10 Things to Do Before You Retire

Here’s What to Do Now if Retirement Is on Your Horizon

1. Decide how you are going to spend your time. What are you going to do during the first six to 12 months in retirement, and what do you plan to do for the rest of your retired life?

2. Determine (realistically) how much money you will spend each month. Remember to include periodic expenditures such as gifts, vacations, taxes, an occasional new car, and emergencies.

3. Anticipate the cost of health care. You’ll have no employer to pay this for you; Medicare, MediGap, and private insurance are all up to you.

4. Buy long-term care insurance. Now.

5. Refinance your mortgage. Many people are shocked to discover that they either cannot borrow money after they retire, or they are forced to pay higher rates.

6. Boost your cash reserves. Make sure your rainy-day fund is enough to cover at least six months’ worth of expenses.

7. Evaluate your sources of income. You have already figured out what you’ll spend on a monthly basis. Now figure out where that money will come from.

8. Revise your investment strategy. The way you’ve handled your investments over the past 30 years is not how you should handle them for the next 30. While preparing for retirement, you were focused on asset accumulation. When you’re in retirement, you need to focus on income and on keeping pace with the increasing cost of living. Assets must be flexible and liquid, so you can meet needs you did not anticipate. New words will enter your vocabulary: rollovers and lump sums.

9. Review your estate plan. Review your will and trust. Don’t have them? Get them. These documents can protect you and your assets while you are alive and benefit your spouse and children when you pass on.

10. Perhaps the most important thing of all. If you are not excited about retiring, then don’t. Many people quickly become bored after retiring. It’s OK — even exciting — to return to school or the workplace. Many do this, often in completely new fields.

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Q&A: Competing Financial Goals

Using “what-if” scenarios to plan for your financial goals.

Ric Edelman is a co-founder of Edelman Financial Engines. The following is taken from his weekly radio call-in show.

Question: My wife and I have three daughters — ages 7, 6 and 1 — and my question is about competing financial goals. We are both fully funding our retirement plans at work; we have long-term care, disability and life insurance; and we pay for day care for the kids. But after all that, we can’t scrape together very much to put into the kids’ 529 plans. Should we back off our retirement plan contributions and increase our 529 investments a little?

Ric: It’s understandable if you’re feeling guilty and scared about the girls’ education costs. Many parents around the country feel the same way.

In a perfect world, you’d save for everything, of course. But if you can’t afford to do it all, should you save for your kids’ college or your own retirement? Or should you reduce your insurance coverage a bit in order to divert more into college savings?

The answer is to keep doing what you’re doing, because you’re doing it all correctly — and here’s why I say that:

You must save for retirement before you retire. You can’t do so once you’re in retirement. But that’s not the case with college. The girls can get loans and pay them off while working.

The same is true of houses and cars: You can buy a house and live in it while you’re paying the mortgage, and you can make loan payments while driving the car. But retirement must be pre-funded.

So you are correct to emphasize your retirement. Think about these what-if scenarios:

  • What if everything doesn’t go according to plan and you aren’t able to work for 40 years?
  • What if you die sooner than you expect?
  • What if you become disabled?
  • What if any of those things interferes with your income production as a couple?

Thus, you must properly fund your insurance coverage — not only life, disability and long-term care but also health insurance, auto insurance, homeowners insurance and umbrella liability insurance. Insurance is your safety net, which helps protect you in case anything goes wrong with your plan.

Having said that, there is a way to solve your dilemma about college. Fund retirement only to the extent necessary. Occasionally we find that parents are overfunding their retirement, but they aren’t aware of it because they’ve never constructed a financial plan.

So I would encourage you to let us develop a plan for you and verify — based on your goals, your future income need, your current expenses and your ability to save — just how much money you really need to save for retirement and how to invest that money. We might discover that you can reduce the amount you’re earmarking for retirement, freeing up some dollars that you can apply to college costs.

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How to Protect Loved Ones From Elder Financial Abuse

If you’ve hired a caregiver for a spouse, parent or other loved one in need of assistance, make sure that they’re tidying things up — not cleaning your loved one out.

In yet another instance of a caregiver trying to take advantage of his charge, an Edelman Financial Engines client recently reported a problem with a man hired to take care of her husband, who suffers from dementia. While the wife was out of the house, her husband’s caregiver had been ingratiating himself in an attempt to get the husband to transfer assets into his name. Fortunately, the client was paying close attention and was able to fire the person, preventing what could have become a huge problem.

This averted disaster serves as an important reminder: You need to protect the financial information of the elderly and incapacitated. Whether it’s workers providing in-home care or staff in a facility or continuing care community, you need to prevent financial loss, identity theft and other scams. Take these steps:

  • Place under lock and key all financial information, such as tax returns and other documents containing Social Security numbers and account numbers.
  • Handle mail carefully. Have it sorted by a family member, not hired personnel, unless they are bonded and vetted.
  • Close credit card accounts held by a person suffering from dementia. If there is a need to keep a credit card open, family members must be particularly protective of that card number and watch for any unusual purchases.
  • Give powers of attorney to responsible family members — and have those documents signed before dementia occurs.
  • Get legal advice if you believe fraud has occurred.
  • Ask doctors to provide written statements verifying the inability of a person to manage financial matters. Communicate this inability to the person’s financial advisors.
  • Give trusted family members duplicate bank statements so they can check for unauthorized withdrawals.
  • For your protection, name a “trusted contact” for your advisory accounts. Your planner will be able to reach out to the “trusted contact” if there are concerns about possible financial exploitation, or to confirm your contact information, health status, or the identity of any legal guardian, executor, trustee or holder of a power of attorney.

More information is also available from the National Center on Elder Abuse at https://ncea.acl.gov.

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An Estate Plan: Create It for Yourself and Those You Love

A comprehensive guide to creating an estate plan.

Heaven can wait … but estate planning can’t. Estate plans deal with the topics that no one likes to think or talk about — accidents, illness, the inability to care for ourselves and, ultimately, death.
But we know you will face these issues eventually — even if the actuarial tables say you have many more years to live, fate may have other plans — and will be creating a tremendous amount of work for your loved ones if you procrastinate and fail to put a plan in place.

If, for example, you become incapacitated due to an accident or illness, your family will face an arduous legal process to have you declared incompetent, so they are able to manage your affairs. And if you pass away without documents in place, they will have to go through a difficult, lengthy probate process. Is that the legacy you’d like to leave?

Death combined with money can bring out the worst in people. By putting your plan in place, you will be saving your loved ones a great deal of difficulty and anguish that you probably aren’t even aware of.

Consider this:

  • Die without a will and, in some states, your spouse could receive as little as half of your money.
  • Die without a will and an unmarried partner would likely be left with nothing, including the home the two of you currently share.
  • If you are unable to handle your affairs due to an accident or illness, no one will be able to handle your finances unless you created and put a power of attorney in place.
  • If you have an accident that prevents you from communicating, your medical wishes cannot be honored unless you state them in a living will and have appointed someone to make decisions via a health care power of attorney document.

With all the well-known dangers of dying without a will, it’s amazing that more than 50 percent of adults today do not have one, according to Chas Rampenthal, general counsel of LegalZoom.

Estate Planning Essentials

  • Will
  • Durable Power of Attorney
  • Living Will (to put your medical wishes on record)
  • Health Care Power of Attorney
  • Proper Titling of Assets
  • Beneficiary Designations (Have you designated per stirpes or not?)

Also Consider

  • Revocable Living Trust
  • Provision for Digital Assets

How to Start Creating an Estate Plan

An estate attorney can easily help you set up the essential documents that form an estate plan — a will, a durable power of attorney, a living will and a health care power of attorney. You should also consider creating a revocable living trust, which helps in many ways: It makes the process remarkably simpler for your heirs, avoids probate, reduces costs, avoids publicity and allows for the management of your assets and decision-making during your lifetime if you become incapacitated.

When you work with a lawyer to create an estate plan, you only need to be an expert in one thing — you. It’s your lawyer’s job to figure out which estate planning tools are the right ones to implement your individual set of instructions.

Estate Planning Questions You Need to Ask Yourself

There are some questions everyone needs to answer in preparing an estate plan:

  •  Who do I want to inherit my assets and my belongings when I pass away?
  • Who can I trust to make these distributions according to my wishes?
  • How can I assure that my affairs are handled in the best way possible if I become incapacitated?
  • How can I lessen the burden on my family when I pass away?

Preparing a Will

When creating an estate plan, the last will and testament is a likely place to start. If you don’t have a will, the probate court will distribute your assets following your death according to the laws of your state — possibly in ways you would not agree with.

For the preparation of a will, you’ll need to answer these key questions:

  • Who gets what (naming of heirs along with amounts or percentages for each)?
  • Who will take care of my minor children (naming a guardian)?
  • Who will distribute my assets (naming an executor or personal representative)?

You should note that a will cannot guide the distribution of jointly owned assets. Wills also do not cover the distribution of assets in accounts in which you name a beneficiary, such as 401(k) accounts, IRAs or life insurance policies. For those accounts, the named beneficiaries receive the assets in the account after you pass away.

That’s why it’s important to review who you’ve named as your beneficiaries regularly — at least every five years. You should also review your beneficiaries after major life events have occurred, such as births, deaths, changes in the marital status of either yourself or your heirs, or changes in your attitude toward your heirs.

Also, remember that minors should never be named as direct beneficiaries of life insurance proceeds, work retirement plans or IRAs.

Durable Power of Attorney, Living Will and Health Care Power of Attorney

A will is only one important step to take in estate planning, however. You will also need documents to direct others to take actions on your behalf when you’re unable to do so. A durable power of attorney is a document that names a trusted family member or friend and describes their rights and responsibilities in those circumstances.

If you are out of the country or are unable to handle your affairs due to an accident, a medical condition or dementia and have not drafted a power of attorney, no one will be able to write a check to pay for your medical bills or normal household expenses.

You’ll also need a pair of documents to cover medical situations where you become incapacitated due to an accident or illness:

  • A living will details the level of medical care you wish to receive (or none at all) if you are unable to speak for yourself.
  • A health care power of attorney allows the trusted person you appoint to direct the doctors to follow the medical directive and can make additional medical decisions for you.

Revocable Living Trusts and Other Trusts

Beyond these core documents, you may also want to consider creating one of the several flavors of trusts.

A revocable living trust has many benefits:

  • A trust can go into effect as soon as you create it and can help if you become incapacitated for any reason. Typically, you would be the trustee of your own trust to start, but would name your spouse or a trusted family member or friend to serve as the backup or successor trustee if you are unable to handle everything. This provides a seamless way to assure that your assets will be handled as you wish throughout your lifetime.
  • Following your death, the trust allows your heirs to avoid probate court. This means assets will be distributed in months as opposed to years and will reduce legal fees substantially.
  • The provisions of a trust remain private after your death, avoiding unnecessary publicity.
  • Following your death, the revocable living trust becomes irrevocable, locking in your wishes. It will be up to your successor trustee to distribute assets according to your specific, written instructions laid out in your trust.

There are quite a few other types of trusts, each useful for a different, specific purpose:

  • QTIP (Qualified Terminable Interest Property) Trust: This type of trust is often used in second marriage situations. It provides income for a surviving spouse, while controlling and preserving underlying assets for distribution to children from a previous marriage or other beneficiaries.
  • Spendthrift Trust: You may want to create this type of trust if your child cannot effectively handle money, is in a problematic marriage, or suffers from drug or alcohol abuse.
  • Life Insurance Trust: This type of trust allows you to avoid estate taxes on the proceeds of a life insurance policy. If done properly, the life insurance proceeds that come through a life insurance trust following death are not counted as part of the estate.
  • Special Needs Trust: If you have a child needing ongoing oversight and custodial care due to a disability, this type of trust avoids the interruption of the agency or government benefits due to the child receiving an inheritance
  • Charitable Remainder Trust: This type of trust is often used for a large donation to a charity, a university or another nonprofit. It can provide a tax deduction today along with the ability to generate income during your lifetime.

When you do the job right, you’ll make sure you will be taken care of and reduce the burden on your loved ones. Plus, you’ll help ensure that your legacy is passed on to future generations.

This material was prepared for informational and/or educational purposes only. Neither Financial Engines Advisors L.L.C (also referred to as Edelman Financial Engines) nor its affiliates offer tax or legal advice. Be sure to consult with a qualified tax or legal professional regarding the best options for your particular circumstances.
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30 Questions to Ask When Considering a Continuing Care Retirement Community (CCRC)

If you’re exploring this option, be sure to visit not just one, but multiple CCRCs if possible — doing so several times on different days of the week, different times of day and even in different months of the year. That will give you a true understanding of what it would be like to live there.

Before you sign any papers, here are 30 questions you should ask:

1. Who owns the facility?
2. Who manages and maintains it?
3. What is the initial deposit?
4. Is the deposit refundable?
5. If refundable, how secure is the guarantee to refund your deposit?
6. What will happen to the guarantee if the facility runs into financial difficulties?
7. Can monthly fees increase?
8. Are rate increases applied to all residents when they occur?
9. What has been the history of fee increases — amounts and frequency?
10. What will be the monthly fee if higher levels of care are needed?
11. If one spouse needs more care than the other, how will that change the monthly fee and their living arrangement?
12. Who determines when you need to move to a higher level of care?
13. What happens to your original unit when you move to a higher level of care?
14. What would be the maximum cost if both spouses needed the highest level of care?
15. Will you need to leave if you can no longer make your payments?
16. If you can no longer pay, how quickly must you leave?
17. Does the CCRC have any resources to cover your fees if you can’t pay?
18. What extra costs might you incur if you are temporarily incapacitated — such as for transportation, laundry, help with medications, delivery of meals to your room, etc.?
19. What medical services are available on the premises?
20. Is short-term rehabilitation provided — and at what cost?
21. Under what circumstances might you need to pay for outside nursing assistance?
22. Can the facility handle dementia and Alzheimer’s conditions on the premises?
23. Are you guaranteed assisted living and nursing home care on the premises, or might you be moved to an outside facility for that?
24. Is the CCRC certified by the Continuing Care Accreditation Commission?
25. Is it certified by Medicare?
26. Is it certified by Medicaid?
27. What are the terms for ending the contract, either by you or by the CCRC?
28. Will you receive up-to-date financial statements and contract terms?
29. What occupancy rate is needed for break-even operations?
30. What is the current occupancy rate?

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There’s No Time Like Thanksgiving to Talk About Your Estate Plan

The upcoming holidays provide a golden opportunity.

Thanksgiving is coming — and it’s one of the best times of the year for you and your family to talk about what really matters over turkey. That means having a serious talk — not about the bird or something as sensitive as politics and religion, but about money.

Because everyone’s together for a few days, including those who live far away, the holidays provide a good opportunity for close family members to talk about financial matters — such as estate planning. For example, you’ll want to let your children know where you keep your will, medical directive and trust documents. And make sure everyone knows whom you’ve named as your executor or trustee.

If you have grandchildren, consider telling them a story or two from your past that teaches financial principles — perhaps how you saved for your first car or the opportunities (or lack thereof) you’ve had because of education. If the kids get money as gifts, perhaps bring up the value of saving. Make it just a simple story — not a sermon.

Of course, when it comes to bigger financial issues, some people prefer to have a disinterested third party facilitate discussions — at another time in a neutral location. If that’s the case, your financial planner will be glad to assist.

Happy Thanksgiving to all!

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Your Savings: How Much Is Enough?

Here’s how to tell when you’ve reached that point.

Is saving 20 percent of one’s income sufficient?

The answer, of course, depends on your situation. And in truth, no matter how much you’re saving, you should be saving more. (After all, nobody has ever complained about accumulating too much money, while many have lamented having too little.)

So, how do you know that you’re saving the right amount each month? It hurts.

Say you’re putting aside a portion of every paycheck into your retirement plan at work. You’re also adding to your IRA and stocking away some cash into a bank account. Does it hurt? If not, you’re not saving enough.

What does “hurt” mean? Simple. If your saving isn’t causing you to refrain from spending, you’re not saving enough.

You need to find yourself saying, “I’d really like to buy that item, but I can’t afford it because I’m saving money instead.”
So if you haven’t denied yourself some new clothes, a shrimp cocktail or an upgraded seat on a flight, you’re not saving enough.

Pass this advice along to your children and grandchildren to help them enjoy a bright financial future.

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Market Summary: June 2019

Stocks Surge as Fed Responds to Weak Economic Data.

What happened.

Closing a remarkably strong first half of 2019, June was a positive month for stocks at home and abroad as well as for bonds. US mid-cap stocks saw the highest returns for the month, up 7.64 percent, with large- and small-cap stocks also up over 7 percent (S&P 400, 500 and 600 indices respectively). Emerging-market stocks were up by 6.24 percent and developed-market stocks by 5.93 percent (MSCI Emerging Market and EAFE indices). Bonds were up as well, with the Bloomberg Barclays Aggregate Index rising 1.26 percent. US stock markets were fairly calm, with the S&P 500 up or down over 1 percent on only two days.

Why it happened.

In June markets around the world were driven by how central banks reacted to data that suggested economies were weakening. At home, job creation fell and new claims for unemployment insurance rose. The unemployment rate, however, remains at a half-century low. Consumer confidence declined, as did new-home sales. Continuing trade tensions also weighed on economic confidence. Looking overseas, manufacturing in the Eurozone weakened and uncertainty about the economy increased. Worries rose that the UK could leave the EU without a withdrawal agreement.

How did this bad news become good news for the markets? Central banks indicated their willingness to step in to support economies. The Fed suggested a cut in interest rates was now more likely, and the European Central bank made it clear that it is ready to cut interest rates if the region’s outlook doesn’t improve. These signals made market participants more optimistic in the face of the economic news, helping stocks. And bonds got a boost because the market’s forecasts of interest rates fell. We take a look at what markets can tell us about future interest rates in this month’s side bar.

What this means for you.

At Financial Engines, we build portfolios tailored to your situation, goals and preferences. Your portfolio will be more aggressive (tending to hold a higher proportion in stocks) the further you are from retirement or the higher your tolerance for risk. This month, with stocks up more than bonds, your return will probably be higher the more aggressive your portfolio. As always, please get in touch with us, on the phone or through our website to discuss your goals or to tell us about a change in your situation.

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©2019 Edelman Financial Engines, LLC. This publication is for informational purposes only and does not constitute investment advice or an offer to buy or sell any security. Future market movements may differ significantly from the expectations expressed herein, and past performance is no guarantee of future results. Edelman Financial Engines assumes no liability in connection with the use of the information and makes no warranties as to accuracy or completeness. Future results are not guaranteed by any party. Financial Engines® is a trademark of Edelman Financial Engines, LLC. Advisory services are provided by Financial Engines Advisors L.L.C. Call (800) 601-5957 for a copy of our Privacy Notice. Bloomberg Index Services Limited. BLOOMBERG® is a trademark and service mark of Bloomberg Finance L.P. and its affiliates (collectively “Bloomberg”). BARCLAYS® is a trademark and service mark of Barclays Bank Plc (collectively with its affiliates, “Barclays”), used under license. Bloomberg or Bloomberg’s licensors, including Barclays, own all proprietary rights in the Bloomberg Barclays Indices. Neither Bloomberg nor Barclays approves or endorses this material, or guarantees the accuracy or completeness of any information herein, or makes any warranty, express or implied, as to the results to be obtained therefrom and, to the maximum extent allowed by law, neither shall have any liability or responsibility for injury or damages arising in connection therewith. All other intellectual property belongs to their respective owners. Index data other than Bloomberg is derived from information provided by Standard and Poor’s and MSCI. The S&P 500 index and the S&P SmallCap 600 Index are proprietary to and are calculated, distributed and marketed by S&P Opco, LLC (a subsidiary of S&P Dow Jones Indices LLC), its affiliates and/or its licensors and has been licensed for use. S&P®, S&P 500® and S&P SmallCap 600®, among other famous marks, are registered trademarks of Standard & Poor’s Financial Services LLC, and Dow Jones® is a registered trademark of Dow Jones Trademark Holdings LLC. ©2019 S&P Dow Jones Indices LLC, its affiliates and/or its licensors. The MSCI information may only be used for your internal use, may not be reproduced or redisseminated in any form and may not be used to create any financial instruments or products or any indices. The MSCI information is provided on an “as is” basis and the user of this information assumes the entire risk of any use made of this information. MSCI, each of its affiliates and each other person involved in or related to compiling, computing or creating any MSCI information (collectively, the “MSCI Parties”) expressly disclaims all warranties (including, without limitation, any warranties of originality, accuracy, completeness, timeliness, non-infringement, merchantability and fitness for a particular purpose) with respect to this information. Without limiting any of the foregoing, in no event shall any MSCI Party have any liability for any direct, indirect, special, incidental, punitive, consequential (including, without limitation, lost profits) or any other damages.

Market Update, Q2 2019: A Strong but Bumpy Quarter

Strong economic performance, trade disputes and Federal Reserve statements combined to produce a volatile quarter.

Despite losing ground for much of the first two months, equity markets rallied in June to create positive returns for the quarter. Large-cap stocks in the S&P 500 index gained 4.3 percent in the second quarter, reaching a new all-time high. Stocks of smaller companies, represented by the S&P SmallCap 600 index, posted a smaller gain of 1.9 percent for the quarter.

International stock markets also had a strong quarter, with the MSCI Europe, Australasia and Far East (EAFE) index gaining 3.7 percent. Despite threatened escalations and de-escalations in the trade war, a more accommodative stance from the Fed helped to improve market sentiment.

Bonds posted an even better quarter than their big run up in Q1. The Barclays U.S. Aggregate Bond index gained 3.1 percent in the second quarter, benefiting from signals from the Fed that the benchmark interest rate may be headed down. Bonds are up 6.1 percent for the year to date.

The Financial Engines perspective.

The second quarter was marked by big shifts in investor sentiment, in part due to announcements from policy makers and the Federal Reserve. Markets move when there is new information about the future. The challenge is that such new information is inherently unpredictable. If it wasn’t, markets would have already reacted. But you don’t need to predict the future to benefit from the market. A disciplined, diversified strategy can yield strong results over the long run. So far this year, markets have delivered strong returns for investors willing to endure the bumpiness of the ride. Have questions? Financial Engines advisors are here to help.

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©2019 Edelman Financial Engines, LLC. This publication is for informational purposes only and does not constitute investment advice or an offer to buy or sell any security. Future market movements may differ significantly from the expectations expressed herein, and past performance is no guarantee of future results. Edelman Financial Engines assumes no liability in connection with the use of the information and makes no warranties as to accuracy or completeness. Future results are not guaranteed by any party. Financial Engines® is a trademark of Edelman Financial Engines, LLC. Advisory services are provided by Financial Engines Advisors L.L.C. Call (800) 601-5957 for a copy of our Privacy Notice. Bloomberg Index Services Limited. BLOOMBERG® is a trademark and service mark of Bloomberg Finance L.P. and its affiliates (collectively “Bloomberg”). BARCLAYS® is a trademark and service mark of Barclays Bank Plc (collectively with its affiliates, “Barclays”), used under license. Bloomberg or Bloomberg’s licensors, including Barclays, own all proprietary rights in the Bloomberg Barclays Indices. Neither Bloomberg nor Barclays approves or endorses this material, or guarantees the accuracy or completeness of any information herein, or makes any warranty, express or implied, as to the results to be obtained therefrom and, to the maximum extent allowed by law, neither shall have any liability or responsibility for injury or damages arising in connection therewith. All other intellectual property belongs to their respective owners. Index data other than Bloomberg is derived from information provided by Standard and Poor’s and MSCI. The S&P 500 index and the S&P SmallCap 600 Index are proprietary to and are calculated, distributed and marketed by S&P Opco, LLC (a subsidiary of S&P Dow Jones Indices LLC), its affiliates and/or its licensors and has been licensed for use. S&P®, S&P 500® and S&P SmallCap 600®, among other famous marks, are registered trademarks of Standard & Poor’s Financial Services LLC, and Dow Jones® is a registered trademark of Dow Jones Trademark Holdings LLC. ©2018 S&P Dow Jones Indices LLC, its affiliates and/or its licensors. The MSCI information may only be used for your internal use, may not be reproduced or redisseminated in any form and may not be used to create any financial instruments or products or any indices. The MSCI information is provided on an “as is” basis and the user of this information assumes the entire risk of any use made of this information. MSCI, each of its affiliates and each other person involved in or related to compiling, computing or creating any MSCI information (collectively, the “MSCI Parties”) expressly disclaims all warranties (including, without limitation, any warranties of originality, accuracy, completeness, timeliness, non-infringement, merchantability and fitness for a particular purpose) with respect to this information. Without limiting any of the foregoing, in no event shall any MSCI Party have any liability for any direct, indirect, special, incidental, punitive, consequential (including, without limitation, lost profits) or any other damages.

How Much Is an Investment Advisor Worth?

It may be more than you think.

You know you incur fees to buy and own investments. You also know you’ll pay a separate fee when you hire an investment advisor to help you. But is the investment advisor’s fee worthwhile? Or, stated differently, will the advisor’s services potentially enable you to earn more (net of all fees) than if you avoided the advisor and invested on your own?

Yes, according to Vanguard1, whose mutual funds manage about $5.1 trillion for investors worldwide. Even though the company is well-known for catering to “do-it-yourself” investors, its study has concluded that financial advisors may help increase their clients’ investment returns by about three percentage points.

How an Investment Advisor Can Help Produce Better Returns

Vanguard identifies several factors that contribute to these increased returns. The first and most significant pertains to behavioral finance: Keeping clients focused on the long term and urging them to stick to a regular investing plan can add up to 1.5 percent, the report says.

Indeed, two key behavioral factors that often hurt DIY investors’ performance are “the allure of market-timing and the temptation to chase performance,” Vanguard says. “Advisors, as behavioral coaches, can act as emotional circuit-breakers by circumventing clients’ tendencies to chase returns or run for cover in emotionally charged markets.”

An example is the coaching — or simply hand-holding — that many people received from their financial planners during the 2008 credit crisis. When some clients grew upset, they didn’t panic and sell. Instead, they were panicked and called, giving their planners the opportunity to reassure them that their investment strategy would get them through the crisis. Over long periods, Vanguard says, this is worth as much as 1.5 percent in returns.

Advisors may also increase returns by up to 0.75 percent by providing “thoughtful allocation of assets.” That refers to diversification — advising clients on how much to invest in stocks vs. bonds, gold, real estate, oil and gas, foreign securities and other assets. The right asset allocation may help increase returns, and Vanguard says professional advisors are better at this than consumers.

Another 0.40 percent can be generated in returns when advisors help clients keep fees low. In addition, rebalancing adds another 0.35 percent of value. We know very well how valuable rebalancing can be in portfolio management. Unfortunately, few investors rebalance regularly — if at all — on their own.

In addition, by carefully evaluating their mix of tax-free, tax-deferred and taxable accounts, advisors can help clients minimize the total taxes2 they pay over the course of their retirement through withdrawals, thereby increasing their wealth and the longevity of their investments.

The Hidden Value of an Investment Advisor

All told, that’s how financial advisors can add about three percentage points or more in net returns, according to Vanguard. We have two observations about the study.

First, those three percentage points are worth even more than they seem. If we take into consideration working with an advisor over the long term, you can see how this additional value can be impactful over time.

Second, Vanguard’s study was limited to investment results. It did not consider the additional services advisors may offer. How much additional value is generated for clients through advice regarding their mortgages, employee benefits, credit and debt, taxes, insurance and estate planning? How much time is saved thanks to the record-keeping and tax-reporting?

Stated another way, might it be said that the advice pays for itself? You’ll decide, of course. But if this wasn’t the case, few people would hire financial advisors. If you’ve been uncertain about the value of an advisor, Vanguard has just quantified it for you.

1 Source: Vanguard Research – Putting a value on your value: Quantifying Vanguard Advisor’s Alpha – September 2016. Like any approximation, the actual amount of value added may vary significantly depending on clients’ circumstances.
2 Neither Edelman Financial Engines, a division of Financial Engines Advisors L.L.C., nor its affiliates offer tax or legal advice. Interested parties are strongly encouraged to seek advice from qualified tax and/or legal experts regarding the best options for your particular circumstances.
Investing strategies, such as asset allocation, diversification, or rebalancing, do not assure or guarantee better performance and cannot eliminate the risk of investment losses. There are no guarantees that a portfolio employing these or any other strategy will outperform a portfolio that does not engage in such strategies. Funds and ETFs are subject to risk, including loss of principal. All investments have inherent risks. There can be no assurance that the investment strategy proposed will obtain its goal. Past performance does not guarantee future results.
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