Opinion: The Most Critical Part of Financial Planning for Retirement

Retirees and near-retirees often don’t know what to look for when looking for a financial advisor.

We know this because of the emptiness of the selling points used by consulting companies to get our retirement planning business. Since these companies often employ some of the best PR firms on Madison Avenue, we can assume their arguments are effective. But given how little they really tell us, that means retirees and near retirees must be largely ignorant.

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Consider the following radio commercials, each from one of the largest national consulting firms. While these arguments may sound compelling, they do not differentiate one company from another. There is no financial planning firm in the country that could honestly not accept each of the following statements.

  • Tailored financial advice for a well-planned life

  • It’s not just what you earn, it’s what you keep

  • Allowing you to stop focusing on saving and focus on life instead

  • It’s never too early to think about retirement

  • If there’s one thing we all share, it’s that our lives are all unique.

  • So you can live your life

  • A lifetime of dedication deserves a lifetime income

These pitches remind me of Rudyard Kipling’s “Just So” stories, like the one about how the leopard got his spots. These stories seem superficially plausible and entertaining. But they don’t tell you anything about the real world.

The reason why the pitches of these companies don’t say much of a big deal is that they can’t. What is really important when it comes to financial planning for retirement is the relationship with the advisor. And individual relationships cannot be turned into a mass approach to retirement planning.

My wife, a clinical psychologist, tells me that the situation is similar when it comes to therapy. There are dozens of different theories, modalities, and systems that therapists use to describe their approaches. But, at the end of the day, research suggests that what is therapeutic in therapy is above all the relationship with the therapist.

What’s your risk tolerance, really?

Consider perhaps the most important question every retiree or near retiree must answer: “What is your tolerance for risk?” It’s actually almost impossible for most of us to answer this deceptively simple question without extensive self-exploration and engagement with a good financial planner.

Many believe that this question can be answered scientifically via risk questionnaires, but they are wrong. These surveys, which vary slightly from company to company but are otherwise largely the same, ask questions such as whether you care more about not losing money or making a lot of it. The problem is, few of us know how to answer these questions accurately.

It’s not that we’re outright lying. We can really think that we have the gut courage and discipline to stick to a strategy through a bear market, for example, but when the situation arises, we don’t.

Most financial planners also realize that these questionnaires are worthless. A few years ago, Wade Pfau, professor of retirement income at the American College of Financial Services, asked planners about their attitudes towards risk questionnaires and found that 95% found them ineffective. Pfau found from surveys of individual investors that 82% of them shared the skepticism of planners.

And yet, these questionnaires remain ubiquitous. Why, if planners and clients realize that they are not helpful? It is as if we are sleepwalking throughout the retirement planning process, indulging in lots of activities that ultimately mean next to nothing.

What is success?

If our true tolerance for risk is largely hidden, even from ourselves, then financial planning in its initial stages is little more than a film in the dark. It is only after a sometimes lengthy process of exploration, with the guidance of a trusted and empathetic financial planner, that we discover our true tolerance for risk. And only then can we begin to develop a proper financial plan.

Notice I said “appropriate”. Success in developing our financial plan for retirement is not judged by rates of return. Instead, success is coming up with a plan that fits. It is not something that can be completely quantified.

This idea helps us understand an otherwise impenetrable comment that Benjamin Graham, the father of fundamental analysis, made in his famous book “The Smart Investor”.

He wrote: “The best way to measure your investment success is not whether you beat the market, but whether you have a financial plan and behavioral discipline in place that can get you where you are. want to go. . “

Many found Graham’s comment surprising, as their sole goal is to beat the market, and they assumed Graham shared that goal. But Graham realized that beating the market is only part of a successful overall financial plan.

What about robot advisers? I am not a big fan. It’s not that they are unable to give us access to a huge amount of valuable information that is relevant to retirement planning. But they cannot satisfy the crucial role played by personal relationships with a trusted advisor.

Ultimately, I believe there is no substitute.

Mark Hulbert is a regular contributor to MarketWatch. Its Hulbert Ratings tracks investment newsletters that pay a fixed fee to be audited. He can be contacted at [email protected].

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