A Little Advice Can Make a Big Difference

A Little Advice Can Make a Big Difference

In this day and age, most people realize how critical it is to plan for retirement.  Fidelity, Charles Schwab and Vanguard are household names.  Your teachers, parents and grandparents have all lectured you on the importance of saving responsibly.  With that being said, it is still very hard for most people to grasp the importance of preparing for an event that is 20-30 years away.  While many are doing what they can to save for retirement, there is rarely much desire to spend time implementing a solid plan to grow a nest egg until retirement is just over the horizon.

Getting a grasp on your retirement savings can be difficult.  On average, most workers have 12 different jobs before they turn 50.  Since many employers offer their own retirement plans, keeping track of these plans with each job change is a headache that many people will choose to ignore.  They know the money isn’t going anywhere and they probably can’t touch it for another few decades.  They are saving for retirement and a quarterly statement in the mail from each retirement plan they are invested in is good enough for them.

This behavior is not uncommon.  According to a 2010 ING study nearly 50% of Americans leave behind their old 401k plan when they switch employers.  20% leave over $50,000.  Out of sight, out of mind.  Not peace of mind though.  And that’s what you really need.

Planning for the later years of our lives requires a bit more attention than mindlessly socking away money into a retirement plan each year.  Not all retirement plans are alike.  Some are better than others.  Managing them efficiently does take some work and not understanding your money or your plan (or if you even have one) is a dangerous game to play.  Even when retirement is years away, the decisions you make today will have a huge impact on your financial situation 30 years from now.  Having a dynamic picture of your finances means knowing where you currently stand, where you’d like to go and how you plan on getting there.  When you have all those pieces in place, your stress levels are lower and you are better prepared to handle life’s changes as they come.  The peace of mind that plan offers can be priceless.  So where do you start?

Get an Advisor

“Is this a sales pitch Tim?”

Not really.  The point I’m trying to drive home is that when dealing with something as significant  as your finances, professional help can be extremely beneficial.  That’s easy for me to say, but if I didn’t think the role I fill provided value to the people I work for, I wouldn’t do it.  Having a good relationship with your advisor is critical.  Before I take anybody on as a client not only do I make sure they are a good fit for my business, but I want to make sure that I’m a good fit for them.  Sometimes people don’t mesh and that’s fine.  What’s most important is that you hire somebody who you are comfortable working with and trust.

“Can’t I just pay more attention and handle my own finances?”

While there are many tasks that people choose to outsource even though they are fully capable of doing them on their own (landscaping, cleaning, painting etc.), personal finance, in my opinion, falls into a different category.

My wife will tell you my analogies are ridiculous but most of the time I’m just trying to illustrate a point.  If I can paint a funny picture while doing it, all the better.  So here it goes…

YouTube is a wonderful thing.  I can’t begin to count the number of small tasks around my house that were solved by YouTube and a trip to Lowes.  Small plumbing, electrical, automotive…you name it, I’ve YouTubed it.  What homeowners did before YouTube existed, I have no idea.

What about bigger stuff though?  To be honest, I really think I could figure out how to put an addition on my house by watching a few hours of YouTube (seriously).  However, that isn’t something I want to risk screwing up.  Even though I did my fair share of chest-thumping after installing the plumbing for my new wet bar, pausing a video, asking the Lowes guy for some advice and general trial & error probably isn’t going to get an addition built.  I’d end up wasting a lot of time, doing something very wrong and most likely really ticking off my wife.  These are things I want to avoid.  For somebody like me, building an addition would be quite an accomplishment, but I know I’d never be comfortable in part of the house that was built by a YouTube warrior.  For every creak I heard or crack that I found, I’d be fearing a roof collapse or something worse.  Lack of confidence would trump my pride and fear of failure would slowly eat away at me.  For big projects like this, I’ll pass on the DIY route and defer to the pros.

This same logic applies when hiring a financial advisor.  I think with enough time and research, most reasonably intelligent people could manage their own finances.  There’s little doubt in my mind, however, that an expert will do a more thorough, more efficient and certainly more objective job at evaluating a person’s situation and helping them build a plan.

How much can an advisor really help?  Well, that depends on the advisor.  Is it unreasonable to estimate an advisor’s guidance could save an average investor 1-2% per year?  I don’t think so.  A few percentage points a year when compounded annually will have a huge impact on your wealth over the long-term.  In the chart below we see the different results of compounding 7,8,9 and 10% returns annually in a retirement account.  Just 1% point makes a dramatic difference!

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Growth of $100k in qualified retirement account starting at 30 years old with annual contributions of $5000.

Crazy right?  Since retirement accounts defer taxes, compounded gains year after year adds up very quickly.  A little good advice has the potential to go a long way.  So save diligently, plan responsibly, understand your investments and have a clear picture of your goals. If that means hiring an advisor to get you on the right path, then do it.  The details matter.


Tim Brennan

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