The Retirement Mistake

The Retirement Mistake: Generalized Retirement Advice

Generalized Retirement Advice is The Retirement Mistake 

Here is the retirement mistake: generalized retirement advice.

Think about what you hear on TV or read in the popular press. What passes for generalized retirement advice is often inaccurate or worse. Why is that the case?

Well, remember: specific facts and circumstances. There is always a disclaimer that the information may not fit your specific facts and circumstances. Ask yourself: Is the retirement advice just right for you?

Generalized retirement advice can be too hot, too cold, or—like the porridge in the Goldilocks fable—just right.

You get one shot at retirement. Is that generalized retirement advice the retirement mistake of a lifetime? How do you know if it is just right for you?


Goldilocks and The Retirement Mistake 

At a bear minimum, retirement advice must account for fundedness and risk tolerance.

Fundedness, Risk, and the Retirement Mistake

Figure 1 (Goldilocks and The Retirement Mistake) 

Look at figure 1 to understand the Goldilocks, Fundedness and risk . On the left is income level (or total asset amount/fundedness for retirement) and on top risk level (or risk tolerance).

Regarding retirement income, when you listen to generalized retirement advice, it may not apply to you because of your level of fundedness.

For instance, let’s think about the advice “always use your Roth 401k.” Using Roth vs Traditional deferral into a 401k depends on your marginal tax rate now but your effective tax rate in the future. This is tax bracket arbitrage and important to understand!

Only when your income is “just right” is the retirement advice appropriate. Too much or too little income and the retirement advice is wrong.

As for risk, a “100% equity asset allocation” might be fine advice for a youngster willing to take on short term market risk. Conversely, if someone commits the cardinal sin of investing and sells low, even once in their lifetime, it is horrible advice. Only when you bake in the appropriate level of risk is the advice correct. Too much or too little risk and the recommendation is wrong.

So, what happens when the well-funded listen to generalized retirement advice?


The Well-Funded and The Retirement Mistake 

Why is generalized retirement advice inaccurate for the well-funded?

If you have over-funded your retirement, than your retirement risks are different than those who are under-funded. The Big Rocks of Retirement depend on your level of retirement fundedness. Running out of money may be less of (and actual) concern, but taxes and legacy goals loom large.

Risks are different in the rarified stratospheres of income. The generalized advice you gets often depends on the advisor type.


The Retirement Mistake and Advisor Type 

Assume now you are getting advice from someone who is preaching to your choir. The advice is appropriate for your fundedness.

Well, with the wrong risk considerations, you might face the retirement mistake.

This depends on advisor type.

For instance, if you have an insurance salesman as a financial planner, you might get put into investments that are too conservative regardless of your risk tolerance. That’s right, for everything bad said about the insurance salesman, insurance products are generally very safe! These complex products may be appropriate for someone who has a need for whole life insurance, or who wants the guarantees of a “good” annuity, but are often sold (for high commissions) as equity-equivalents.  They are not. They are bond alternatives. This means that you need to take more risk with the rest of your assets if you have these products rather than keep your traditional conservative portfolio.

Conversely, if you go with a Fee-only or Fee-based advisor preaching Assets Under Management, you are sold “risk with a side of fees.” Fees matter, and even 1% can decimate your returns over the long term. Remember, if the safe withdrawal rate is about 4%, than the 1% fee is a quarter of your living expenses in retirement.

You are a square peg and will be pounded into the round hole of that “holistic” advisor who views the world as only insurance or investments.


A Specific Example of The Retirement Mistake

Let’s look at a specific example—a common conundrum—and see why bad retirement advice in action.

What about the pervasive pension question: take the lump sum or the life-long annuity payments?

If you get advice appropriate for your income level and risk tolerance, the correct answer is: it depends! It depends on the IRR (how well the annuity pays over the years—the internal rate of return) and what other assets you own. Well, “it depends” is not very satisfying!

Risk, Fundedness, and the Pension Dilemma

Figure 2 (Risk, Fundedness, and the Pension Dilemma)

Aside from the “Just Right” advice of “it depends,” what are some other possible answers to the pension dilemma?

Let’s look at overfunded folks and a Pension first.

If you are high income and high risk, you should take the lump sum and invest it for your heirs. Medium risk tolerance: the right answer depends on the internal rate of return—is it a good investment at face value? Finally, if you have low risk tolerance yet more money than you need, take the annuity option. Find something else to do with the rest of the money.

For those with low income, it is all about social security planning and taxes. If the annuity causes the tax torpedo, it is best to take the lump sum to use as a bridge to maximize social security. (Of course, you need to take health and longevity into account as well… facts and circumstances.)

In Summary: How can generalized retirement advice provide you with the answers? It can’t and listening up to all the talking heads (including those on the internet with blogs) is the retirement mistake.


The Retirement Mistake: Or, Why Generalized Retirement Advice Sucks

Generalized Retirement Advice sucks because it is intended for a person with a specific income and risk level. You are not that person. Remember: specific facts and circumstances.

It is bad retirement advice unless it is “Just Right” for your fundedness and risk level.

Chose your advice carefully. Facts and circumstances makes all the difference with the retirement mistake.


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