Category Archives: Risk Tolerance

Is it Worth Paying for a Financial Planner?

Funding Retirement, Investment Strategy, Risk Tolerance, , ,

Is it Worth Paying for a Financial Planner? Is there a solid return of value for the cost to have a financial planner manage our portfolio and/or develop our financial or retirement plan? Certainly the internet makes possible our ability to self-educate on almost any financial topic. Yet many still use a financial planner, including myself. Before you say anyone giving up hard-earned cash to a Certified Financial Planner (CFP) is a fool, let me explain some of the benefits of having paid professional financial advice.

Is it Worth Paying for a Financial Planner? There Are Benefits

I succumb daily to my curiosity and my need to continually learn. Part of that is researching financial related ideas and concepts. It is a big part of what brings me enjoyment in my early retirement. It is my brain exercise. With everything I know, information available through research, and whatever I can figure out on my own, does paying a CFP result in my having a larger return on my investments? Not just a larger investment return but also reduce risk. Can they deliver a more sustainable or better early retirement funding strategy than if I manage my portfolio on my own?

For me the answer now is YES.

In my daily research and learning I tend to gravitate to the things that interest me. However I hate looking at company financials, stock trending, sector performance measurements, etc. so I would do what most people do. I would just invest in broad market low fee index funds. Probably in an ETF variety. That isn’t a bad way to go but I know me and without my CFP there is some risk of my blowing it.

I have a little life-long problem called “Investment Risk Aversion”. Maybe it was my low-income upbringing where money never came easy and was never present. I know it is irrational. It totally defies the financial logic I have accumulated. That is my greatest benefit of paying a financial planner. Having a professional to act as a buffer between me and my portfolio. A professional team-mate to cool my jets when things get hairy in the markets like they have recently.

Removing Ourselves From Making Stupid Moves

There are many stories about people letting their emotions take control of their investment decisions. They end up selling low and buying high. They jump in and out of the market at the worst of times only to destroy their wealth.

Paying for my CFP means paying for someone with the education and certification to know more than I do. Not only that but they are required to continue their education and as a fiduciary planner they must recommend what is in my best interest, not what will generate their biggest commissions.

With my dislike of necessary financial digging required to pick, buy, or sell the right securities at the right time, along with removing my emotions from the equation, means there should be fewer errors in my plan and portfolio strategy. Certainly nothing is guaranteed but I believe having a professional on my team stacks the odds slightly more in my favor.

What should we look to get in return when paying for a Financial Planner?

Anyone investing and especially those who retire and depends on their portfolio to support and fund their retirement will need an income and investment strategy to be sustainable for the long-haul. It comes down to five key elements to make that happen:

  • Asset Allocation. The right mix ratio of Growth and Dividend Stocks, Short and Long-term Bonds, Managed funds vs Index funds, etc.
  • Withdrawal Strategy. A sustainable withdrawal rate, bucket approach, etc. along with what will generate that income for withdrawal.
  • Tax-efficiency. Portfolio and withdrawal strategy looking at the most tax-efficient way to tap portfolio funds from early retirement, the beginning of receiving Social Security, RMD, through late life retirement.
  • Product Allocation. Looking beyond traditional investment products like Stocks and Bonds. Taking into consideration guaranteed-income products when and where appropriate.
  • Goal and Timeline Specific Investing. Developing the strategy to fit our unique goals, risk tolerance, income needs and our timeline.

Making the correct decisions in these five key investment elements is the difference between success and failure. Go too conservative and you won’t generate enough income or have the growth to last your lifetime. Go too aggressive and you risk large losses during market turmoil as we have now or worse during anything close to what happened in 2008-2009. Allocate too little cash and investment income producing assets toward immediate income needs means selling low in down market conditions. Financial Planners are paid to deliver solid advice to cover all the five key investment elements. When paying a financial planner we should expect to have all five key investment elements covered in a way to match our specific and unique financial needs.

Paying a Financial Planner to Create the Plan

For a onetime flat-fee a financial planner can create a financial or retirement plan. Call it your personal financial road map. I did this when I turned age 40 and decided I wanted to retire early at age 50. I turned over a detailed list of all our assets, liabilities, income, savings, investments, number of kids and their ages; educational plans for the kids, life insurance, etc. and paid $600. In return I received a full plan on what it would take to get to my early retirement goals. I then followed the plan. I continued with my full 401K contributions within a new frugal lifestyle budget, a change from my conservative to a moderate investment allocation, and a savings/investment target. The plan also had me start to build up the recommended emergency fund. Then later I added Roth IRAs. It worked, I retired at age 51.

I wasn’t paying my CFP much in fees to manage my Roth and nothing on the money market emergency fund. I had a plan and just made sure I stuck to the asset allocation and savings target. Of course things changed and required my target numbers to increase with inflation all under my financial planner’s guidance.

Paying a Financial Planner isn’t an all or nothing deal.

Meaning you can manage your own portfolio using a mix of funds but pay a CFP to create your plan and cover the five key investment elements for you to follow. I call it Managing Our Own Portfolio but With a Little Help. In fact I just paid $1,100 to have a new comprehensive financial plan put together that includes both my wife’s and my portfolio, our early retirement funding, future plans, social security benefit strategy, and a tax-efficiency strategy. Basically covering the 5 key investment elements. I won’t have the results for a few weeks. I am hoping it wows me. If not I will have something to say about it.

That is where my accumulated financial knowledge becomes handy. I expect them to deliver something far better than I can put together if I am going to pay them for it.

I expect to see them give my best strategic mix of managed vs index funds, asset allocation, income and bucket strategy; social security strategy, Roth conversion and fixed income considerations; tax-efficiency advice including RMD and Social Security considerations, etc. All specifically created to fit my budget and early through late retirement needs.

The Problem with all the internet information to go it alone

Could I or anyone do this on their own? Yes and many do.

It should be easy to figure it all out because we all know that everything on the internet is true. NOT! Not everything someone posts online is going to be good advice for our specific needs. I think it is fair to say that there is a lot of information that is far from factual or accurate. The rule of online research is to question everything. Know the source and understand what is and isn’t going to work for you.

I have read impressive personal financial blogs that discuss their investment strategy and how they escaped the rat race. Real life financial examples of what it took to get to financial independence from frugal living budgets, paying off debt, ratcheted up savings rates, to their investment strategies. Well talked about low-cost index funds, dividend paying stocks and passive income strategies, etc. are commonly mentioned. There are promotional posts about using some of the known new investment companies to help us manage our portfolio. Think Betterment, Motif, etc. (non-affiliate links) of which from what I have researched are geared toward the DIY investor crowd and do a great job.

There is always the disclaimer, “I am not a certified financial planner and this post is for informational purposes only”. Whenever I mention anything “Investy” on Leisure Freak I do the same. Always keep that in mind before pulling the trigger and making changes to your portfolio or plan.

So to ask again, is it Worth Paying for a Financial Planner?

In the end the answer is yes if you don’t have the time, knowledge, confidence, patience or inclination to do the work yourself. We should care the most about our portfolio. Sometimes that means we need to pay a professional to help manage it for us. Especially if our financial situation becomes complicated, we need the emotional risk aversion buffer, or we just doubt we are able to manage our portfolio on our own. Just make sure your Certified Financial Planner is a fiduciary and hammer them down when we can on any wrap fees associated to the portfolio management.

Always keep increasing financial knowledge.

Is it Worth Paying for a Financial Planner?When attending meetings with any paid financial planner go in loaded with knowledge. We need to question and help them get an idea of what our risk tolerance is and our long-term requirements. I am the biggest pain in my financial planner’s keister. I ask a lot of questions and challenge them to make me understand their investment decisions. Generally I am happy and more knowledgeable when I leave a meeting than when I went in. So far I think it is worth paying for a Financial Planner.

That doesn’t mean I am going to always need or want to continue having them manage my portfolio to the extent they are now. Or maybe I will. It all depends on how much I learn going forward and how comfortable I get with handling things on my own. I need to feel confident that I can follow a professional plan and not add unnecessary risk or cause diminished returns. It will also depend on how well their overall management performance results are. One thing is for certain. I do enjoy not having to worry about managing my portfolio so it has been worth the wrap fee I am paying. That doesn’t mean I am not constantly asking about reducing fees. They understand that I can go somewhere else or go the self-managed route so there is a kind-of dance going on between us.

What are your thoughts on the question, is it Worth Paying for a Financial Planner?

Signs of Pension Plan Insecurity

Pension, Retire Early, Risk Tolerance, , , , ,

One of the questions I am often asked is why I decided to fund my early retirement on my own instead of just taking the Corporate Pension payment (annuity) every month. The reason was there were many Signs of Pension Plan Insecurity. I made a decision based on those signs and my feelings about the company I was retiring from.

If you have a pension benefit associated to a government position then some of this information will not totally apply to you. But there are some warning signs here that you may also be on the lookout for.

If the pension plan you are under becomes underfunded there could be risk of losing some of your benefit. If you are still working and not yet fully vested (age + years of service) to receive your pension but striving toward that goal. Then even if the pension fund isn’t in financial trouble you can still end up being reclassified as far as eligibility and status which can also lower your benefit.

Here are some Signs of Pension Plan Insecurity to watch for:

A Company Merger or Being Taken Over with a Change of Leadership.

This was my first sign with the company I had already put in 20 years with. But I was still 10 years away from my full pension benefit. Our pension was considered over-funded and secure as secure can be. But the new company didn’t offer pensions to their employees and thus started some big changes.

Shortly after the so-called merger an announcement was made to all the conquered company employees. They stated that if you didn’t have 20 years of service on December 31 of that year you are frozen at that time and service. You will be put on a much less generous defined contribution plan.

Then all the merger synergy related layoffs began. Because of the pension over-funded status the company received the federal government’s blessing to offer lump sum severance packages to tens of thousands of laid off employees from the pension fund. They did this instead of paying it out of the corporate funds. This drained the pension fund down very quickly because the severance pay was a full year’s salary for most (I heard to decrease lawsuits).

The new company had no legacy feelings about a now small group of employees with a pension benefit. It was not anywhere on their priority list.

In short— Beware of the 3 following clues

Be on alert if your company is taken over by a company that doesn’t provide employee pensions

Caution is the word if they don’t believe in pensions or if they do have a pension benefit but their pension plan is underfunded. The merged company can legally mix the two pensions together. That can cause what was once a fully funded pension plan to be dragged down with the other. In any case the new guys could care less about your pension and the deal you signed on for years or decades before.

Be on alert if your company pays out lump sums from the pension fund for non-retirement costs.

Watch out if your company uses your pension fund instead of using money from the general corporate funds for severance pay to the laid off employees. Or starts offering special early retirement or severance incentives for people to leave which can severely drain the pension fund.

Be on alert if your company starts creating multiple employee benefit types.

Be concerned if your company creates multiple employee benefit flavors by abruptly reclassifying eligibility requirements and moving people to a less generous defined contribution plans or no new plan at all. Establishing multiple employee benefit layers could be a bad sign.

Whether there is a company merger, buy out, or not, be on alert if you find the company division you work in is spun off or is sold.

Companies normally do that to their under-performing segments of the business and load them up with retirees but without the funds to pay the promised benefits.

The Company’s Revenue is Sinking.

The company I served for 31 years was a legacy land-line telephone company. It’s bread and butter was always land-lines. But the world evolved and now only wanted wireless cell service. The business model that worked for decades was done and although providing DSL to a data hungry public was taking off. It didn’t make up for the dropping land-line revenue.

There was constant layoffs and they were always explained as being due to lost customers. Their next move didn’t come as a surprise. It is a move financially struggling companies usually start with. That is freezing the pension. Funny it is never decrease executive pensions, stock options, or obscene salaries. I digress….

Whether the pension is the drag on the bottom line as they try to make it or they are just taking advantage of the situation to kill the pension funding issues once and for all, it has huge impact on your benefit. Especially if you haven’t reached pension eligibility yet.

My company CEO told us the pension was tens of millions of dollars underfunded and they have no intention of adding another dime to it. If we didn’t like it we could leave. That kind of talk is another bad sign.

Recap — Beware of the following 4 clues

Be on alert if your company revenue and finances are in trouble.

Regardless of whether you pension is underfunded or not, the company can target it as a cost they just don’t want to deal with anymore and freeze it.

Be on alert if your company starts tough talk about your pension fund status.

Especially if the word is it is substantially underfunded.

Be on alert when someone at your company’s executive level tells you of a benefit reduction.

Whether it’s your pension or another retirement benefit. Like ending 401K matches. Especially if it’s followed by a comment like “if you don’t like it hit the bricks”.  Your pension benefit may be in real trouble.

Be on alert if you receive a Participant Notice.

By law if your company pension becomes heavily underfunded during the year (20%) then you have to be officially notified with a Participant Notice. That is a sure sign of a pension insecurity alert.

Bankruptcy

Obviously if your company goes bankrupt you may have some big pension trouble. Bankrupt companies usually always terminate any pension plan benefits they have. If your company was filing under Chapter 7 any pension plans must be terminated along with the company liquidation to pay creditors. Not only did you lose your full pension but your job too.

Filing under Chapter 13 and the pension may just be frozen. Or it could still be terminated but handed over to the Pension Benefit Guaranty Corp (PBGC) to take over the fund and the retiree payments. Your benefit will be reduced depending on your age and the amount the plan is underfunded. The PBGC is better than a poke in the eye. But it does mean you will be retiring with less than you planned for.

Form 5500 – Pension Health Report

If you work for a company that provides a pension benefit to you. Then always check the yearly Funding Notice your company must send out about the pension funding status. If you have more suspicions than that easy to read notice tells you then you can request the pension financial form filed with the government each year called Form 5500.

Form 5500 is like reading through a hundred page corporate income tax filing. These usually come out almost a year after the year that is being reported. I can usually find these on-line by searching for by company name and Form 5500 or Funding Notice.

There isn’t much you can do if you find your pension plan sinking but to save as much as you can and decide if sticking around is worth waiting for a diminished pension. You may do better if you have other better paying opportunities available. Or opportunities that you would be passionate about pursuing.

What has happened To my old company

As to the company I retired from and their pension benefit. The salaried employee pension plan is still frozen. No matter how many extra years people put in or salary raises they get the benefit is frozen. It stays at the same amount to whatever they had up to Jan 1, 2010. It never paid a cost of living raise so taking the annuity option means a pension payment that grows smaller in spending power every year even before they retire.

The company has since been taken over by another company. Now pension eligible employees are twice removed from the company that made the pension promises. This new company now reports that the pension is fully funded. But in their yearly Funding Notice report they now also list within a section spelling out the conditions where they can terminate the plan. That they have the legal right to terminate it and hand it over to an insurance company if it is fully funded.

Update- in 2015 they were allowed to combine all of their conquered company pension plans into a new single plan. At this time the pension is listed in their documentation as underfunded.

Who knows which direction they will go? I took the lump sum which was considered as less value than the annuity at that time. I invested it within some IRAs. I would rather take my chances this way than be tied to the whims of a company I never worked for. No way I wanted to be tied to a company with all the signs of being one that I couldn’t count on for the long haul.

Do you work for a less than solid company that provides a pension benefit or know someone who does?

Did you or someone you know have their pension terminated and handed over to the PBGC?