7 Mistakes to Help Clients Avoid When Planning for Retirement
Do you know how money works? You might think you do. You make it, you spend it, and you've hopefully been saving it, maybe even investing it. But do you know how to make it work better for your clients?
According to Michael Davis, CEO of Davis Financial Services, Inc., the secret to making money work for you doesn't start with earning a large paycheck – it starts with knowing how to keep it. Here are 7 costly mistakes Davis says retirees should avoid in order to reach a successful retirement.
When income doesn’t flow through the door so freely, you must tune down your appetite for risk.
Retirees are urged by nearly everyone, except perhaps brokers, to switch from a mindset of accumulation to preservation. Davis recommends following the "Rule of 100" to ensure savings are never entirely at risk: Take your age, subtract it from 100, and that is the percentage of your assets you can invest on the market with relative safety. Keep in mind, however, that the "Rule of 100" is just a guideline.
"Most of my clients have one thing in common. They have enough money to live out a comfortable retirement as long as they don't lose it. Over the years we've taken great pride in helping our clients hold on to what they have. I'm kind of selfish I guess, because when my clients are sleeping good, I am also sleeping good knowing they're not losing money," says Davis. Again, the key here is to preserve your assets and ensure you’ve got an adequate buffer to weather tough times.
Retirees' first priority must be to cover their basic, vital expenses using income streams that are as reliable as social security checks. "Retirees should invest in vehicles that provide a steady income they can't outlive, just like pensions used to do," says Davis.
Sometimes when retirees rebalance their portfolio, they don’t keep track of the intermediary transaction fees, as well as potential capital gains taxes they may offset by booking capital losses. While seemingly small, these fees may accumulate and add up to a significant amount over time.
Davis says one of the most significant challenges today's retirees face is what will likely happen with taxes in the coming years. "Taxes affect everybody. Taxes and inflation are the two major obstacles to ensuring a lifetime income,” says Davis.
In response to harsh tax climates, Davis says his favorite financial instrument for retirees is the hybrid annuity. They offer growth potential that is linked to several indices such as the S&P 500 and have a principal guarantee, which means hybrid annuity holders literally cannot lose money provided they don't surrender their contracts during the surrender charge period and incur surrender fees.
While IRA accounts provide tax advantages for retirement savings, they can also cost clients money if you’re not familiar with the rules. Speak to an IRA expert to make sure surprises don’t appear and jeopardize your retirement.
Just because your clients are about to retire does not mean all your assets must be liquid. Sure, your expenses may exceed your revenues during the latter part of your life, but if you’ve saved enough, you can still capitalize on the returns of assets that are not the most liquid of nature. Just be sure to live within your means and understand – or get a financial advisor to help you understand – your limits.