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Fiduciary Advice: 5 Critical Behaviors to STOP Within 5 Years of Retirement

Fiduciary Advice: 5 Critical Behaviors to STOP Within 5 Years of Retirement
October 04
00:18 2016

Sometimes we don’t do what’s in our best interest. Sure, we might know “the right stuff,” but we might not have “the right stuff” – the discipline – to do “the right stuff.” Even the greatest in their fields find it useful to retain an objective adviser to coach them to achieve greater efficiencies. While this is a clear strategy when it involves one’s professional career, for whatever reason, people are reluctant – or too shy – to apply this same proven strategy towards personal matters.

Among those personal matters often neglected includes retirement planning. To be honest, a steady savings strategy should be sufficient for the bulk of one’s career. However, as the retirement date nears, it’s incumbent employees begin to focus on refining behaviors that time can easily forgive. And when an employee is within five years of retirement, the time needed for forgiveness has all but evaporated. We polled retirement advisers from coast to coast to gauge their advice when it comes to the five critical behaviors employees must stop within five years of retirement. Here’s what they said:

#5: Stop the Leakage
For those not familiar with the term, “leakage” refers to prematurely withdrawing from a retirement plan. While these withdrawals are perfectly legal and often address important financial needs, they can harm retirement prospects. Thomas R. Seneca, Managing Partner at T.M. Wealth Management in Washington D.C. suggests people within five years of retirement should “stop tapping their IRAs and 401k’s.” He says, “Many people that have achieved the age of 59½ feel they can now access their retirement accounts for those unexpected expenses. While they do avoid the 10% penalty they do not avoid the opportunity cost of having these funds invested for the additional time prior to retirement.” 

#4: Stop Living Beyond Your Means
We often hear of retirees “downsizing” their homes. This allows them to both realize instant cash and reduce or eliminate debt at the same time. This is just one example of living within one’s means. During your wage earning years, it’s easy to rely on credit or debt to finance the acquisition of desired assets. When you’re nearing retirement, the time to deleverage has arrived. “One would be stop adding to consumer debt,” says Ben Rolfes, President of Regal Group, Inc. in The Triad, North Carolina.

This shift from accumulating to decumulating can be jarring. To soften the blow, sometimes it’s just a matter of the words used. Catherine Scrivano, a financial planner at CASCO Financial Group in Phoenix, Arizona, calls it “a moratorium on accumulation.” She advises this “especially if there is additional debt as a result.” She says, “The more things we add to our lives the more distraction we face; as we anticipate a major life change like retirement we want to remain focused in our attention and in our finances.”

In a nutshell, employees within five years of retirement must stop “Living beyond their means,” says Ilene Davis of Financial Independence Services in Cocoa, Florida. “Now is the critical time to get finances under control, start paying down debt (other than mortgage if lower than 5%), and get overall finance in better order (retirement might come sooner than desired).”

#3: Stop Putting Off Implementing a Financial Plan
If the above sounds like the essence of a plan, it is. As stated earlier, implementing a simple saving strategy can be sufficient through the peak years of one’s earning career. Towards the end the, one can no longer afford to “put off tomorrow what should be done today.” Retirement becomes a lot easier – and more enjoyable – when one creates a realistic plan in advance. “What’s the one thing people within five years of retirement should stop doing?” asks Russell Smith, Partner at Gordon Asset Management, LLC in Durham, North Carolina. He answers bluntly, “Stop thinking that ‘hope’ is a plan.”

A common symptom of delay is shifting blame. Robert L. Riedl, Director of Wealth Management at Endowment Wealth Management, Inc., located in Appleton, Wisconsin, would like to see near-retirees stop “procrastinating on their retirement planning and stop complaining about not retiring early on social security. Get active and take control of their future now and work towards a plan!”

Of course, a common misconception is that, by the time you’re this close to retirement, it’s too late. It’s amazing, though, how much can be done in just a few short years – with the proper planning, of course. Brian Wiedermann, Wealth Manager at Plancorp, LLC in St. Louis, Missouri, says people “should stop delaying putting together a plan for retirement. It’s never too late to begin building a solid plan.”

Even if, at first, the plan is merely to begin collecting data, that can have a long term benefit, too. “For the ‘don’t sweat the details’ crowd: If you’re within five years of retirement, you should absolutely stop living without a budget,” says Billy Lanter, Fiduciary Investment Advisor at Unified Trust Company, in Lexington, Kentucky. “Begin tracking your expenses, review spending habits and patterns and start thinking about what expenses will be in retirement. Odds are you won’t start monitoring your spending more in retirement if you’re not doing so already. Start budgeting today and establish a baseline to build your retirement budget from.”

For those interested in some specifics, Michael Minter, managing partner of Mintco Financial, in Tampa, Florida and Buffalo, New York, offer this: “I would say 5 years before retiring pay off your house, your car, meet your financial adviser to review your investments portfolio and review all your expenses, decide what to do with your social security.”

#2: Stop Relying on Investment Home Runs
Needless to say, when it comes to investment advice within five years of retirement, there are plenty of thoughts. Remember, though, this is considered within the domain of what’s in the best interest of the near-retiree. To that end, Brendan Walsh, Managing Member of Quantum Leap Capital, located in South Burlington Vermont, says, “Stop telling yourself investment returns will pull you out of the fire. There is no product or investment formula that will cure your disease of not saving enough and planning properly.”

The lure of “the investment home run” can be quite enticing, but the downside of taking it can be disasterous. Emily Guy Birken, author of The Five Years Before You Retire and located in Lafayette, Indiana, tells near-retirees to stop “chasing quick investment returns. Seeing retirement on the near horizon can make anyone panic, especially if their retirement savings are less than robust. Trying to chase quick returns is never a good idea, but it can be disastrous in the years before retirement because you have less time to allow your investments to bounce back.”

Alex Sylvester, Retirement Plan Advisor, Assured Partners, Indianapolis, Indiana, agrees. He says, “Too often we see individuals shift their investments to an extremely aggressive allocation in order to ‘make up’ for lost time in their employer-sponsored retirement plan. Of course we know that this may cause a large decrease in their balance right before they are planning to leave.”

As a corollary to this, one must also consider how one’s retirement assets are allocated. “Stop investing so much money into stocks,” says Doug Carey President of WealthTrace in Boulder, Colorado. “Start thinking about diversification and retirement income.”

We all know of the popularity of target date funds, but “set it and forget” can represent a risky path. “The one thing people should stop doing when they are 5 years from retirement is ignoring their investment allocation,” says Clint Bauch, President/CEO at Hausmann-Johnson Bauch Financial, in Madison, Wisconsin. “Many people will rely heavily on their 401k or other company-sponsored retirement plans to produce retirement income. Market corrections can happen at any time and in more recent periods, have been deep and painful for most. This can cause individuals to be forced into prolonging their projected retirement date as they wait to recover lost wealth.”

The need to review one’s allocation doesn’t stop when one reaches retirement, either. Jamie Hopkins, Professor of Retirement Income Planning at The American College in Bryn Mawr, Pennsylvania, says, “For people within 5 years of retirement, one thing that you should stop doing is taking on too much market risk. The 3 years leading into retirement and the first three years in retirement are the most crucial investment risk years as the sequencing of returns risk is very high. So consider dropping down your equity investments leading into retirement and increasing them again early in retirement if your plan can handle the additional risk and higher returns at that point.”

#1: Stop Worrying
If there’s one thing we’ve learned from speaking with actual retirees it’s that once you pass the retirement date, most of the anxieties tend to disappear. Until then, the uncertainty of the unknown can tear away at your soul. Alleviating this pressure requires that discipline referred to at the outset of this article. “For the detail-oriented crowd,” says Lanter, “If you’re within five years of retirement, you should absolutely stop checking your investment account balance every day/week. When you’re in the distribution phase of life, you can’t be worried about whether the market was up today or down last week. Ensure your portfolio is positioned properly and know where cash flow is coming from. Just because you’re retired doesn’t mean you need every dollar in retirement next month. A good portion of your portfolio likely still has a long-term time horizon. You care where the market is in seven years, not seven days. Start this practice now to reduce your anxiety and stress once you’re actually dependent upon your portfolio for your daily needs.”

Of course, there’s a blunt reality implied here. Charles C. Scott of Pelleton Capital Management, Ltd. in Scottsdale, Arizona, says, “stop worrying about whether you’ll have enough – at this point in time you either have enough or you don’t, and it’s probably too late to play catch up if you don’t have enough.”

Bonus: Stop Being a Workaholic
We’ll leave you with this bonus item. In the end, it may be most important: “Stop making work the center of your universe,” says Richard Carr, President of Carr Financial Group in Worcester, Massachusetts.  Carr proposes you “start to build social connections outside of work.  Join clubs.  Try a new sport.  Take dancing lessons.  Imagine a month when there is not a single thing on your calendar that you must do.  Now what?”

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

1 Comment

  1. October 07, 08:19

    This article should be required reading. Well done.

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