Deciding when to fix problems in your retirement plan should not be determined by who wins the Presidential Election. Our team at Strategic Wealth Designers has over 120 years’ experience in the financial services industry, and we’ve met with thousands of people nearing retirement during election cycles. Trust me when I say that you aren’t the first person to say “We don’t want to make any decisions about our retirement portfolio until after the election” and you won’t be the last. In the following blog post, I’ll explain why election paralysis could prove to be one of the most-costly investment mistakes you make in your entire life.
HOW ELECTION PARALYSIS STARTS
In recent memory, whenever a Presidential election year arrives many things occur at once. People who have been friends for years suddenly are entrenched in a social media war, acting like super hero crusaders behind their keyboards. As fast as their fingers can type they’re hammering out their points about why their candidate is a great and moral choice while the opponent is a lying scumbag. All the while campaigns are soliciting money and bombarding citizens with ads on every conceivable media platform.
There’s only so much election information a person can consume before they just tune out. Eventually they stop listening, bury their head in the sand and no longer engage with the messages being projected or more correctly- being stuffed in their face. This is what we call Election Paralysis. You no longer feel the capacity to engage and so you shut down, dreaming of the day when all of this will cease for another three glorious years — no matter who wins.
In 2020, a year unlike any we have ever endured before, a heightened feeling of paralysis has set in which many have closed off and just want to wake up with the coronavirus and the election behind them. Let’s look at why completely shutting down, especially in relation to your financial investments, is a recipe for disaster.
A PROBLEM IS STILL A PROBLEM
Extraordinary circumstances in 2020 have added significant stress to many people’s lives. But the election of one candidate or another will not rescue your investment portfolio from its existing problems. When you learn that there are problems with your investment portfolio you should address them just like you would an issue with your house. Kicking the can down the road for six months doesn’t make that roof leak go away, rather it deepens the issue requiring more work and more money to repair. Your investment portfolio can react in much the same way.
The bottom line is, your financial house is the second most important component of your life to have in order outside of your physical health.
PRESIDENTS CHANGE POLICIES NOT PORTFOLIO PROBLEMS
You often hear that the stock market likes certainty, and if a new candidate wins the resulting uncertainty could send it into a tailspin. New policies and procedures being implemented and even new laws being enacted – all of which could occur – will not resolve the problems in your financial plan. If you are paying investment fees that are too high today, after the election your current financial advisor isn’t going to suddenly change that fee to be in-line with what you believe is a fair price for advice.
Your current financial advisor may have constructed your investment portfolio such that 75% of your money is exposed to risk if the market were to drop. When you are in or near retirement that should be concerning, and it isn’t going to change because of an election. In other words, if you are 75% exposed now you likely are still going to have that level of exposure after the election.
Maybe you have products like mutual funds or variable annuities, which often contain excessive fees that are not clearly explained so it’s difficult to understand their true cost structure. You guessed it- those fees will still be there after the election. Instead of waiting on what may happen in the future (out of your control), we recommend addressing the issues in your investment portfolio in the present (in your control).
2020 FINANCIAL PLANNING STRATEGY
Our focus in this article is on those in or near retirement, which typically would be someone 50 and over. Right now, your investment portfolio should be centered around minimizing three key factors: Risk, fees and taxes.
As you get older your risk level should decrease and at Strategic Wealth Designers we religiously follow the Rule of 100. This simple rule subtracts your age from 100 to arrive at the percentage of your portfolio that should be at risk. That means your age represents the approximate percentage of your investable assets that should be completely protected from market risk. We use this rule because we know that when you are nearing or already in retirement, a big loss in the market will hurt you far worse than a big gain will help you.
There can be exceptions to the Rule of 100. Some people are fortunate to have a great pension that covers the majority of their monthly living expenses, and in this kind of scenario taking a bit more risk would be acceptable. However, we know from working with thousands of clients over the years that most of them don’t like seeing wild swings in their portfolio during their retirement years.
STOP OVERPAYING FOR FINANCIAL ADVICE
Elections create uneasiness for the country and generate volatility in the market causing people to freeze up in their decision making. I encourage you to look past those thoughts and focus on the fact that if a problem exists in your portfolio from a cost standpoint – you’ve got to fix it now. Continually paying fees is a can that you shouldn’t continue kicking down the road until after the election. Every client is different, but there are very few scenarios where a client with $500,000 or more in investable assets should ever pay over 1% on their entire portfolio for financial advice. However, you may be holding mutual funds or variable annuities in your retirement portfolio that contain 2-4% or more in fees every single year, and the cost drag you incur throughout your retirement can be monumental.
Now many of you may be thinking “There’s no way I’m paying fees that high. My advisor would have to tell me and I wouldn’t stand for it.” Well, you are right in thinking that your financial advisor does have to tell you. But the way they provide the information to you is a bit unfair. How they do it is with that hundred plus page document in 6 point font that they give you after you sign the paperwork to buy the mutual funds. It’s called a prospectus and you have to nearly read it cover to cover including addendums in order to have a clear picture of the total cost structure of the product you purchased- and even then it’s not easy to understand.
Stop overpaying for advice no matter what stage of life you’re in. We are happy to use our proprietary planning software to run a complimentary fee analysis for you to help determine what the true cost of your investments are.
THE TAX SALE IS ENDING SOON
2020 will go down as the most difficult year of the millennium so far and possibly for all of our lifetimes. The financial burden of job loss, bankruptcies, bailout spending, rioting and destruction across the country leads to one conclusion: The financial burden on American taxpayers must eventually go up.
With taxes most likely being lower today than they will be in the future, there is an opportunity for most everyone to take advantage of this tax sale right now. You may have the ability to shift a good portion of money to a tax-free strategy while tax rates are at a historical low point. We are happy to do a tax analysis on your investment portfolio to see what advantages may be waiting for you before a potential “tax-mageddon” hits in the coming years.
If you have spent your lifetime saving and the majority of it isn’t in tax-free accounts, your tax exposure could change greatly in the years ahead as we’re forced to pay for all the stimulus money and job losses incurred across the country. No matter what, consider your current tax landscape and how your life would be affected if your tax bracket was increased by 10, 20 or even 30%. Don’t let election paralysis derail your retirement plan.
DON'T BENCH YOUR INVESTMENT PORTFOLIO
We’ve talked before about the hallmarks of what to look for when seeking professional financial advice:
- Work with an Independent Fiduciary Financial Advisor
- Know your fees- excessive fees for products and financial advice can kill your retirement
- Advisors must always do what is right and not what is popular
- Keep your financial plan simple
Remember… your investment portfolio keeps rolling along no matter who wins the election. Despite celebrity proclamations that they are leaving the United States if their candidate doesn’t win (they never do it!), the stock market doesn’t close and at the end of the day you either have a well-structured financial portfolio or you don’t. Get a 2ndopinion on your retirement investments and then take immediate action if there is a problem.
You are not stuck if you are paying too much in fees, carrying too much risk in your portfolio or are facing a high tax burden currently- but you have to free yourself from the paralysis that’s limiting you. Election paralysis affects not just the investor, but their children and grandchildren for generations to come. You don’t know what you don’t know, so make sure you’re getting the best financial help from an independent fiduciary wealth management firm. Lay down the fear of the unknown and rise up in the certainty of a robust financial plan built for your family’s future!
