Imagine you are seventy years old with a comfortable retirement and a $1 million nest egg. You are drawing $40,000 per year to supplement your retirement pension and social security income. Everything is going great, and your financial advisor says all is well since your withdrawal rate is at only about 4 percent; according to most financial professionals, that is a safe level of withdrawal at which you would not risk depleting your life savings.
You have followed your financial advisor’s recommendation and diversified your investments among stocks, bonds, mutual funds, and ETFs. Then 2008 hits and suddenly you face one of the worst recessions since the Great Depression. In one year, you watch your life savings drop from $1 million to less than $500,000. Your financial advisor calls you into his office and explains that you are now draining your portfolio at 8 percent per year, and at the rate you are going, a much higher possibility exists that you will run out of money before you reach the end of your life.
You then have to choose between two frightening options: Would you like to cut your retirement income in half? Or risk running out of money? Frankly, I don’t like either of these options and neither should you.
Understanding the different investment worlds you can use to diversify your investment assets is important in building your investment strategy for retirement. Many advisors hunker down under one investment philosophy, and they refuse to look at the alternatives that exist. However, in these situations, financial advisors need to get their egos out of the way.
The plan I put together for a client isn’t about me. It’s about my client achieving his or her goals, dreams, and aspirations, and doing so with the highest degree of confidence in an investment plan. To give my client that confidence, I have to be flexible in my thinking and evaluate opportunities as they show up.
The investment and financial planning world is geared toward stocks, bonds, and mutual funds. The recommendation of these particular vehicles seems to stems from an inherent conflict of interest that exists in our profession. Most financial advisors have underlying self-interests in the recommendations they are making. Sometimes as a client, you don’t know whether the advice you are getting is really in your best interest or in your advisor’s best interest.
In my firm, I recommend my clients diversify across three different investment worlds: Safety, Growth, and Hybrids. Over the next few weeks I’ll outline in my blog a little bit more about them.
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