Do You Need a Financial Advisor or Robo-Advisor?

I recently taught a new class titled Do You Need a Financial Advisor or Robo-Advisor? because many of my students were asking about hiring financial professionals during classes about retirement planning, investing, and income taxes.

Below are eight take-aways:

Frequency of Use- According to one study, less than half (44%) of American adults said they worked with a financial professional in 2023 but 88% said they thought that doing so would be helpful. Obviously, this is a major disconnect.

 

Common Financial Challenges- Studies indicate the following: not knowing where to start, being overwhelmed by investment choices, lack of time or expertise to manage finances, fear of making costly mistakes, and new income tax calculations such as required minimum distributions (RMDs).

 

When Financial Advisors Are Useful- Common situations include retirement planning and decumulation (spending down savings) decisions, major life transitions (e.g., widowhood and retirement), complex tax situations, and receipt of an inheritance, settlement, or large prize.

 

Benefits of Working With a Financial Advisor- Advantages include personalized financial guidance, expertise in tax planning and investments, retirement and estate planning guidance, a holistic approach to financial management, behavioral coaching to curb emotional investing mistakes, and objective “third party” insights.

 

Common Myths- One myth is that “all financial advisors are expensive.” The truth is that many offer hourly rates or flat fees that do not involve ongoing investment management expenses. A second myth is “I don’t need an advisor if I’m good at managing money.” In reality, even financial experts seek outside guidance.

 

“Alphabet Soup”- There are dozens of certifications in the personal financial planning space. Among the most widely recognized are: accredited financial counselor (AFC®), certified financial planner (CFP®), chartered financial consultant (ChFC®), certified public accountant/personal finance specialist (CPA/PFS), and chartered retirement planning counselor (CRPC®).

 

Advisor Compensation Methods- There are three main types: 1. Fee-only (advisors that charge an hourly rate, a flat fee, or a percentage of assets under management), 2. Commission-only (advisors that earn commissions by selling financial products), and 3. Fee-based- Advisors that charge a fee for advice but may also receive commissions on product sales.

Questions to Ask a Potential Financial Advisor- Here are five key questions: What are your qualifications and certifications?, How long have you been a financial advisor? What types of clients do you typically work with? Are you a fiduciary (obligated to act in clients’ best interests)?, and Have you ever been subject to any disciplinary actions?

This post provides general personal finance or consumer decision-making information and does not address all the variables that apply to an individual’s unique situation. It does not endorse specific products or services and should not be construed as legal or financial advice. If professional assistance is required, the services of a competent professional should be sought.

Step Down to Save Money

Recent stock market volatility and recession jitters have me thinking of a similar environment five years ago at the start of COVID-19. What I wrote then is as important today: “While we can’t control prices, we can control (somewhat) what we spend.” Not everyone is able, or will feel emotionally inclined, to “buy the dips” in stock prices, but everyone can review and tweak their spending habits.

In this tough economy with rising prices for many household expenses and stock market carnage, many people are looking for “deals.” People at all income levels are seeking ways to lower expenses so they can claw back against inflation, save money, and/or repay debt. Consider these strategies:

Consider Stepping Down- Like smoking cessation patches where nicotine is reduced gradually, “stepping down” reduces household spending in gradual stages instead of eliminating an expense completely. To visualize stepping down, imagine a staircase. On the top step is the most expensive way to buy an item and on the floor below the bottom step is the least expensive purchasing method. 

Put It Into Practice- Here’s an example of buying pancakes for breakfast. The most expensive method (top step of the staircase) would be going to a “sit-down” restaurant. The next step down would be to buy pancakes at a fast food outlet. Go down two steps  and you can buy frozen pancakes at a supermarket and, three steps down, pancakes prepared with a mix. At the “floor” of the staircase would be the cheapest method still: pancakes prepared “from scratch” (i.e., dry ingredients).

Keep On Going- “Stepping down” can also refer to the frequency or amount of a purchase as well as where it is made. For example, you may decide to eat out two or three times a month instead of five or six. You’re not completely eliminating what is obviously a pleasurable activity. You’re simply taking steps to reduce the cost. Or you might “step down” by eliminating an appetizer, drink and/or dessert when you eat out. Again, you’re still enjoying a restaurant meal, but doing so for less money.

Step Down Shopping Venues- “Stepping down” works best with “discretionary” expenses that are not locked in. Examples include clothing, shoes, gifts, home furnishings, toys, housewares, and travel. Steps of spending, from top to bottom, might include shopping high-end retailers, mid-level price department stores, discount stores, factory outlets, consignment stores, and thrift shops, flea markets, and garage sales. Again, the more steps someone goes down, the greater the likely savings. 

Be a Thrifty Shopper- Many thrift stores are operated by non-profit organization fund-raisers and are a win-win-win-win: donors get rid of items they no longer need, shoppers get great bargains, a non-profit agency gets needed cash, and less stuff ends up in landfills. Some thrift shops have “dollar racks” and end-of-season bag sales. I volunteer at a thrift shop and am constantly amazed at the wonderful items (all donated) that are available for sale at a fraction of their original price. I also went on a thrift shop trail recently with friends and bought home a haul of nine items that cost $22.

Now is a tough time to be a consumer with the impacts of tariffs and inflation. The next time you want to buy something, consider “stepping down” and visiting a local thrift or consignment store. 

This post provides general personal finance or consumer decision-making information and does not address all the variables that apply to an individual’s unique situation. It does not endorse specific products or services and should not be construed as legal or financial advice. If professional assistance is required, the services of a competent professional should be sought.

Social Security: Legislation, Funding, and Future Predictions

I recently attended an interesting webinar for financial professionals about Social Security sponsored by The American College of Financial Services. Below are seven key take-aways:

Social Security Fairness Act- The number of SSFA affected individuals was about 3.2 million people (myself included). I previously heard 2.8 million and 3 million so this was a slight increase but still roughly 3.1% of all Social Security beneficiaries who had benefits reduced or eliminated as a result of the Windfall Elimination Provision (WEP) or Government Pension Offset (GPO).

Affected Individuals- The WEP affected people who worked for state/local governments in non-Social Security covered employment but who also qualified (40 quarters) to earn Social Security benefits. Think teachers, firefighters, and police (in some states) and others with jobs that did not pay into Social Security. The GPO primarily affected those receiving spousal or survivor benefits.

Loss Aversion Impact- The speakers noted that many Social Security recipients affected by the WEP and GPO felt wronged that their earned benefits were taken away, especially those who requested Social Security benefit estimates. They were anchored on full benefit amounts and felt the cuts from the WEP and GPO as a loss. The Social Security Administration had warned about WEP and GPO benefit cuts but did not say by how much, leading to very strong emotional responses.

New Fairness Issues- The speakers noted that a combination of covered and uncovered jobs may beat out (i.e., result in a higher payout than) having two covered jobs and, for married couples, uncovered and covered spouses may beat out two covered spouses. This math is currently not widely known, prompting a speaker to note “it will be interesting when the public recognizes this.”

Trust Fund Depletion- The SSFA moved up the timeline for trust fund depletion by six months. If proposed new laws eliminate taxes on Social Security benefits and/or taxes on tips, the trust fund depletion date will be even sooner. By law, Social Security can only pay out in benefits what it collects in revenue. It cannot borrow money. Current estimates are that Social Security benefits would need to be cut by almost 20% if Congress does nothing to shore up the program’s stability.

Consumer Concerns- Social Security beneficiaries are understandably concerned about cuts to Social Security’s almost 1,230 local field offices and 10 regional offices. Financial advisors on the webinar were advised to help their clients plan around delays. Staff reductions will lead to longer waits to get questions answered and benefit claims processed. 

Social Security Sustainability- Various potential “fixes” to shore up Social Security were discussed. They include mandatory Social Security participation by all workers, an increase in the Social Security tax (e.g., from 12.4% to 14.4% of gross income), decreased benefits for high earners, slowly raising retirement age (e.g., from 67 to 68 or 69), and increasing the wage cap ($176,100 in 2025).

This post provides general personal finance or consumer decision-making information and does not address all the variables that apply to an individual’s unique situation. It does not endorse specific products or services and should not be construed as legal or financial advice. If professional assistance is required, the services of a competent professional should be sought.

Annuities 101: The Basics

I recently taught a new class called Annuities 101: The Basics for a class of older adults. Below are nine key take-aways that I shared with my students:

What Are Annuities?- Annuities are a contract between an investor (annuitant) and an insurance company. The investor makes a lump sum payment or series of payments to the insurer and the insurer agrees to make periodic payments to the investor immediately or at a future date. 

Simple But Complicated- While the concept of exchanging payments to an insurance company in exchange for regular income is easy to understand, there are different types of annuity types and tax implications. Annuity features, such as surrender charges for early withdrawals, also vary widely.

Reasons to Buy Annuities- Common reasons that annuities are purchased are to create a “retirement paycheck” (i.e., regular income stream) in later life, for guaranteed lifetime income, and for tax-deferred growth until withdrawal. In addition, non-qualified annuities (annuities not held in a qualified retirement plan) do not have IRS maximum contribution limits like IRAs and 401(k)s.

Earnings Growth is Tax-Deferred- Earnings on non-qualified and qualified annuities are taxed as ordinary income- not long-term capital gains. Qualified annuities are subject to required minimum distributions (RMDs) and contributions + earnings are taxed. For non-qualified annuities funded with after-tax dollars, only earnings are taxed as income. The amount contributed is not taxed.

Payment Options- Depending on the annuity contract, payment period choices can include the life of the annuitant, the life of the annuitant and spouse, and for a fixed number of years. A beneficiary and contingent beneficiary should be named for any remaining payments or a death benefit.

Insurance Company Ratings- Potential annuitants must determine if an annuity issuer (insurance company) is in good financial health. Annuities are not backed by FDIC insurance, like CDs are, but protected through state guarantee associations. Guarantee coverage varies by state. It is wise to check insurance company ratings by companies such as A.M. Best, Standard & Poor’s, and Fitch.

Annuity Fees- Surrender period fees/penalties apply if annuitants withdraw money or cancel a contract early. However, many contracts offer a penalty-free withdrawal (typically 10%) during the surrender period, which provides some flexibility to access funds. Fees on annuities can range from about 0.50% of the annuity’s value to well over 2%. The industry fee average is 2.24%.

Three Key Elements- Annuities can be classified in three ways: 1. By type (fixed, variable, and indexed), 2. By payout date (immediate or deferred), and 3. By purchase method (single premium or payments over time). Fixed annuities are the most widely sold annuity type.

Specialized Annuity Products- Two annuities that are specifically designed for retirees in later life are Qualified Longevity Annuity Contracts (QLACs) and Medicaid Compliant Annuities. Assistance by a professional advisor is highly recommended.

This post provides general personal finance or consumer decision-making information and does not address all the variables that apply to an individual’s unique situation. It does not endorse specific products or services and should not be construed as legal or financial advice. If professional assistance is required, the services of a competent professional should be sought.

Retirement Planning: Answers to a Podcaster’s Questions

I periodically participate as a guest on podcasts to answer questions about personal finance topics. Below are five questions that I answered recently on a podcast about retirement planning:

Your book, Flipping a Switch, covers 35 key financial and lifestyle transitions in later life. What are some of the most overlooked transitions that impact financial security?

Many people underestimate the impact of income taxes in later life. Some may even have a higher income in retirement than when they were working due to multiple streams of income (e.g., Social Security, pensions, investments, and required minimum distributions (RMDs) from tax-deferred accounts). Another thing that is often overlooked is making specific plans for long-term care.

How can people ensure they have enough income to support a desired lifestyle in retirement?

Personalized calculations are best, with or without the assistance of a financial advisor. For “do-it-yourselfers,” I recommend using at least three different online calculators because their data inputs and assumptions vary. Some retirement calculators will tell users the amount of money they need to save to fund their desired lifestyle. Others, called Monte Carlo calculators, will project a probability of “success” (not outliving one’s assets) and how much more savings is needed to avoid this.

What are some common financial mistakes retirees make, and how can they be avoided?

Spending errors are a common mistake. Some people spend too much or too little of their accumulated savings, resulting in a large surplus upon their death or running out of money. Other errors are lack of estate planning, lack of long-term care planning, and lack of communication about legal documents and the location of financial records, including access to digital assets.

What are the biggest financial shifts impacting retirees today?

One big shift, compared to previous generations, is “do it yourself” retirement planning. Baby boomers were “guinea pigs” for both IRAs and 401(k)s and needed to make three key decisions: whether to contribute, how much money to contribute, and how to contribute (i.e., asset allocation decisions about the percentage of contributions to different types of investments). Subsequent generations have had to do the same. Another big shift is decumulation from retirement plans.

What are the biggest financial challenges for baby boomers in retirement?

One big challenge is not outliving assets. Not surprisingly, running out of money is the top fear of older adults. Another challenge is the potential for costly long-term care expenses. Nobody knows how much care they will need but they need a plan “just in case.” A third challenge, for retirees who have been super savers, is the impact of taxes and determining ways to mitigate this expense.

This post provides general personal finance or consumer decision-making information and does not address all the variables that apply to an individual’s unique situation. It does not endorse specific products or services and should not be construed as legal or financial advice. If professional assistance is required, the services of a competent professional should be sought.