Reaction: 7 Mistakes People Make When Choosing a Financial Advisor

Here is the original article if you would like to read it for yourself (highly suggested).

Choosing a partner who will help you make wise investment decisions for your retirement is one of the most important financial decisions you can make. It’s one that ideally should be made at an early stage in your working life. The longer your invested money can grow with good returns, the more you will retire with. One critical point from this article is a finding from a study by Vanguard (one of the major retirement investment companies). This study found that advisor-managed portfolios averaged an 8% annual return while self-managed portfolios averaged only 5%. Over the course of 25 years in which the investments could grow, this works out to a major difference. Advisor-managed portfolios would be worth almost double the self-managed portfolios. Yet only 29% of adults in one survey responded that they work with a financial advisor.

Why should you work with a financial advisor?

Saving for retirement is a complex scenario. Years ago, people counted on company pensions to fund their lives in retirement. Pensions were a great way for a company to reward loyalty in its employees because the longer you stayed with the company, the higher your payout in retirement would be. While pensions still exist in some companies and government employers, they have largely been replaced by 401(k)s and similar arrangements. In these types of retirement accounts, the employee and/or the employer can deposit money, which is then accessible in retirement, but the money all belongs to employee. If the employee leaves the company, they take that money with them.

What you do with your money inside your retirement accounts is the big question. If you were to put away $1,000 per month every month from the age of 30 until you retired at 65, you would only have put away $420,000. Using the 4% rule (commonly used to estimate retirement savings needs), this would provide an annual income of $16,800 or $1,400 per month. Do you think that is going to be enough to live the retirement you want to live? For most people, that answer is going to be no. So, we need to do something with our retirement money besides shove it under the mattress. We need to invest it somehow.

There are a ton of options, but to keep it simple we’ll look at a couple different scenarios.

If you were to deposit your retirement money in bank account or invest it in very conservative investments, the money will grow. I used 1% annual growth for this calculation because you can get close to that rate with high-yield savings accounts. This is the most conservative option (besides shoving it under your mattress). Investing (or saving) the same $1,000 for 35 years will result in just over $500,000 for retirement, $420,000 of which you put in yourself. This would work out to roughly $20,000 annually or $1,600 per month. So, this gives you a little more money than the mattress method, but not much.

At 5% annual growth (the average Vanguard determined for self-managed portfolios), your retirement savings grow to about $1.1 million dollars, double the ultra-conservative savings-account method. This amount of money means $44,000 annually or $3,600 per month, which is more than double the monthly retirement payout off the previous method. So, investing in slightly higher-risk investments makes a huge difference when it comes to retirement.

At 8% annual growth (the average Vanguard determined for advisor-managed portfolios), the account grows to more than $2.1 million, again nearly doubling the previous method. This works out to $84,000 annually or $7,000 per month.

Which retirement would you like to have? A 1% rate of return seems very low, and it is for almost any type of retirement investing. However, many people I’ve talked to continuously put 10% of their paycheck into a savings account while investing less than that in their retirement. Don’t mistake me here: I’m not suggesting you go without an emergency fund. But once that emergency fund contains a level of savings you feel confident can handle most emergencies, any more money you put in is money that could have gone towards retirement and could have brought much higher returns. Even the difference between 5% and 8% returns is a significant difference yielding almost twice as much monthly income in retirement. This is the importance of 1) investing for retirement and 2) finding the right financial advisor to help you and guide you.

The article pushes a tool to help match you with an advisor, finding several in your area whom you can then interview to decide who works best for you. There are other similar tools available from other sites including Dave Ramsey’s website. If you have questions about why to invest, you’re afraid to invest, or you want to better understand investing, reach out. We’ll learn more about investing together.