but as we age into our 80s and beyond not having to manage a portfolio and make investment decisions is probably a good thing. Another strategy is to delay Social Security to age 70 for the larger monthly benefit. If you live a long time it should be there for you and, as you age, living well is all about guaranteed inflation protected cashflow.

    Circumstances are different for each of us but if outliving your money is your number one concern then there are steps you can take. So few retirees actually do this I wonder if outliving their money really is the number one concern. It seems to me the number one concern is keeping their savings intact (which is a different thing).

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  8. I would like to question that statement about annuities being insured by governments. In my state annuities are insured by a nonprofit organization setup by all the insurance companies. Annuities are not insured by the state of federal government. The limit for any one insurance company is $250,000. I believe all states work the same, the only difference is the amount insured. Typically runs 100K to 250K. In a normal situation if one insurance company fails the others in the state can pick up the polices and make good on it. A potential problem arises if the economy went into a depression with many companies failing at the same time. There is no guarantee the nonprofit entity or the other insurance companies could pick up all the defaulted policies at full value. At the very least I would make sure I did not exceed the state limit with any one insurance company. If anyone has information that contradicts this I would be very interested in hearing it.

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    1. Indeed, being sure you do not exceed insured limits is worth paying attention to. On the annuities I was trying to generalize but as you say it varies from place to place. Where I live the federal government requires life insurance companies to be members of an agency that insures annuity payments (not the capital) for 100% up to $2,000 per month and 85% above that. You can of course spread your annuities among more than one insurance company for full protection, at least where I live.

      If the economy goes into a full scale depression with banks and insurance companies failing left right and center I doubt that almost any investment will be safe. In that case you might be better off to keep your mattress stuffed with cash or bury some gold bars in your backyard. I actually know someone like that who believes we are on the edge of a major downturn and 5 years ago sold his house and moved all his investments into cash and gold. Who knows he may turn out to be right but so far it hasn't happened.

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    2. “I believe Fred is correct. As I understand it, annuities are NOT guaranteed by any Federal entity. There is a State Guarantee Association that pools resources to “cover” up to $250.000. But basically it relies on the solvency of whichever company writes the annuity. That is why it is wise to research different companies. And there are fees that need to be understood. As David says it can be a good option for a continued income stream but must be thoroughly researched.

      And I agree with others that everyone needs to hone their own financial literacy. The financial aspect of your retirement is too important to blindly leave to others.

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  9. I think it’s important as well to find a financial advisor whom you feel comfortable with and can work well with - not unlike finding a doctor, dentist, or hair stylist. When I moved to a new city and was looking for a financial advisor, I spent some time interviewing him, finding out his credentials, and beginning with small steps rather than just handing over my whole portfolio to him. Also, I see his role as providing advice; I make the final decision about each recommendation.

    Although I am relatively financially literate, he has a lot more knowledge about finances and the market than I do. That is why I have a financial advisor rather than managing my own portfolio. I do not hesitate to make use of his knowledge. For example, when I was first considering retirement, I asked him to develop a financial plan for me. It included information such as recommended amount to withdraw per year, and which investments to spend down first. Also, when I wanted to begin divesting my portfolio of fossil fuel intensive mutual funds, I had him do the research on what to sell, and what green funds to invest in instead.

    We do not agree on everything, but, as I said, when we differ, I have the final say.

    Jude



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    1. You having the final say is critical. But, like you, while I understand financial matters pretty well, that isn't my field of expertise. I want the opinions and suggestions of someone who has made that his or her's life work. Then, I will make the call.

      I was with an advisor for about 20 years. He was getting close to retirement so I considered some alternatives. An advisor my parents used for over 20 years had done a great job for them. So, I switched everything over to her 5 years ago. I felt comfortable because of being able to watch her work with my mom and dad for so many years.

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  10. I'm lucky to have a wonderful financial advisor who is a dear friend so I trust him completely to keep my best interests in mind.

    I laughed about avoiding complicated explanations. My advisor has learned to keep things simple. He can see my eyes start to glaze over!!

    All good advice for those who give us financial guidance.

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    1. You are lucky to have a personal friend you trust so completely.

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    2. Galen- trust no one completely when it comes to your money. My mother did that and lost 100% of her nest egg in 2008 when her advisor, whom she had known for years, "invested" all of her money in a sure bet of 12% return.... In a company buying mortgages that were soon in default.

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