You’ve probably heard the phrase “hope is not a strategy.” The definition of hope is “to want something to happen or to think that it could happen” (Merriam-Webster). When it comes to saving for a financially secure retirement, many statistics would suggest that we rely more on hope than we do on strategy. We hope Social Security will be around. We hope we won’t lose our jobs. We hope we’ll be able to pay off our debts. We hope we’ll stay healthy forever. We often get consumed by the things we need to pay for today – instead of focusing on ways we can save for our longer term future. While we may hope that things will take care of themselves when it comes to money matters, the reality is that there is simply no substitute for long-term planning. Sadly, only 31% of financial decision-makers in families say they have created a comprehensive financial plan.1 This statistic suggests that more than two in three Americans will be left with nothing but hope to provide for a safe and secure retirement. If you’re one of them, know that when it comes to creating your retirement plan, hiring a financial advisor may be the first step you need to take in order to turn hope into strategy.
A Voya study shows that working with an advisor significantly increases the likelihood that an individual will have more saved for retirement within and outside of employer-sponsored retirement plans. Those who use an advisor have, on average, saved 56% more money for retirement than those who do not work with an advisor.2
All charts from Voya Retirement Research Institute (2015). Advisor Value
Retirement planning is not all about putting a certain percentage of your paycheck into your Company’s 401(k), while making sure you put in the amount your Company will match. That is a start – a good and necessary start – but it just isn’t enough. There are many other financial uncertainties that come up along the way, and you need to be prepared for the unexpected. According to a 2012 Retirement Confidence Survey by the Employee Benefit Research Institute, “half of current retirees surveyed say they left the workforce unexpectedly due to health problems, disability, or changes at their employer, such as downsizing or closure.”3 Also, older consumers are carrying more debt, including mortgage, credit card, and even student loan debt, into their retirement years than in previous decades. With a sound financial plan in place, unexpected issues beyond your control don’t have to cause sleepless nights.
Less Health, More Care
Estimating the future cost of healthcare is a common oversight when planning for retirement. A Society of Actuaries survey in 2012 showed that only about half of all people who retire do so by choice. Thirty-one percent retire due to health issues, either their own or that of a loved one.5 It is important that you properly estimate the potential financial need for increased health care as you age – a task you may find much easier completed with the help of a knowledgeable advisor.
The Cost of Living…In Debt
Many people are buying homes later in life, or taking out home equity loans in order to maintain quality of life. A Census Bureau survey shows that fewer older homeowners own their home outright compared to a decade ago, and the mortgages they hold have less home equity than a decade ago.6 Consumer debt is still high as well. The Employee Benefit Research Institute has stated that one in two families headed by a person 55-64 had a credit card debt in 2007, compared with about one in three in 1992.7 Debt, especially as you near and enter retirement, can eat away at your savings or, worse, hinder your ability to save altogether. The balancing act of meeting your borrowing needs while growing your nest egg is one best performed with the help of a financial advisor who can help set a sensible budget and align financial priorities for you.
The Benefits of Financial Advice
Few people would dispute that seeking advice from a medical professional could pave the way to good long-term health. Seeking advice from a financial professional – much like seeking advice from your doctor – can put you on a path to better financial health. Life expectancy tables tell us the good news is that we are living longer. The bad news is that most of us haven’t saved nearly enough to fund a longer retirement. It is estimated that more than half (52%) of Americans have less than $10,000 saved for retirement while life expectancy is 78.5 years – more than 10 years into retirement.8 Professional financial advice could provide the planning necessary to help safeguard against outliving your savings. People who work with financial advisors tend to save more for retirement, and generally have more confidence in their financial well-being.2 The bottom line is – picking up your financial prescription may lead to better retirement outcomes.
Increased Confidence in the Future
The study by Voya shows that use of an advisor can increase feelings of control and confidence in understanding how to pursue one’s retirement goals.2 It seems logical after all. Imagine you’ve spent time with an expert, discussing your goals, listening to him or her explain options in an easy-to-understand way. That advice has made you more knowledgeable and given you greater confidence about achieving your goals. It eliminates the guesswork and speculation, leaving you less worried than if you had to do it all on your own. People who don’t use an advisor are more likely to be risk-averse, which increases the risk that they will fail to capture market growth in their early savings years. The Voya study found that 39% of people who choose to invest without the guidance of an advisor characterize themselves as “conservative” investors, vs. only 19% of advisor-assisted individuals.2 This means you are more likely to stay with investments you deem as safe, while missing out on potential market growth that could help you achieve your financial goals.
A Better Understanding of Needs
Most people who plan for retirement only plan for their ideal scenario – retiring healthy, purchasing a second home, planned vacations and travel to see the grandkids. But the reality is sometimes quite different from the dream. A financial advisor can help you map out your needs, no matter which retirement scenario unfolds. An advisor can also inject a dose of reality when it may be needed and quickly correct your savings path so you can more adequately meet future needs. Understanding your expected and unforeseen needs is at the heart of a good financial plan. An advisor can build and maintain that blueprint for you as life’s unexpected events take shape. People who use an advisor are also much more likely to have a formal retirement investment plan in place. Fifty-two percent of the people surveyed for the Voya study who use a financial advisor have a formal retirement investment plan in place, versus only 20% of those who go it alone.2
People who seek out help from a financial advisor have better savings habits, which may include multiple savings accounts or an emergency fund more appropriate to their specific needs. According to the Voya study, people who work with an advisor are significantly more likely to have an emergency fund, and to have more saved in it than those who don’t work with an advisor. Almost half of the people who seek out a financial advisor have an emergency fund equal to six months or more of their salary, while only 28% of those without the use of an advisor had the same.2 People who work with an advisor are also twice as likely to have a workplace retirement account balance of $200,000 or more.2
Better Diversification and More Balanced Allocation
Personal experience is a powerful navigational system for future actions, whether or not that experience is logical. This preference for the familiar, referred to as familiarity bias,9 leads us to the faulty assumption that just because we’re familiar with something, it must be safe. When we allocate investments based on this familiarity bias, it can lead to poor diversification – an integral element of a balanced financial plan. A financial advisor can bring experience, knowledge, and a better understanding of investing, that can help you to a better diversified portfolio that fits your unique situation.
A Better View of the Future
Your vision for retirement is just that – yours. A financial advisor can help make that vision a reality. We all go through life relying on the advice of experts. That’s the beauty of living in a society where specialization can lead to improved standards of living. So why won’t more Americans work with a financial advisor to help improve their retirement picture? Today, advice and guidance are available in many shapes and forms, often in conjunction with a workplace retirement plan. These services can range from professionally managed accounts via Target Date Funds to holistic Managed Account guidance, and full-service on-line, phone-based, or in- person financial planning. There is likely a “flavor” of advice for nearly everyone. The challenge is getting more people to the table to have a taste.
Financial planning is a complex field where decisions are fraught with behavioral pitfalls. An advisor can use proven methods and expertise to develop a personalized retirement plan based on your needs, wants and wishes. When it comes to long-term planning, hope is not a strategy – but a sound financial plan developed with the help of an advisor should certainly give us hope for a secure and comfortable retirement.
- Princeton Survey Research Associates International (July 23, 2012). 2012 Household Financial Planning Survey
- Voya Retirement Research Institute (2015). Advisor Value, A Voya Retirement Research Institute® Study quantifies the benefits of working with a financial advisor.
- Employee Benefit Research Institute (EBRI) (2012a). The 2012 Retirement confidence Survey, by Ruth Helman, Mathew Greenwald & Associates; and Craig Copeland and Jack VanDerhei, EBRI. No. 369
- Federal Reserve Board (2010). 2010 Survey of Consumer Finances.
- Society of Actuaries (2012). 2011 Risks and Process of Retirement Survey Report of Findings, by Mathew Greenwald & Associates, Inc. and EBRI.
- Census Bureau, (2011). Complete Set of Tables: Table C-14A-OO Mortgage Characteristics – Owner Occupied Units.
- Employee Benefit Research Institute (EBRI) (2009). Debt of the Elderly and Near Elderly, 1992-2007. EBRI 20 (10) 24pp.
- Employee Benefit Research Institute (EBRI) (2014). The 2014 Retirement Confidence Survey, by Ruth Helman, Matthew Greenwald & Associates; and Nevin Adams, Craig Copeland and Jack VanDerhei, EBRI. No. 397
- The New York Times (November 22, 2010). “Avoid the Investing Trap of Familiarity,” by Carl Richards, CFP.
Press inquiries: Christine Hotwagner
Director, Program Operations
ABA Retirement Funds