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The Five Killer Concepts that Most Confuse Retirement Savers

The Five Killer Concepts that Most Confuse Retirement Savers
May 03
00:03 2016

Do you remember the first time you sat down for a hand of poker? If you’re lucky, you played with a member of your family who patiently guided you through your confusion. If you weren’t lucky, a nefarious shark coaxed you into your initial experience with five card stud, no doubt licking his greedy chops while the variety of card combinations muddled your brain. Worse, imagine having no choice but to play this game for the first time under the pressure of “having” to win?

For many, retirement can confuse just as much as poker confuses a novice. Too often people choose to avoid this confusion simply by ignoring it. They put off until tomorrow what they could (and should) be doing today. And when that tomorrow comes, it hits them like a ton of bricks.

Nothing focuses the mind like a looming deadline. “Most people nearing the retirement window look back with a tremendous amount of regret,” says Chris Kowalik of ProFeds in Fox Lake, Illinois. “They are often so hard on themselves for what they have failed to do in the past that they can’t seem to set their sights on the future to begin accomplishing their retirement goals.” That the retirement “game” is so complex only makes the situation poorer. For, with this lack of understanding, comes an emotion well known to stop progress in its tracks. “They are scared of making a mistake,” says Kowalik.

While professionals can confidently breeze through the retirement landscape, to the casual retirement saver, these five concepts have led to the greatest confusion:

How to Save
It starts with the very first step: saving. Behavioral finance shows how too much choice can lead to a paralysis in decision-making. There are plenty of retirement savings vehicles available, that’s for certain. Less certain is knowing which one is the best for the particular needs and circumstances of the individual retirement saver. The inaction caused by this paralysis has left making workers vulnerable when it comes to their retirement.

Richard E. Reyes, CFP, The Financial Quarterback, Maitland, Florida, says, “There are numerous issues that confuse retirement savers. These deal with everything from not understanding what the different types of retirement vehicles, what they are there to accomplish, how they work, how they are taxed, their penalties, and their fees.”

“With nearly 40 percent of working households with members aged between 25 and 64 having no retirement savings, our country is facing a real retirement savings crisis, especially among the millennials and Generation Xers,” says Adam Bergman of IRA Financial Group, LLC in Fort Lauderdale, Florida. “The blame lies squarely on us as a society which for some reason has not pushed for greater education on the power of retirement saving at our schools and universities. I have many friends who are doctors, lawyers, engineers, who stayed in school until their late twenties and who took hundreds of university and graduate level classes on a wide array of subjects, but were never once offered the opportunity to learn about how to save for retirement. Many of these very well educated and successful people couldn’t tell you what a Roth IRA is or how the power of tax-deferral works.”

How Much to Save
Once the question of “How to save?” is tackled, one must be able to understand the process for determining how much to save. As with retirement savings vehicles, there are a number of competing paths to go down here, too. Unfortunately, these paths tend to feature the banal mean of average retirement saver rather than the broad reality of an array of unique individuals. In the end, each path is askew, exactly how much and in which direction is different for each and every retirement saver. The “rules of thumb” associated with these paths can offer more damage than good.

Reyes see the #1 area of confusion is, “how much should I put away and how much do I need for retirement?” What makes this so complicated? Reyes says “this is different for everyone and resources are different for current or future needs. But this question often becomes so daunting that savers think they will never be able to accomplish this and just give up.”

Robert R. Johnson, President and CEO of The American College of Financial Services in Bryn Mawr, Pennsylvania, says, “How much retirement savings is enough?  Unfortunately, too many investors are trying to come up with a ‘number’ — that is, how much retirement savings they will need to accumulate to safely live through retirement. Trying to come up with one number is problematic for many reasons. For example, implicit in many of the retirement calculators is some sort of ‘average’ longevity. The problem is that when you retire, you don’t need to save for the average life span, you need to save for the best possible scenario — that is, a long life span. You only get ‘one draw from the longevity distribution’ and you can’t afford to outlive your money. People want to overly simplify retirement income planning. Unfortunately, it isn’t simple.”

Once past these preliminary hurdles, we now enter the realm of technical “jargon.” This is the point where many just give up. They don’t even bother seeking the advice of professionals (more on that in a moment). Of course, those are the honest ones, the ones willing to admit what they don’t know. For others, they trudge along confidently, only to discover a bothersome obstacle they’ve tried in vain to ignore, made incorrect assumptions about, or simply failed to take into account.

Neil Maxwell, Founder and CEO of Maxwell Wealth Planning, Inc. in Parker, Colorado, agrees that while “clients don’t know how much to save,” he believes “the biggest ‘surprise’ is inflation. Can you believe that what $10k buys you today, will cost $20k 20 years from now? The best way for people to get educated on inflation is to build a financial plan. The client has to be the driver of the process. Just going to a planner and getting a plan done for you might not get the message across.”

No one has a crystal ball that gives them 20/20 vision into the future. This makes answering important financial questions with 100% precision nearly impossible. “Are you and your significant other prepared for possible three-decade retirements with the prices of goods and services increasing, on average, between 2% and 4% each year?” says Rodger Alan Friedman, a founding partner of Steward Partners Global Advisory in Washington, DC. “Let us be clear on this. Imagine 30 years without a paycheck. Roll that around your brain for a bit. Scary isn’t it? I would think so. This is not an insurmountable obstacle if you begin planning and saving early enough.”

When you finally overcome and can fully account for inflation, you must then pick from an extension universe of investments. At this point, professionals tend to take competing side regarded which portfolio best optimizes the probability of meeting the individual retirement saver’s goal. Given this professional disagreement, how can we expect the everyday saver to not be confused?  This confusion frequently leads to improbable assumptions.

Ilene Davis of Financial Independence Services, Cocoa Florida, says retirement savers need to take another look at their fantastic assumptions and set “realistic risks and rewards of different investments.” She says, when it comes to understanding investments, “often they think they know but don’t really.” For her part, Davis sees education as the key to surmounting this confusion. “I recommend books, not magazines,” she says.

Who do you trust?
Finally, once a retirement saver concedes his fallibility, there remains one more source of confusion. With some many professional options available, and with the need for industry players to rely on good marketing techniques to demonstration their “unique selling proposition,” the retirement saver is once again confronted with the paralysis of analysis. Which pitch is most believable?

Ryan Groves, Partner at located somewhere on terra firma, says, “The most confusing thing for most investors is who to trust. All day, every day, they hear conflicting messages from a heavily biased financial media. Their first goal should be to become educated and seek the truth. The only unbiased source is academia. Academic research is done for the sake of the research. It’s done to solve a problem or to prove a truth and it is subject to rigorous peer review so it is distilled down to what can be accepted as fact. As opposed to Wall Street Research which is largely done to market product or to further the interests of Wall Street.”

In many ways, retirement saving is no different than any other sophisticated activity and the retirement savings industry is no different from any other profession. After all, there is a reason why we regularly refer to complex tasks as “brain surgery” or “rocket science.” And it’s OK to compare retirement saving to these two endeavors.

What you don’t want to compare retirement saving to is poker. Or any other game of chance. That’s not just confusing, it’s scary.

Are you interested in discovering more about issues confronting 401k fiduciaries? If you buy Mr. Carosa’s book 401(k) Fiduciary Solutions, you’ll have at your fingertips a valuable reference covering the wide spectrum of How-To’s (including information on the new wave of plan designs) every 401k plan sponsor and service provider wants and needs to know. Alternatively, would you like to help plan participants create better savings strategies? You can buy Mr. Carosa’s latest book Hey! What’s My Number? How to Improve the Odds You Will Retire in Comfort right now at your favorite on-line or neighborhood book store.

Mr. Carosa is available for keynote speaking engagements, especially in venues located in the Northeast, MidAtantic and Midwestern regions of the United States and in the Toronto region of Canada.

About Author

Christopher Carosa, CTFA

Christopher Carosa, CTFA


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