Why it is important to have a “Balanced Financial Plan” for your retirement
Recently I heard a person who called themself a financial advisor on the radio. They were talking about the last stock market crash in 2008 and how they helped protect their clients’ money from market losses. They had a real “sky is falling” mentality when it came to the stock market.
It became obvious that they were an insurance agent and were not licensed to advise on stocks, bonds and mutual funds. They did mention briefly that they were not securities licensed. There is nothing wrong with this, as long as people are fully aware. So while many people in recent years had experienced strong gains from the stock market, this insurance agent had several clients that had most likely missed out on the recent bull market with record profits. It can be very important to have protection built into your portfolio, but not at the expense of missing out on potential robust gains.
I heard another person on television that also called themself a financial advisor. The main thing this person talked about were rates of returns and predictions that the stock market could continue to rise 5% to 15% per year for the near future. It was evident that this person was a commission broker (also known as a stock broker) in which about the only things they advised on were stocks, bonds and mutual funds. Years when the stock market is up, most of their clients are likely earning strong returns. Years when the stock market is down, many of their clients are likely experiencing losses in their accounts.
The challenge is something that I see often which is advisors that do not help their clients with a truly “balanced” financial plan. For many, it’s all or nothing.
Commission brokers likely have most (or all) of their clients money at risk in the stock market with a mix of stocks, bonds and mutual funds. If a person is with one of the big box brokerage firms (the ones that you might see advertised on television), then it’s likely they have the same mutual funds that many other have that can have high internal fees and higher risk than they are aware of.
Insurance agents likely have some of their clients’ money in annuities and/or life insurance. But when it comes to advising them on the stock market, they are not much help because they do not have the licensing or training to do so.
I pride myself on being a full service financial advisor since I am both securities licensed for stocks, bonds and mutual funds, and also licensed for different types of insurance.
Some of my clients choose to only have investments in the stock market. Other clients choose to only have investments in annuities and insurance products along with money in the bank.
Many of my clients choose to let me help them with a “balanced” financial plan in which they have a mix of some of their money in the markets and some of their money in annuities which can offer safer growth and/or a lifetime income option.
Of course we also make sure they have money in the bank for emergencies. This is what I like to call “9am money” (since you can usually get to it by 9am on the next business day), or I have called it “5 minute money” (since you could have some of it if you live within 5 minutes of your bank).
With a “balanced” financial plan, imagine having different buckets of money. Each bucket will have a different purpose since trying to have one account with all of your money is not always the most effective way to accomplish your goals.
First, let’s think of Bucket #1 as the emergency cash bucket as described above. This is usually money in checking and savings accounts in the back. It might be 5% or 10% of their net worth. Or it could be 3-12 months of their expenses. If a person had a $1 Million net worth, they might want to have $50,000 in the bank.
Next, let’s think of Bucket #2 as the growth bucket with some risk that you are comfortable with. To help determine how much this might be, let’s use the “Rule of 100”. Take the number 100 and subtract your age. If you are 65, then the answer would be 35. This answer might be the percentage that you have at risk in the stock market. Now it’s simply a rule of thumb, or a suggestion. I have clients that choose to have the majority of their money in the stock market, while others do not have any money in the market. For this example, let’s say that a person chooses to have 50% of their money at risk in the markets. This is money that could earn 5%, 10% or much more (depending on several market factors and other things). This is also money that could experience losses due to market downturns. For this same person with a $1 Million net worth, they would have $500,000 invested in the stock market.
Now let’s think of Bucket #3 as the safer growth bucket. This is money that you want to earn more than you would from a savings account, but without of the risk of losses from the stock market. Many people choose to use annuities which can offer safer growth and/or a lifetime income option in the future. There are different types of annuities from many different companies. The key can be working with a financial professional that can offer different options based on your important goals. This person might choose to have 45% of their money in an annuity that meets their criteria. The annuity could have low fees or even no fees. It might include an income option, or just be for growth. For this same person with a $1 Million net worth, they would have $450,000 invested in an annuity.
So in this example, this person would have the following:
$50,000 in the bank for emergencies
$500,000 invested in the stock market for growth
$450,000 invested in an annuity for safer growth and some protection
There are other factors that I always look at with clients such as long term care considerations, potential life insurance options, charities/donations to their church and causes that they care about, and much more.
What I will NOT do is have a doom and gloom, sky is falling approach in which I try to scare people. I also will not advise on investments unless I know a person’s important financial goals.
The thing that I enjoy about my business is getting to know people like yourselves…
If you are married, I want to know how you met your spouse.
How many children and grandchildren do you have? Where do they live?
What do you do for fun?
Where do you like to travel to?
I truly enjoy helping people that are nearing retirement or already retired to accomplish their financial goals with investments they are comfortable with. My goal is to help lower your risk and lower your fees, and to do it with a “balanced” financial plan.
Let’s chat soon. You can call the Riedmiller Wealth Managementmy office at 402-904-7575. I will be happy to answer any of your financial questions, or at least point you in the right direction. This could be the best 15 minutes that you spend all month!