You Can Do Better with an Advisor

In Our Ridiculous Approach to Retirement, Teresa Ghilarducci, a professor of economics at the New School for Social Research, writes that the 401(k)/individual retirement account model, a “do-it-yourself pension system,” has failed because it expects individuals without investment expertise to reap the same results as professional investors and money managers. She asks, “What results would you expect if you were asked to pull your own teeth or do your own electrical wiring?”

The statistics Ghilarducci cites in her article certainly illustrate American workers’ inability to save for retirement: Seventy-five percent of workers nearing retirement age in 2010 had less than $30,000 in their retirement accounts. Almost half of middle-class workers will be living on a retirement food budget of about $5 a day. And, according to the Employee Benefit Research Institute, only 52 percent of Americans expressed confidence that they will enjoy a comfortable retirement. (Twenty years ago, that number was close to 75 percent!)

Ghilarducci writes, “To maintain living standards into old age we need roughly 20 times our annual income in financial wealth. If you earn $100,000 at retirement, you need about $2 million beyond what you will receive from Social Security. If you have an income-producing partner and a paid-off house, you need less.”

If you work with an advisor, you know your retirement “number,” but Ghilarducci’s blunt talk will come as a surprise to the many individuals not working with a financial advisor. Equally distressing will be her insistence that simply working longer is not a solution for folks who have not saved enough. She stresses that the Boomer generation’s plans to “never retire” are particularly unrealistic and risky given current high unemployment rates for older workers.

The bottom line is that today’s self-help, “I can find the answers I need on the Internet” applies to personal finance just about as much as it does to dentistry or electrical wiring. Certainly, you can read and educate yourself about the issues, but when it comes to constructing and executing a retirement plan, you are in better hands with an advisor – someone who operates as a fiduciary. In fact, a 2010 report from the ING Retirement Research Institute, Working with an Advisor: Improved Retirement Savings, Financial Knowledge and Retirement Confidence, found that investors who seek advice from an advisor tend have higher retirement balances, more discretionary income, and feel better about retirement. And in this uncertain economic environment, it is undoubtedly more beneficial than ever to have a professional in your corner.

Three Steps to a Financially Secure Retirement

If you want your golden years to be, well, golden, the Financial Services Institute Inc. recommends these three steps: Start saving in your 20s, save regularly, and use an investment advisor to help you to set goals and guide you. Obviously, due to the power of compounded interest, getting an early jump on saving for retirement is beneficial. Also, from a behavioral standpoint, the sooner you can establish saving regularly as a solid habit, the better off you will be down the road. And, of course, the expert advice of an advisor, one who is bound by a fiduciary duty to look out for your best interests, can help you stay on track and avoid major pitfalls.

The Financial Services Institute issued its unsurprising findings to kick off National Retirement Planning Week, an education program sponsored by the National Retirement Coalition, an organization comprising 17 retirement savings organizations and trade groups.

The fact that, in the last decade, investors have been harmed by market factors well beyond their control underscores the benefits of working with an advisor. During our recent tumultuous markets, we have helped our clients not to panic and to focus on tempering downside risk while remaining in position to benefit from the market’s eventual upturn.

Yet, wealth accumulation is just part of the retirement planning puzzle. Increasingly, Boomers will need expert guidance with retirement wealth distribution. That is, retirees will need an advisor’s expert guidance on issues from tax-efficient ways to make required distributions from retirement accounts to when and how to claim Social Security benefits. And these answers are far more complex than just building a retirement nest egg. So, if you are closing in on retirement or already retired and you do not work with a financial advisor, you can still get plenty of value from the relationship.

401(k) Plans Hit the Big 3-0

It’s been three decades since the 401(k) arrived on the retirement saving scene. And to celebrate the tax-deferred account’s milestone, many U.S. companies that eliminated their 401(k) matching contributions during the Great Recession are beginning to restore this valuable benefit.

According to the consulting firm Towers Watson, during the recent recession, almost one in five U.S. companies with at least 1,000 workers suspended 401(k) matching contributions. Now, many of those companies are reinstating the perk – albeit often at a reduced level. Today, the once standard 3% match is considered generous. In addition to offering smaller matches, some companies are linking their contributions to corporate profits or requiring employees to reach a particular dollar level in their account before any matching occurs.

With traditional pension plans going the way of the drive-in movie and concerns mounting over the long-term health of Social Security, 401(k) accounts are a critical leg to the retirement stool. According to the Employee Benefit Research Institute (EBRI), 79 percent of eligible workers (36 percent of all workers) say they participate in retirement savings plan with their current employer. Furthermore, 28 percent of participants report that they have increased the percentage of their salary that they contribute to the plan in the past year, and just 4 percent report they decreased the percentage. EBRI also found that workers who currently participate in this type of plan are more than twice as likely as those who do not to report retirement savings and investments of at least $50,000 (52 percent vs. 23 percent).

While 401(k) participation levels have certainly increased since the plan’s introduction and held steady even throughout the recent financial crisis, the industry can do a better job with education. In fact, EBRI found less than half of workers (42 percent) report they and/or their spouse have tried to calculate how much money they will need to save to secure a comfortable retirement. Disappointingly, this percentage is lower than the 53 percent recorded in 2000 and the 47 percent in 2008.

What You Don’t Know Can Hurt You

The Role of Financial Literacy in Determining Retirement Plans by Robert Clark, Melinda Sandler Morrill, and Steven G. Allen is the latest publication in the National Bureau of Economic Research’s Working Papers series. Based on responses from more than 1,500 workers nearing retirement at three large U.S. companies, the researchers arrive at a sobering conclusion. They state, “Although retirement-related decisions will affect workers’ well-being for the remainder of their lifetimes, many do not possess enough basic financial knowledge to confidently make optimal choices.”

Just where do the employees fall short? While nearly all of the workers surveyed were covered by defined benefit pension plans, 56% didn’t know what their pension would be once they retired. And when asked about national retirement programs like Social Security or Medicare, workers got only 50% of the answers correct. Alarming, just 37%, knew 66 was the age that they could retire with full benefits.

Make this year the year you take maximum advantage of your retirement plan at work. Contribute all you can to your 401(k), at least enough to qualify for any company matching funds. If you receive a raise, increase your contributions. This year’s plan limits are $16,500, or $22,000 if you're over age 50. If you are self-employed, or have self-employment income from consulting work or a hobby, there are additional retirement savings vehicles you can use, including Individual 401(k) plans, SEP-IRAs, SIMPLE IRAs, or Keoghs.

You should also consult with an independent financial advisor if you have questions about your retirement plan.