From the Desk of Dr. Guy Baker--How to Chose a Financial Advisor, Insight #5

Have you ever wondered how to choose a financial advisor? Over the last few weeks, I have shared what I learned from Dimensional Funds' founder, David Booth, and executive, David Butler, and what they discovered by surveying 20,000 DFA investors. The first installment from my booklet, "How to Choose a Financial Advisor," was posted Thursday, April 18th. The second installment was posted Thursday, April 25th, entitled "Does the Cost of Investment Advice Equal Value?" The third installment, "Peace of Mind," was published on Thursday, May 2nd. The fourth, published on May 9th, was "The Importance of Client Service Experience.

Progress Toward Goals -- What Financial Information Would Help Me the Most?

Most investors surveyed said the size of their retirement nest egg is important when preparing for retirement. However, this concern was less important than having confidence in the amount of income they would be able to spend each month.

The DFA survey segmented investor questions into two categories: 1) Are you preparing for retirement, or 2) Are you already in retirement? Those planning for retirement thought knowing both how much they could spend and the likelihood of reaching their objective were equally important. Both were more important than how much money was in their investment account.

This result is not surprising. The Transamerica Retirement Institute and other surveys have discovered that more than 80 percent of Americans have no idea how much money they need when they retire. Lee Eisenberg was the first person to label this required amount for retirement, “Your Number.” A simple rule of thumb to determine “Your Number” is 20 times your desired income at age 70. If you are 65, then your number would be 25 times your target income. So if you want $100,000 a year for life, over and above your social security or other guaranteed income, you will need at least $2,000,000 to retire at age 70, or $2,500,000 to retire at age 65. This number assumes no earnings on the capital. You will have virtually nothing left when you reach age 90, and with life expectancy being extended, this could be a potential problem. But focusing on $2,000,000 as the goal, is better than not having any goal. Unfortunately, most people approach retirement with no tangible goal in mind.

“What is your Number?” is one of the three questions most people cannot answer about retirement. The second question is, “How much do I need to save?” To answer this question, you need to do some math. Factors such as age, the amount you have already saved, your life expectancy, and your willingness to take risk, are all going to impact the savings rate you will need to achieve to reach retirement. Essentially, the longer you are likely to live, the more money you need when you retire. The third question asks, “Do you have an investment process that has the highest probability of achieving the optimum return for the lowest amount of risk?” Most investors have no idea how much risk they are buying, or how to allocate the asset classes to achieve that optimum return. The Wealth Teams Solution was designed to answer this question and provide an intellectual framework for investing long term.

Those already in retirement, are very concerned about their net spendable income every month (33%). The return on their portfolio is the next important factor, followed by the size of their nest egg. This is why we developed the Wealth Teams Solution. It is a combination of laddered Treasury Inflation Protected Securities (TIPS), first trust deeds, and a balanced investment portfolio. The targeted distribution rate is eight percent annually. Notice, I did NOT say the rate of return is eight percent. Our studies have shown that most retirees will need to implement an “asset liquidation program” to meet their income needs. They will have to systematically spend down capital to maintain an income that will sustain them through retirement. This is just a mathematical fact. So the ideal solution has to provide a reasonably high distribution rate plus an asset growth strategy to replenish the capital spent. The Wealth Teams Solution is formulated to meet both of these requirements.

Watch for next week's installment, "What is your Greatest Fear Regarding Your Personal Finances?" ~~ Dr. Guy

The Wealth Teams Alliance has a long track record of delivering value to their clients. We hope you will take the time to evaluate our services. Past performance is no guarantee of future results. All investing involves risk, including the potential for loss of principal. There is no guarantee that any investment plan or strategy will be successful.