Question: I am 63 years old and hope to retire in 2 years. My wife and I have a 403(b) and a 457. Also we each have a Roth IRA and we both are covered by modest pension plans. By a lot of self-education (including Marketplace Money), we have done well accumulating our nest egg, but we're not sure how to transition to using our nest egg. Do you think we need a financial adviser to make this transition? If so, what criteria do we use to choose one? Perhaps more importantly, how do we learn to trust this person with our future? Thank you. Walt, Grove, IL
Answer: How much to withdraw from savings in retirement is one of the biggest decisions anyone ever makes. Live too high on the hog off accumulated savings early in retirement and you'll probably have a lot of fun at the risk of being forced to make drastic spending cuts later on. Spend too little and hoard money, the danger is you'll die with plenty of cash and a long list of regrets. Problem is, there's no easy answer to the managing money in retirement question.
I would be extremely wary of rules of thumb you might read and hear about, such as the popular "4 percent" rule. The idea is that you take out 4 percent of your portfolio in the first year; the following year you take out another 4 percent, plus inflation; and so on. It's a recipe for trouble. You can't go on auto-pilot.
Now, you've educated yourself about retirement savings over the years, so I'm comfortable recommending two comprehensive DIY websites. Analyzenow.com is the creation of Henry "Bud" Hebeler, a passionate proselytizer for conservative retirement saving and spending. Esplanner.com is the brainchild of Laurence Kotlikoff, an economics professor at Boston University. Both websites offer a mix of free and fee-based web programs that will give you worthwhile information and analysis about spending in retirement. Both Hebeler and Kotlikoff genuinely want to help people live well as they age.
You asked about consulting with a financial planner. I'm skeptical about planners most of the time for the average middle class family. However, I do think their expertise can be invaluable at a major transition point like retirement. You'll want to work with a fee-only certified financial planner (CFP). The advantage of a CFP is that they can look at your whole financial situation and not just slices of it, such as your insurance needs or asset allocation.
Every once in a while I reprint a list on finding a financial planner. It was put together by Ross Levin, a leading planner. It's time to reprise the list (which addresses a number of financial issues, including retirement).
Understand your needs:
- What is the triggering event that makes you feel you need a planner? Are you changing jobs, inheriting money or do you just feel like you want more financial controls in your life?
- What type of person will you feel most comfortable with discussing issues that are very personal for you? A good planner will spend a lot of time trying to understand you; you need to make sure that you are comfortable with the professional.
- What would have changed in 1 year with your financial life if you were working successfully with a planner? Would you have drafted a will? Would you have saved tax dollars? Would you feel more comfortable with your investment philosophy?
Must Haves with a planner:
- Your planner needs to have a Certified Financial Planner designation. This indicates that your planner has experience, has education and has passed an examination. He or she is required to adhere to a code of ethics.
- Look for a fee-based planner. While there are good planners that charge commissions for their services, it is usually best to pay the planner a fee directly, rather than have him or her earn a living from commissions. There simply won't be as many conflicts of interest.
- Find out if the planner's practice involves many people with situations similar to your own. Ask specifically to talk to some clients who the planner feels were in similar situations. Ask for the SEC form ADV. This tells you about a planner's philosophy, experience and regulatory history.
- Have the planner clearly lay out what they expect from the relationship. Be sure to find out what type of planning they do. Some planners give out big books filled with analysis. Other planners are more organic. You need to know what to expect.
Where to start:
- The best place to start is with your friends and colleagues. Try to be specific with what you are looking for. Ask them to be specific with you about what they like about their planner. If you have advisers who are not in the business of financial planning, ask them for recommendations.
As Ross notes, it's best to find a planner through a referral. If that doesn't work, the main website for finding fee-only financial planners is the National Association of Personal Financial Advisors. You can get a list of local CFPs though the Financial Planning Association. A well-known financial planning group that targets middle-income households is the Garrett Planning Network.
I would also add that you're looking for a written blueprint as well as conversations to help you think through your options and trade-offs. You don't need the planner to manage your money for you, unless that's a route you decide to go later on.