The Financial Dam Has Broken: Retirees Need to Wake Up

The following is adapted from Fire Your Financial Advisor.

Snow White was out for one year. Jack Spartan (Demolition Man) was on ice for close to 40. And Steve Rogers (Captain America) was frozen for almost 70. But Princess Aurora (Sleeping Beauty) wins the snooze button award for being asleep for a full century. 

My point—other than staying away from poisoned apples, a blond-haired Wesley Snipes, experimental drone plane trips over the North Atlantic, and dodgy spinning wheels—is that the world keeps going, with or without you. When you eventually wake up, the world you knew is gone, and you find yourself in a very different place and time. 

If you are a retiree, this has never been truer. You can’t afford to hit the snooze button. The financial dam has broken. It’s time to wake up to this scary new world.

Start Asking the Right Questions 

Information is flooding everywhere across the Internet—and it’s waking retirees up from a decade-long hibernation. Fee schedules, investment comparisons, tax plans, and long-term care realities are finally out in the open for everyone to see. 

The snooze button that kept everyone in the dark ages, with no access to information, is gone. So you shouldn’t feel bad about asking your financial advisor questions. What questions should you ask? Here’s a list:

• Did my financial advisor reallocate my assets to safer investments at retirement?
• How much of my money could go backward?
• What am I paying my financial advisor?
• What am I paying for the investments they sold me?
• Why don’t I have a tax plan for my IRA?
• Do I have a plan for long-term care?
• What services does my financial advisor provide besides selling investments?

Of course, it’s no surprise if questioning someone you have trusted for numerous years is difficult. But this is your life savings we’re talking about. I think it’s reasonable to assume that you owe it to yourself and your family to take the time to do some tire kicking and make sure you feel confident that your money is in the right hands.

To help you see why asking your advisor these questions is so important, let’s zero in on four areas that are critical to retirement planning: investments, fees, taxes, and long-term care. These are not just the areas that have experienced the most change and evolution during the retiree hibernation; they also remain the cornerstones of any successful retirement plan. It’s crucial to get them right.

#1: Investments

Before the age of financial advisors, investment choice didn’t matter for most retirees. You retired. You received a monthly pension. The end. Once the IRA came around and pensions started to die, though, that all changed. Retirees had to choose their own investments or, more likely, pay someone to choose for them.  

Enter the mutual fund. Incredibly, almost half of America has been sold a mutual fund. There was a problem with these funds, though: the fees were much higher and the performance much lower than the peddlers of these funds promised, particularly when compared with all the new and cheaper investment alternatives popping up every day.  

The result? In 1975, a new and more cost-effective way to participate in the stock market was born: the index mutual fund. To the chagrin of the financial advisors selling mutual funds, this investment cost less and earned more. Then, around 1990, another pro-retiree investment option came along called “exchange-traded funds” (ETFs). Like index funds, this new investment option could mimic an index.

Index funds and ETFs can be purchased and managed with the ease of a click on any online platform. Plus, given their nature, there is no management or additional trading needed. The customer just passively rides the index until they want to hop off, and it can all be done without any financial advisor fees or costs.

Remember our list of questions? Exactly. What are you paying for the investments your advisor sold you? Believe me, it’s worth looking into.

#2: Fees

As important as investments are, the black hole for most retirees is fees. When you ask someone how much they pay their financial advisor every year, 99 percent of the time they have no idea. Even if they know the percentage going to the financial advisor, they have no clue how much that means in dollars, let alone actual investment costs. 

Despite all the information out there that retirees can get for free, the average fee for financial advisor advice remains around 1.17%. Sadly, when it comes to services, this still only buys you investment picking—which is commodified through technology and passive investment options. Meanwhile, the old financial advisor guard keeps digging in and, shockingly, going in the opposite direction by charging even higher fees. 

That’s right: higher fees. In fact, according to SmartAsset, if you are a retiree with a $500,000 IRA, then on average, you pay your financial advisor $13,725 a year. If you add up the time spent for a quick birthday call, one or two meetings, and pushing a button for an automated allocation program based on your age a couple times a year, it would be extremely generous to say that your financial advisor is putting an annual 10 hours into your family and plan. 

Applying an hourly rate, that means you are paying your financial advisor around $1,372.50 per hour. Let that sink in. And let’s not forget, they are only picking investments, not offering other professional services like legal or tax help or addressing any of the other big risks in retirement. Nope, for $1,372.50 per hour, all they are really doing is selling mutual funds. 

Those questions are starting to look more and more important, aren’t they?

#2: Long-Term Care

Along with investments and fees, there’s another thing that you need to think about: long-term care. Look, I know you don’t want to talk about it. You don’t want to think about it. Because it is never going to happen to you. 

That is the mindset of almost every retiree I have ever met when I bring up the potential future need for a nursing home. Believe me, I get it. Getting old sucks. And nobody wants to plan for something they have convinced themselves they will never need.

Yet, if you want a real plan for retirement, long-term care can’t be ignored. It is too important. It costs too much. It can be $9,000 a month ($108,000 a year), or more! That means that if you and your spouse both end up having a prolonged nursing-home stay, you could be spending over $1,000,000 on the nursing home alone. 

In other words, long-term care could mean you lose everything you worked your whole life to build. That doesn’t feel like the grand, “holistic” plan promised to most retirees by their financial advisors. Yet, shockingly, this risk is swept under the rug by almost every advisor out there.

This doesn’t mean you’re helpless. There are some very effective new strategies and tools to protect your assets, spouse, and family from this huge long-term care risk. Unfortunately, most advisors don’t talk about these options and strategies because they take a lot more work to learn about and put into motion. And they don’t end with yet another investment sale or commission for your financial advisor, so under the rug these possible solutions go—unless you ask about them.

#4: Taxes

That brings us to the last area we need to talk about: taxes. They’re a bummer, but inevitable. And here’s the thing: the creation and evolution of the IRA left a Grand Canyon-like fault line in most retirees’ plans.

In the United States, we have a graduated tax system. That means everyone’s dollars are taxed the same going up the tax rate ladder. Why is this important? Well, you are retired. Your income is most likely turned off, and you may not have turned on Social Security. Regardless, you can now get your pre-tax dollars out of your IRA accounts at a huge discount—if you plan ahead and build a tax plan rather than use Uncle Sam’s plan for your IRA dollars.

If your financial advisor ignores the issue, however, there are various penalties waiting to take your money. Take the “widow’s penalty,” for example. When a spouse passes, whoever is left goes from married to single tax filing rates. This can cause your tax rates to almost double. For a $500,000 IRA account that you allow to fall afoul of this penalty, you could end up paying around a 20 percent effective tax rate, or $100,000 over the course of the widow’s or widower’s life.  

However, with a proper tax plan, we see IRA tax liability crashing down to 10 to 15 percent rates. Instead of losing $100,000 of your $500,000 IRA to taxes, you could walk away paying far less Yet almost no financial advisors put together these tax plans, despite the clear savings for their clients. Again, the burden is on you to ask about it.

Wake Up

As you can see, many financial advisors don’t look out for their client’s investments, long-term care, or taxes. And worst of all, they are being paid handsomely for their lack of value.

Instead of someone who builds a plan geared toward keeping your dollars rolling to your financial advisor and Uncle Sam, you need someone who will help you build a specific plan for each of these risks. The only way to find that person is to start asking the right questions. And, if your advisor can’t answer to your satisfaction, it may be time to fire them and find someone who can.

For more advice on how to find the right financial guide, you can find Fire Your Financial Advisor on Amazon.

About Greg Aler

Greg Aler was born and raised in small-town Ohio. After attending law school, he worked at one of the largest law firms in the world. Later, Greg went on to build three multimillion-dollar companies before the age of forty: an elder care law firm, a financial services firm, and a real estate company. He re-thinks and re-builds industries to help service the other 99 percent of America. Greg has his own TV, radio, and podcast show: Expedition Retirement. The only thing Greg loves more than cooking, scuba, boating, and laughing with friends on his back porch is being with his wife, Fernanda, and three kiddos (Lilly, Lola, and Louie).