While some experts say a good rule of thumb is to hire an advisor when you can save 20% of your annual income, others recommend obtaining one when your financial situation becomes more complicated, such as when you receive an inheritance from a parent or you want to increase your retirement funds.
“We’re more than stocks-pickers,” says Jose Sanchez, a Santa Fe, New Mexico, financial planner with Retirement Wealth Advisors. “People often procrastinate making decisions and need a slight nudge. We focus on the human side of financial planning and spend 80% of our time listening, finding out those goals and how to achieve them.”
Are financial advisors worth the cost? Costs vary, as investors can choose from fiduciary advisors, who are required to put the interests of their clients first and are also known as fee-only advisors since they do not accept commissions on the investments they suggest you add to a portfolio. There is another group, fee-based advisors, who do charge commissions and fees. They typically charge a quarterly fee that is based on a percentage of the assets that are being managed.
When to get a financial advisor? People need to be honest with themselves if they are interested in managing their money, says Daren Blonski, managing principal of Sonoma Wealth Advisors in California.
“You can’t do it on a part-time basis. It’s short-sighted to think you can weekend warrior your portfolio.”
During a bull market when the markets seem invincible, “everyone does well because the tide rises, but then the market changes on a dime and delivers a pie in the face to those who thought they mastered stock investing,” he says. “When it comes to your retirement, don’t make the gamble; either educate and commit to learning or hire someone,” Blonski says. “You have to be really careful to protect your capital. It’s good to have a second pair of eyes on your portfolio.”
Here are ways to help answer the “Do I need a financial advisor?” question:
— Creating an investment strategy.
— Minimizing taxes.
— Avoiding emotional-decisions.
— Lowering your risks.
— Structuring withdrawals from accounts.
Creating an Investment Strategy
Diversifying a portfolio is crucial to avoid volatility, which increases the amount of risk and potentially the amount of income your retirement funds generate. A diversified portfolio helps to ensure stability during a market downturn or extended geopolitical event. The Invesco QQQ ETF (ticker: QQQ) is a popular exchange-traded fund since it tracks about 100 of the largest U.S. and international nonfinancial companies listed on the Nasdaq. Over the past 30 days, the trading volume averaged around 39 million shares and it now has roughly $123.3 billion in assets.
“Right now is the perfect example with QQQ ripping and roaring and everyone is piling in there,” Blonski says. “It’s important to have diversification because the market always goes back to equilibrium and corrects itself,” he says.
When investors allocate large percentages of money in sectors such as tech, they are betting on those industries outperforming for the long haul. Certain sectors such as the financial and industrial industries will not perform poorly forever, he says. “If you over-allocate, you might make the money in the short term,” Blonski says. “The market is going to take that back from you in the long term. When things get overbought, they often get oversold.”
While socking away the majority of your hard-earned savings in a 401(k) plan or traditional individual retirement account is a good strategy, other options help investors pay a lower amount in taxes and save money for retirement. Some investors get caught up in “analysis paralysis” and wind up contributing nothing because they cannot decide between contributing to a Roth or traditional IRA, says Anna N’Jie-Konte, founder of Dare to Dream Financial Planning in Kensington, Maryland.
“I am a fan of keeping it simple and using numbers to cut through the emotion,” she says. “For retirement, you just need to contribute something. I would much rather see people contribute to a Roth than nothing.” People who earn a relatively high income and have a simple financial situation where there are not a lot of deductions and do not own property can look at more of a traditional IRA since it’s going to provide some additional tax benefits, N’Jie-Konte says. Investors who own a house and have children and other deductions could find it more attractive to sock away their money in a Roth since the contributions are taxed at your current salary. “Don’t get caught up in the granularity of it,” she says.
Having a diversified approach to investing is critical because “you don’t know when you’re going to need the money,” Blonski says. People who believe they will wind up in a higher tax bracket when they retire could find that it makes sense to have a Roth IRA since it allows you to withdraw money tax-free, he says. Or if you believe your financial situation will decrease by the time you are age 65 and you’re going to pay a lower amount of taxes, you should stash away more money in an IRA. “Advisors can help navigate the rules with saving money,” he says.
Opening a health savings account, known as an HSA, can also minimize the amount of taxes you pay and help you save money for retirement since any money that is not used for health care purposes rolls over each year like an IRA. HSAs are beneficial because of the triple tax benefits: contributions are tax-free, the money accumulates tax-deferred and money used for medical expenses is tax-free, says Luis Rosa, a Las Vegas- and Los Angeles-based financial planner and founder of Build a Better Financial Future. “You can use money in an HSA for co-payments, glasses, dental work and many other medical purposes,” he says.
Avoiding Emotional Decision-Making
When the market is volatile or undergoing a massive decline because of geopolitical events or weaker economic conditions such as a contraction in growth domestic product figures, investors can often fall prey to their emotions. Investors often want to purchase stocks when the market is relatively overvalued, says Lamar Watson, a financial planner and founder of Dream Financial Planning in Reston, Virginia.
Too many investors think they can successfully time the market over an extended period of time even though active trading usually leads to underperformance of the S&P 500’s 10% annual returns going back to the early 1900s, he says. “People have to understand how risk-averse they are and what their time horizon is,” Watson says. “Keep your costs low and understand your risk tolerance.”
Relying instead on logic and data can be challenging, but advisors can help investors stay the course and stick to their financial goals. “Advisors are less likely to become emotional about the market and can provide a different perspective,” Blonski says. “Most retail investors get caught in the fear of missing out and they sell when they shouldn’t sell and buy when they shouldn’t buy.”
Managing a retirement portfolio includes determining the amount of risk investors are comfortable with. While stocks are more volatile and riskier assets, they generate higher returns over a longer period compared with bonds. When investors get closer to retiring, they often allocate a large percentage of their money toward bonds to avoid market volatility and generate more income. Fixed-income investments can often provide a balance to stock portfolios during volatile times. “While fixed income investments certainly don’t have the growth appeal of stocks, they provide a balance in times of volatility, an important component of any well-rounded portfolio,” Blonski says.
Mutual funds or ETFs can also decrease the amount of volatility in returns compared to individual stocks. There are a lot of new investors who want to buy individual stocks and should buy mutual funds instead because of the lower costs, says Emlen Miles-Mattingly, CEO of Gen Next Wealth in Madera, California. “Investors need to understand what they are investing in and focus on the values of the companies,” he says.
Investing in defensive stocks can also help investors hedge against cyclical stock volatility. Defensive stocks are the opposite of cyclical stocks since they are involved in industries that are needed regardless of economic conditions, such as consumer staples, utilities and health care. While defensive plays may generate lower yields than cyclicals when the market is performing well, they also have lower declines when the market takes a dip.
Structuring Withdrawals From Retirement Accounts
Cash flow planning is important because many people underestimate the amount of money they need in retirement, says Camille Koppenberg, a financial advisor for Asset Advisors in Ferndale, Washington. Before people decide to retire, they should review their expenses, especially health care costs, including Medicare and supplemental plans. They also need to determine when is the best time to take their Social Security benefits and how it impacts their taxes and factor in long-term care expenses.
“You have to be realistic about it,” she says. “My hope is that we’ve had the cash flow discussion years before retirement and not during retirement.”
The majority of people need to save more for retirement and plan for bull markets ending and outliers such as a global pandemic that will impact their retirement returns. “We need more money than what we think we need,” Koppenberg says. “If you got a raise, then it’s time to bump up the retirement savings. We need to think of it in percentage terms, and not absolute dollars.”
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