We asked financial advisor Ryan Monette about the biggest mistakes Americans make when saving for their retirement. His advice was to listen to whoever said to save eight percent to 10 percent of your wages right away.
Although he was joking, saving something is better than saving nothing (of course). But Monette doesn’t believe in placing a limit on how much an individual should save. Rather, he believes that individuals should save as much as they can, as often as they can.
“Let’s put it this way: All things being equal, if you want to have the most flexibility when it comes to deciding on when to retire, then you better save as much as you can up until that point,” says Monette.
There are some individuals who end up working their entire lives and then passing away before enjoying a long retirement. However, for the most part, we’ll end up spending as much time in retirement as we did working full-time.
“Therefore, you better get it right the first time,” he says.
Monette, who works for the fee-only wealth management firm Savant Capital, recently checked in with us to share more strategies on planning and saving for retirement. Here’s what he had to say:
Savant Capital Management is a nationally-recognized, fee-only wealth management firm that has been serving clients since 1986. Savant offers integrative investment management and financial planning solutions to individuals, families, foundations, trust funds, retirement plans, and nonprofit organizations. They also provide portfolio design, tax planning, and advanced estate planning and sophisticated business consulting services.
At Savant, we help people live the way they want to when they retire. Savant professionals take the time to get to know their clients’ goals, aspirations, and what is most important to them.
Then, we work to develop a financial plan that guides people to the end goal while also helping them make sure they stay on track with their plan along the way. At Savant, we call our model “building ideal futures.” We focus on providing clients with peace of mind, simplicity, clarity, and confidence.
As fee-only Registered Investment Advisors (RIAs), we act in the best interest of the clients; we stand in the shoes of clients and advise them as if they were family. We fully acknowledge and actively embrace our fiduciary responsibilities, employing prudent investment processes, and providing full transparency of fees.
Because of this, we believe we can provide people truly objective advice.
At its core, wealth means “anything of value.” Although most individuals might associate wealth with money, that really is only one component. We have all heard the saying, “The only things certain in life are death and taxes.” So perhaps money isn’t the most important component because you can’t take it with you, and to some extent, taxes will help you with that.
Money is of course necessary, but many individuals still believe that their faith, family traditions, friendships, and other personal possessions are other components of wealth. Quite frankly, peace of mind could be what makes us feel the wealthiest. Often times, we are most at peace when we are not thinking about money at all.
I believe that’s what Savant does on a daily basis for our clients. We help remove the burden, fear, and uncertainty that many investors have before they hire us to manage their money. In a sense, we are providing wealth by increasing their peace of mind.
All of my clients prefer that we work on their retirement planning together. The first thing I ask my clients is, “What does retirement look like to you? Do you have plans to do something, such as a hobby, travel, or work part-time?” Many pre-retirees really have no idea what they are going to do. They just think retirement is the next logical step.
Then we start documenting a budget. Where is their hard-earned income being spent presently, and how might that change in retirement? Next, we identify the sources of income and assets they can expect to have in retirement. We identify the sources of retirement income, such as pensions, Social Security, and rental income.
If their spending goal surpasses these sources of retirement income, we know approximately how much will be needed from their investable assets. We shoot for a high level of success when running retirement projections.
Our retirement projections use Monte Carlo simulations, which is a method that runs 10,000 iterations of rates of return that could take place throughout an individual’s lifetime.
More often than not, the most successful retirees are the ones who have a game plan for what the next stage of their life looks like.
The two most important considerations are how much income a retiree will need from their investment portfolio on an annual basis and how that investment portfolio will be allocated from a risk-return standpoint.
There are several well-known studies that show how long an investment portfolio could last based on the withdrawal rate or the number of distributions taken per year compared to the value of the investment portfolio.
Also, identifying how much risk an individual can take from a financial–as well as an emotional–point of view is extremely important. One of the last actions a retiree wants to take is reducing (or even worse, going to cash with) their mix of stocks to bonds during a bear market because they took on a riskier investment model than what they could financially or emotionally stand.
What we find is that it takes significantly longer for an individual to make up lost ground because of moving out of the market or becoming more conservative (compared to the individual who stands their ground and rides it out).
The components of a sound retirement plan are the exact same considerations that should be made when contemplating retirement. Understanding the amount of income you will require from your investment assets and how much risk you are willing to take are both components of a sound retirement plan.
A third component of a sound retirement plan is the ability to understand how your investments work for you. Every investor should work with a financial advisor who has the skill to help you understand what components of your investment portfolio will help you in retirement.
For instance, the stock side of a portfolio can provide dividend income and help grow your assets. The fixed income side of a portfolio can provide interest income that also plays the role of preservation. An investor with the right amount of both can oftentimes grow their portfolio in a bull market and preserve it in a bear market.
What we found during the 2008/2009 financial crisis is that most of our clients could distribute the income they required from their fixed income. It was a safe haven that was performing well, and they didn’t have to sell their stocks at a low point. This ultimately led to the recovery of the market and their investment portfolios.
The best strategies for netting higher returns on retirement investments could include rebalancing, using low-cost investment vehicles, and tax management. Rebalancing is the act of realigning your investment portfolio to fit your risk tolerance.
Over time, your investment portfolio will either become overweight in stocks or fixed income due to market fluctuation. By rebalancing, or selling the overweight asset class, we find that an individual can add about a 1% return per year. If you think about it, rebalancing is the most natural method of selling high and buying low. Using low-cost investments can also produce higher net returns.
Consider it this way: Investor A has an investment with an expense ratio of 1.5% and Investor B has the exact same investment but his investment has an expense ratio of .25%. If both investments produce an 8% return, Investor A walks away with a 6.5% net return while Investor B walks away with a 7.75% net return.
The third strategy for netting a higher return is using tax-efficient investments in your taxable investment accounts. With pre-tax (IRA) or tax-free (Roth IRA) accounts, this doesn’t matter as much because these types of retirement accounts have favorable tax status.
But with a taxable account (think savings accounts but with investments), you want to minimize the tax bite because the income in these accounts is taxed annually to the investor. Using tax-managed investments can help with this.
What investors don’t want to do is the opposite of what I mentioned above. Something else that investors should not do is time the market. Countless studies show that market timing does not work in the long run. A small group of investors can do it regularly but most cannot.
This is a great question for which I do not have a great answer. In the past, individuals would work until they could no longer work because their bodies wouldn’t let them or they died. This was true because the life expectancy was so low.
Now, we have average life expectancies in the United States at all-time highs. Let’s face it: Retirement planning is more important because most individuals are living into their 80s. I don’t think the definition has changed, but the expectation sure has. Individuals expect more income to meet their pre-retirement lifestyle.
Many of us believe retirement is going to be this great time where we live like kings. But it’s not going to be that way the entire time. What we see is what has been coined the “go-go,” “slow-go,” and “no-go” stages of retirement. Most individuals will live fairly well in the early years of their retirement.
This time of their lives will be filled with traveling, more expensive entertainment, and nicer dinners. Then, one day they will slow down a little bit. This period of time will involve spending down their assets to help family members financially, such as helping their grandchildren with education funding. Finally, they will enjoy just waking up and spending the day relaxing and expenses will drop.
I also believe that retirement might be more difficult than it has been in the past. There is going to be an overlap where retiring baby boomers are going to be spending a lot of their time taking care of two generations: their parents and their children. This is already underway, and I have seen it personally within my own family.
The biggest concern for my clients who are under the age of 65 has to do with health insurance. Uncertainty can lead to inaction. At Savant, we try our best every day to make sure our clients have the information they need to make good decisions. Health insurance is expensive, and if you want to retire before eligibility age for Medicare, then you need to pony up the dough and get covered or potentially risk losing even more in the event you get seriously ill.
My absolute favorite publication is The Journal of Financial Planning. Not every article has to do with saving for retirement, but there are enough to make it worth a subscription. The Journal of Financial Planning provides information on all areas of financial planning, and it publishes the work of some of the best advocates for financial planning.
My favorite retirement planning tool is from Moneytree. They produced software called Silver Financial Planner. It is not the most technical retirement planning tool, but it is very directionally sound and incredibly user-friendly. My clients love its use of illustrations.
At Savant, we use several retirement planning tools, but one of the best tools we use is called PAVE. PAVE is a proprietary tool that several team members built over the course of several years. It stands for Portfolio Analysis Value Enhanced, and there are several main objectives of the tool.
PAVE can be used to help formulate a retirement withdrawal strategy and/or provide recommendations for Roth conversion strategies. From a retirement withdrawal strategy standpoint, the tool helps determine the optimal withdrawal strategy that can generate the most tax-efficient method of withdrawing from investable assets while providing optimal heir lifetime value. On the Roth conversion side, PAVE can help determine the best strategy for making Roth conversions over several years. It is by far one of Savant’s strategic advantages in our Planning Department. No one else has it.
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