In May, Advisor Larry Goldberg participated in the Birmingham Business Journal’s 2015 Insights into Retirement Roundtable. Here are highlights.
Q. What is the most critical factor for developing a strong retirement plan?
Goldberg: I think there are three things. Number one is consistently saving regardless of market conditions. Number two is monitoring their progress. Are they achieving the goals they thought they were going to? And number three is probably the most important. When they get to retirement, managing the withdrawals. People often do very well in accumulation stage, but then struggle in the withdrawal stage by taking out too much.
Q. The past few years have seen the stock market hit record heights, while interest rates have remained low. What does that mean for retirement planning moving forward? Should investors be particularly cautious?
Goldberg: It is a different time right now. You have what potentially could be very high stock valuations as we know them today, and then lower interest rates make it a very difficult investment environment. Clients should work with professionals to make sure they are properly diversified, and not take any unnecessary risks just to try to beat the market.
Q. What does a key retirement plan need that many individuals overlook?
Goldberg: How do clients take income? Accumulating is so much easier. You put money in – it might make 8 to 10 percent one year, then another year it loses some – but you have so many more years until you have to take money that it doesn’t really register. Then when you get ready to start taking money, that is when issues really come into play. What is the best possible strategy in order to take that income? That is a little difficult. Because most people tend to be making a certain amount, and when they go into retirement, they don’t have as much income coming in. So you really have to focus on that income aspect of it. I have been doing this for 28 years, and up until four or five years ago, there was this magical age that people wanted to retire at 55. It was always 55, 55. I don’t know where it came from – if it was from the speed limit sign or what – but that was the number. What you had to remind them was that if they are lucky enough to live to 90, that’s 35 years of needing money, and you only worked for 35 years. In recent years, that retirement number has ratcheted up. Partly because people’s accounts went down for a while, partly because people don’t have enough saved. Between 60 and 65 is probably a better base of when people want to leave now.
Q. What factors should be taken into account when hiring a financial advisor? What are the different types of advisors and how are they compensated?
Goldberg: I am not sure there is a right way to do it. There are basically three different ways people charge, and each group will tell you their way is the right way, and rightfully so. I understand it, as long as they’re doing the best thing for their client. The insurance company agent or the Merrill Lynch agent, they are primarily going to be commissioned-based, which is not bad. Then you move into an area that we are in where we charge an asset-under-management fee to do your plan and they are not being compensated any other way. One of the factors you should take into account is educational skills, to see if they have the designations. The most recognizable is the CERTIFIED FINANCIAL PLANNER™, or CFP®. Fewer people have a Certified Financial Analyst, CFA, but it is a tremendous thing that takes years of experience. You should look at the experience of both the company and the person with whom you are working. Another important factor is having the right ethics. Our regulations are getting harder and harder, and it’s not because most of us have done something wrong. It’s because the Bernie Madoffs of the world have made the regulations such that it is sometimes almost impossible to do business. And finally, there is the relationship. When all is said and done, a person is going to work with you because they trust you and a relationship develops.
Q. How big a role should tax considerations play in a retirement strategy? How can individuals find the right balance when it comes to their tax burden?
Goldberg: Is is very important. It’s one of the few items that we have some control over. But while being aware of taxation is important, I don’t think the tail should wag the dog. To not sell anything because you are fearful of taxes, it can’t be the main criteria. We saw this when options were such a big thing back in the early 2000s and companies were providing options to people as an incentive bonus. People wouldn’t sell because of the increase in taxes. And then a lot of those dot-com companies went down and people would have sold at any price at that point in time and paid the taxes. So taxes are important, but they can’t be the only issue involved.
The hardest part sometimes is telling a client how beneficial it is to sell at a loss. Clients don’t always understand that philosophy. It is a great strategy to offset gains, but clients don’t want to hear that they’re going to lose money. That can be a bit of a hurdle.
Q. Aside from conventional retirement plans (IRAs, 401(k) plans, etc.), what are some other options individuals can consider as they plan for retirement (annuities, insurance options, etc.)?
Goldberg: We emphasize that people maximize their retirement plans through work, especially those plans that have matching contributions. However, sometimes one of the greatest tools is people occasionally do have surplus money, and there is nothing wrong with having a regular investment account. It can be with low or high taxation in terms of the dividends. We tend to sometimes lose sight that a typical basic investment that is not an IRA is very good. It can be some of the first money you draw out when you get to retirement. You can keep them low-cost, which relates back to annuities. There is a pro and con to annuities, the con being that the internal expenses are higher and can cause the returns to be lower. The reverse of that is you can defer money and take it out at future dates when your tax bracket might be a little lower. They both have a place. But mainly, people just need to save. They do a good job of saving in their own 401 (k)s and IRAs, and sort of forget that they can also invest outside those things. So encouraging them to save, save, save is the key.
Q. How can an individual or family accurately determine its financial needs in retirement?
Goldberg: You should hire a professional. And you want to do it at an earlier age, so you can talk about the future and begin saving more and attacking debt today. Or at least have a game plan in general about how you want to get from point A to point B. Otherwise, there is a retirement date in the future and you plug along and think you’ll figure it out yourself and you don’t look for help. It’s very important for people to reach out to the professionals who can give them a game plan and a road map to get to the state. So when retirement comes along, they are well prepared for it.
It’s not all about investing. When you are younger, retirement is the last thing on your mind. You’re thinking about buying a car, a house, maybe getting married, having children. You need to be developing a strategy around that, not building a lifestyle and then coming back later to develop a strategy. Because if they get too far down the road, sometimes you can’t help them. They’ve built up such a debt load that the only thing you can do for them is try to help them get out from under this problem.
One of the biggest problems right now is we don’t really know where the medical costs are going. That alone is the hardest thing to factor in. You may not be traveling to work and buying as many clothes when you retire, but you turn around and spend that money on other things. So I’m not sure the overall amount that you spend drops dramatically like people think it does. And the medical part is such a moving target right now.
It goes back to had they planned and seen the numbers and thought through it before they got to retirement, they would know about how much they are going to spend and whether they will have enough money.
Q. Studies show that many individuals aren’t putting enough away for retirement. What financial ramifications could that have as Americans continue to live longer?
Goldberg: The day of retiring at 55 is pretty much gone at this point. I don’t think that is on people’s brains as much as it used to be. The problem we run into now is the big corporations that you grew up with and assumed would take care of you the rest of your life, it’s not there anymore. People are losing jobs more regularly now, and they don’t have enough saved at this stage. They are having to find jobs and keep working, and the young person coming along who was going to absorb that job is having a very difficult time. The legal field is a great example of an area that is really having an issue with this.
I saw an interesting article recently that said the RSA here in Alabama is talking about putting a 5% tax on the pension, which for a $1,000 pension would be $50. They are having a hard time maintaining these plans, and they’re trying to figure out how they are going to do that. So there is a lot going on in the pension plans and medical plans.
Q. How should individuals factor Social Security into their retirement planning?
Goldberg: I still think it’s an important piece of the puzzle. Obviously, the closer you are right now to retirement, the more likely you are to receive it. For people in their 50s, I think we are going to have it. Will we have it through our lifetime the way we know it today? I’m not 100% sure about that, but I think we’re pretty good for awhile. For the younger person, I don’t know what it will mean for them in 30 or 40 years. It may not be there. So when you do the planning, if you are 60 years old it is probably going to exist. But if you are 30 years old, let’s talk about the possibility that it may not exist, and try to plan differently to some degree. I think you have to assume lower benefits. The second part of that is, wait as long as possible to start taking Social Security. Because with each year, the amount you receive goes up dramatically. There is a huge difference between starting at 62 and at 70. The fear is, “I’m going to die before then.” I get that. But if there is any way to wait, you need to do it.
Q. Are there any particular retirement considerations that small business owners should take into account?
Goldberg: Small business owners need to be treated like everyone else. They need to have a retirement plan in place. They sometimes think of their business as being their retirement plan. That works occasionally, but sometimes it doesn’t. So they need to have a retirement plan in place just like an individual. The other thing is, they need to have an exit strategy, and the planning for that needs to be a few years in advance. Selling your business doesn’t happen by accident. You really have to plan it to make it happen. It’s similar to what you do for your own personal planning. You don’t start that planning the year before you retire.
You need to develop a budge early in life so you stay and live within your means. If you can do it early enough, you can translate that with each and every year. If you don’t save, it doesn’t matter what kind of strategy you have, you are not going to have any money when all is said and done anyway. So if you can stay within your means, you have a much better chance.