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Questions to Ask a Financial Advisor About Retirement

What are some questions to ask a financial advisor about retirement to make sure you are thinking about all the important issues and that your advisor is the right person to help you?

Retirement is exciting and potentially stressful. Because it is such an important time of transition, many people will seek help from a financial planner – often, for the first time. These questions can help get you going in the right direction. They can also help you evaluate the advisor.

How Long will My Money Last in Retirement?

This question is often top of mind because the #1 fear of many retirees is running out of money. I particularly like this question because answering it requires a more in-depth analysis of your goals and the strategies you may use to achieve them. In other words, the answer is a big ole “it depends” and you’ll need to work through some stuff to get to a useful answer. It serves as a prompt for both you and your advisor to dig deeper.

Your advisor’s reaction to this question can also help you figure out if they have the expertise to help you. They should be able to guide the discussion by asking the appropriate questions to spur a conversation. Your advisor should bring up different approaches for planning retirement income, risk factors, taxes, life expectancy, and goals because these are all necessary to figure out how long you can expect your money to last.

How Much Can I Afford to Spend in Retirement?

This question is very closely related to the first question. The two are a basic trade-off. The more you plan to spend in retirement, the shorter period of time your savings will last. It doesn’t have to be as scary as it sounds though. There are numerous ways to handle this trade-off.

A huge part of retirement income planning will involve finding the right balance. Your life expectancy, other sources of income, taxes, investment and distribution plans all play a part in determining how much you can afford to spend each year.

When Should I File for Social Security?

You can file for Social Security retirement benefits as early as 62 for a reduced benefit. You can delay up until age 70 for an increased benefit. Like most things in retirement planning, there isn’t a one-size-fits all answer. Generally though, the longer you can delay the better off you’ll be.

This decision also isn’t just about you. Your marital status, your spouse’s benefit and age, and the financial situation you’d leave a spouse in if you were to pass away first are all factors that need to be considered.

But wait, isn’t Social Security Going Broke?

Well, kinda. If Social Security is going broke, doesn’t this question become pointless? Not really.

First, the Social Security Trust Fund is on track to be depleted. In that sense, you could say that Social Security is going broke. That doesn’t mean what most people think it means though. Even when the trust fund is depleted, ongoing FICA taxes will still be enough to pay roughly 80% of promised benefits based on current projections. So, you can still expect a benefit even if it is reduced.

Second, that assumes Congress does nothing to fix the problem. I wouldn’t hang my hopes and dreams on Congress doing the right thing. But, I’m always confident that politicians will do the politically advantageous thing. I imagine there’s a lot of points to score for the person who “fixes” Social Security.

Should I Take My Pension as a Lump Sum or Monthly Payments?

It can be very tempting to take your pension as a lump sum. However, that is not always the best option.

Monthly payments that are guaranteed can significantly reduce your risk in retirement. They can also act as an income floor in case your savings are wiped out. Knowing that you have pension payments to rely on can even let you take a more long-term approach with your investments. This can potentially lead to a higher return over time. They can also protect you in the case of a major market decline. Sequence risk is the danger that you experience poor markets in the first few years of retirement. It has an outsized effect on how long your money lasts. This risk is reduced if you can lower your withdrawals because you have income from a pension.

Whether you should take your pension as a lump sum or monthly payments also depends on what your other savings are.

What Are Your Qualifications?

The term “financial advisor” has no standard meaning when it comes to expertise or skillset. Each advisor has their own education, training, experience and even personal interest that will affect the nature of the help they may be able to provide you. You need to ensure that the advisor you choose to help you is the right one for the job.

One way to do that is to check the advisor’s qualifications. There are too many to list, so I’ll provide a brief overview of what to look for here.

Education

Here, I mean traditional schooling. I’ll be the first to tell you that a Ph.D. is entirely unnecessary, but you may want to see that your advisor has some relevant education. Degrees in finance, economics, and business will be the most common. There are also programs specifically in financial planning. These often cover the CFP curriculum mentioned below.

Licenses

An advisor needs to have the appropriate license. In most cases, this means they either have passed the Series 65 or Series 7 exam and are properly registered. However, this by itself is not really any mark of distinction. You should view an advisor and their license the same way you do a 16 year old with a driver’s license. It simply means they are legally allowed to do something.

Professional Certifications

Obtaining a professional certification usually involves passing one or more exams after going through a prescribed course of study.

There are probably hundreds of different certifications, each with their own focus. Some credentials convey a lot about the advisors that hold them because the requirements to earn them are strenuous and require that the advisor demonstrate mastery of the material. Others are not worth the paper they are printed on.

Certifications that I think are the most relevant and meaningful for a retirement advisor (which is why I chose to earn them) are:

  • Certified Financial Planner (CFP) – This is often thought of as the gold standard in financial planning. That’s because it is very broad and covers all the major topics. It requires the certificant to complete the equivalent of 7 college courses. These cover financial planning, investments, taxation, estate planning, retirement planning, insurance, and a capstone course during which they complete a comprehensive financial planning project. It is also academically rigorous. Pass rates for the final comprehensive exam are typically in 60-65% range. I consider the CFP certification to be the foundation that every advisor should have regardless of their specialization.

  • Retirement Income Certified Professional (RICP) – This credential is entirely focused on retirement income planning. Think of this as a specialized certification whereas the CFP is general. The RICP curriculum requires the completion of the equivalent of three highly-focused college courses. The topics include investment strategies specific to the distribution phase, withdrawal strategies, retirement risks, Social Security, and Medicare.

  • Enrolled Agent (EA) – Enrolled Agents are tax experts, and you can’t ignore taxes in retirement. Your money can last longer and you can enjoy retirement even more if you plan for tax efficiency. An Enrolled Agent can help you do that. Becoming an enrolled agent requires passing three exams administered by the IRS. These exams cover personal taxation, business taxation, and representation before the IRS. Although many Enrolled Agents prepare and file tax returns, not all do. I don’t, and recommend that my clients use a dedicated tax preparation professional.

Are You a Fiduciary?

An advisor with a fiduciary duty is required to give you advice that is in your best interest. All advisors should do this anyway, and frankly, most probably will. But, for an advisor that is truly bound to a fiduciary standard of care this isn’t a sales pitch. It’s a legal requirement. Their answer will be a simple “yes” and they will be willing to put it in writing.

How Will You Invest My Money?

This question can refer to both the advisor’s investment philosophy as well as physically how they will hold your money and buy and sell investments.

Investment Approach

It is important that your advisor’s approach to investments matches your own. If you and your advisor have different investing styles then you aren’t likely to be happy. Have your advisor explain what they would do. If you don’t understand it, do some reading. If you don’t like it, keep looking.

My own approach to retirement investing is to choose a portfolio of index funds that is appropriate for the goals and timeline of the client, balanced with their appetite and desire for risk. I always make this clear to clients and like to get their thoughts as well. If they are wanting a high-paced trading plan and expect their advisor to call them twice a week with hot stock tips then they will never be happy with me. It’s better for everyone to just know that up front.

How Will Your Advisor Hold Investments and Place Trades?

In the investing industry, we call this custody. Generally, you don’t want your advisor to have custody of your money.

What you are looking for is that they use a third party custodian (brokerage firm) to open accounts and purchase investments. This puts a layer between your advisor and your money that helps prevent fraud or other mishaps. Some custodians, like Schwab or Fidelity, also work directly with the investing public so you’ve probably heard of them. Others, like LPL (or Altruist who I use), don’t have a public retail business so you may not have heard of them.

Are these All of the Questions to Ask a Financial Advisor About Retirement?

No, this is not an exhaustive list of every question you’d want to ask a financial advisor about retirement. These are just some of main questions that you would want answers to. This list also serves as a good way to break the ice and get the conversation going.