After supporting hundreds of individuals with their financial and retirement planning needs, we know it’s not unusual to manage at least some of your investments on your own. We wholeheartedly support individuals with the knowledge, desire, and mental discipline to manage their own investment portfolios during the accumulation stage of their lives. Nowadays, this task has been made easier than ever. 

Virtually all workplace retirement plans offer a wide array of diversified, low-cost, index fund investment options, and there are many great managed portfolio solutions like Vanguard’s Target Allocation or Target Retirement Date funds that can provide an individual with a highly efficient, low-cost, diversified portfolio all wrapped up in a single holding.  

With only a minor investment of time, an individual can manage their investment portfolio quite effectively without incurring the extra expense of a financial advisor.  

So why even consider hiring a financial advisor or a retirement planning specialist when it comes to planning for your retirement years? 

The Difference Between DIYing Before and After Retirement

Many DIYers build confidence during their accumulation years and decide to continue DIYing into retirement.  The problem is that planning for retirement is so much more than investment management with the added function of taking money out to fund living expenses. 

In addition to figuring out how to make a retirement budget that you can stick to while accommodating any additional goals such as passing a legacy onto your family, investing in retirement (or decumulation) presents a very different stage of life than accumulation. It often brings up many new factors that need to be taken into consideration.  As a result, DIYers tend to unknowingly take on many additional risks and endure adverse consequences while potentially sacrificing the retirement lifestyle they were trying to build in the first place.

Following are four areas of unplanned consequence DIYers expose themselves to in retirement:

1).  Sacrifice More Quality of Life in Early Retirement Than Necessary

Left to their own devices, we find that most individuals that DIY retirement tend to massively underestimate just how much they can spend in retirement without taking excessive risk.  This is due to many reasons such as:

• Anchoring to rules of thumb such as the “4% rule” or withdrawing only your portfolio’s dividend and interest income. (Here’s an alternative to the 4% rule to consider instead).
• Misinterpreting the inputs and outcomes of retirement calculators driven by Monte Carlo analysis. 
• Assume their annual retirement spending through retirement will need to be equal to their beginning spending amount (adjusted for inflation), when research shows this is most likely not the case.

Whatever the reason, the end result is the same: failure to maximize potential quality of life early in retirement when relatively young, healthy, and able to do so only to have more than is needed later in life.  See our Insight entitled “10 Reasons Most Retirement Plans Are Overly Conservative” for more.

2).  Pay More In Lifetime Taxes Than You Have To

Few individuals possess the tools and knowledge to integrate tax planning strategy into their DIY retirement plan.  Yet, through effective tax planning, once can cut their lifetime tax bill by a substantial amount (often in the $millions for the clients we serve as their retirement planning specialists).  

When you build a retirement plan, it is imperative to take a look at your mix of financial accounts (i.e., tax-deferred, taxable, and Roth), your level of retirement funding, your intended withdrawal sequencing, and then model your current and future tax situation accordingly.  

This will allow you to see where opportunities may be present to put yourself into a better situation and financial account mix over time (usually through a well crafted Roth IRA conversion strategy).

Unfortunately, the majority of time that former DIYers come to this realization is when they hit Required Minimum Distribution (RMD) age and they realize they have been sitting on a tax time bomb.  While a retirement planning specialist may still be able to help you make the most of the situation, the ideal time would have been many years sooner - immediately after retirement. See our Insight entitled “Create a Withdrawal Strategy that Exploits Marginal Tax Rates” for more.

3).  Lack Effective Risk Management Planning

When most DIYers hear the term risk management, they immediately think about their investment portfolio and whether their asset allocation (i.e., mix between stocks and bonds) and investment selection (i.e., individual stocks vs. diversified funds) is appropriate.  This is far from a complete risk management plan in retirement.  

In retirement, there are many additional risks that have to be accounted for now and managed so that you can truly enjoy financial independence.  

The level of sustainable withdrawal you can expect from an investment portfolio is heavily influenced by your sequence of returns and what you do when the market inevitably drops in value during times of economic trouble.  See our Insight entitled “How We Actively Manage Sequence of Returns Risk for Clients” for more.

4).  Lack Consideration for Spouse

Individuals buy life insurance during their working years to protect their spouse (and family) from the risk that something could happen to them.  In the unfortunate event something did happen, the life insurance would at least pay out and provide your spouse (and family) with the financial resources to continue on.  Parents with children create trusts that spell out how the children will be taken care of should something happen to them.  

Why then, do DIYers not think about what their spouse would do if something were to happen to them?  It is the odd case where both spouses are equally as knowledgeable and involved financially.

We take on many former DIYers at this stage of realization.  The former DIYer takes solace that they are creating a relationship with someone they trust and whom the spouse can meet and feel comfortable with while providing continuity and care for the spouse should their mental faculties or health decline.  See our Insight entitled “The Overlooked Imperative of Advisor Continuity in Retirement” for additional perspective.

As retirement planning specialists, we are proud to serve many former DIYers that have realized they need help, and can find it without having to pay a percentage of their portfolio to a financial advisor. If we can help you with retirement planning and investment management as you near or while you’re in retirement,  feel free to reach out  to us at any time.