How to Choose a Financial Advisor for Retirement
Updated: Jul 16
A generation ago, you didn’t have to worry about how to choose a financial advisor for retirement, because most Americans had a pension for life to provide income. Today, that’s no longer the case except for a fortunate few. Everyone else has to self-fund retirement primarily with savings in employer-sponsored 401(k)s and IRAs.
That’s a huge responsibility, and unfortunately, a lot of Americans are unprepared. A 2019 study showed that 56% have no idea how much money they’ll need to retire, and 1 in 5 seniors enters retirement with less than $5,000 in savings.
Retirement planning isn’t really a luxury anymore; it’s an essential part of your financial blueprint—and even your health. Dave Ramsey discovered that 74% of Americans who are worried about their retirement savings have high levels of anxiety and report frequently losing sleep compared to just 17% of those who feel confident about their savings.
When it comes to retirement, working with a Certified Financial Planner™ professional may deliver concrete results. The same Dave Ramsey research showed that 44% of people who partnered with a financial advisor had $100,000 or more in retirement savings; only 9% of those flying solo achieved that particular milestone.
Do you need a financial advisor for retirement planning?
Everyone’s financial situation is different, and there are certain scenarios where a long-term relationship with a Certified Financial Planner™ professional may not be necessary. If you’re a young adult, for example, and just starting your career, you may only need an initial plan to get you started in the right direction.
People in their 20s and early 30s are probably fine with an annual financial planning checkup unless they make a lot of money or have unusually complex finances. A yearly meeting with a fee-only financial planner is usually enough to establish short- and long-term goals and fine-tune your savings strategy.
However, by the time you hit your 50s, the DIY option exposes you to potential pitfalls. As your income increases and your career plateaus, you have less time and your finances become more complex. Increased complexity can provide financial opportunities, but it can also snowball minor problems into big ones.
From developing a sound investment plan, to reducing income taxes, to creating sustainable income in retirement, your 50s and 60s are a pivotal moment for retirement preparation.
Ultimately, hiring a financial advisor for retirement can help you retire on your own terms with the peace of mind you need.
What does a financial advisor for retirement do?
The short answer is that a financial advisor helps you clarify your goals for retirement, develops a plan to help you achieve them, and monitors your progress so you stay on track.
That might sound like something you should be able to do on your own, but the fact is, most people seriously underestimate their income needs in retirement. Others use outdated savings models that leave them underprepared. The 4% rule, for example, is still a fairly popular rule of thumb for estimating savings goals, but it may not work with today’s longer lifespans, higher health care costs, and low bond interest rates.
A Certified Financial Planner® helps you clarify and prioritize your goals expenses. Together, you’ll develop a spending plan for housing and home maintenance, health insurance and medical costs, charitable giving, new vehicles, travel, and gifts. You’ll also look at different scenarios for assisted living, private duty nursing, and long-term care so you’re prepared for those possibilities.
Once you have a realistic budget, your advisor analyzes your cash flow in retirement by looking at your income sources and evaluating them against your fixed and discretionary expenses and tax scenarios.
At this stage, you’ll begin to have a clearer view of your retirement savings goal.
The next step is to develop a retirement income plan. Your advisor will weigh strategies to maximize your Social Security benefits, analyze any pension and annuity payout options, and create an investment plan to generate income from your portfolio to fill the gaps.
These steps are the foundation of retirement planning, but the process doesn’t end there. A retirement advisor also manages your investments, ensuring your asset allocation - the right mix of stocks and bonds - strategy is sound. He’ll also discuss diversification strategies and periodically rebalance your portfolio.
As your income and assets grow, the best financial advisors will review your tax return and recommend strategies to minimize your tax liability now and in retirement.
Although a financial advisor can’t draft your will, he or she is an essential part of your estate planning team. A financial planner helps you understand how life changes affect your estate plan and explains how any changes you make—or don’t make—could impact your finances.
Perhaps most importantly, your financial advisor regularly evaluates your retirement plan against economic conditions, market performance, and life events and tracks your progress. If you’re not on track to retire with the money you need, your advisor develops strategies to help you hit your target.
How to choose a financial advisor for retirement
The term “financial advisor” actually covers a lot of different services, so it’s important to understand the different types of financial professionals who offer these services and how each might suit your needs.
Professional designations are important. But when it comes to financial planning for retirement, one designation stands out among the rest - the Certified Financial Planner™ or CFP®.
A Certified Financial Planner™ has completed a rigorous four-part certification process that includes education, experience, examination, and ethics. CFP®s are bound by strict standards set by the Certified Financial Planner Board of Standards. As the name suggests, a Certified Financial Planner™ helps you manage your money today and plan for your future needs. The CFP® designation is widely accepted as the premier credential for astute financial advisors.
Fiduciary financial advisors hold a fiduciary duty to their clients. This means they are ethically and legally required to put their clients’ best interests above their own. Fiduciary duty requires that your advisor acts in good faith, provides all relevant facts, and discloses potential conflicts of interest.
Working with a fiduciary financial advisor gives you peace of mind because you know the person managing your money is legally obligated to make decisions in your best interest, not his own. If your financial advisor is not a fiduciary, you have fewer legal protections if you feel that person isn’t putting your interests first.
How do you know if your financial advisor is a fiduciary?
Ask him to sign a fiduciary oath. If he doesn’t sign it, don’t hire him. Download a fiduciary oath here.
There are three ways a financial advisor is paid:
Fee-only: Fee-only advisors charge a flat fee for their services and they don’t represent a particular financial services company. You may pay an hourly rate or a set fee for a particular service. Some fee-only advisors may ask you to sign a retainer agreement.
Commission only: The advisor charges a percentage of the money he invests for you. You pay this fee upfront, so if you have $100,000 in your portfolio and your advisor charges 5%, he pockets $5,000 and invests $95,000 on your behalf. This is different from—and in addition to—commissions you pay on stock and fund trades.
Fee-based: Not to be confused with fee-only, a fee-based advisor charges you a combination of fees and commissions. For example, you may be charged $1,000 for an investment plan and pay a 3% commission on any funds the advisor manages on your behalf.
Fee-only advisors are almost always more transparent and cost-effective. You know in advance exactly what your costs will be for advice and management services and there are no hidden charges.
Will your financial advisor still be guiding you when you need him most?
In an ideal situation, you’ll have a relationship that lasts 20 or more—your advisor will be with you as you build your retirement nest egg, and when you’re ready to retire and reap the rewards of your plan.
For that reason, it’s a good idea to choose a financial advisor who is at least ten years younger than you if you’re close to retirement.
Trust but verify
Ronald Reagan made this Russian proverb famous, and it’s applicable for choosing a financial advisor. Before you hire someone to manage your retirement funds, check credentials and make sure there are no complaints or disciplinary actions.
The Financial Industry Regulatory Authority (FINRA) regulates the securities industry and plays an important role in protecting investors. You can verify that an advisor is legally registered and licensed to sell investments and provide advice and view any complaints or disciplinary actions using FINRA’s BrokerCheck tool.
If your advisor is a Certified Financial Planner, you can verify his or her certification and background at the CFP Board.
Interview before you hire
Most financial advisors are happy to do a phone interview or a free in-person consultation before you sign on the dotted line. Take advantage of this opportunity to make sure the advisor is someone who shares your values and is committed to helping you achieve your goals.
Here are some questions to ask a financial advisor about retirement and his approach to retirement planning:
What are your qualifications? Are you a fiduciary?
How long have you been practicing and have you ever been disciplined?
How would you describe your ideal client? Do you have many clients like me?
What retirement planning services do you provide?
What is your retirement investment philosophy?
How do you develop your retirement cash-flow projections?
How often do you meet with your retirement planning clients?
What happens to my money if something happens to you?
How will you help me achieve my retirement goals?
How are you paid?
Finally, it’s a good idea to ask the advisor to explain a concept to you, such as sequence of return risk or active versus passive investing. You’ll get a feel for whether this is someone who will take the time to help you understand the reasons behind different recommendations, and why those reasons make sense for your situation. If the advisor talks over your head or shows impatience, move on. You need to feel confident in—and comfortable with—your retirement plan.
What to expect
Retirement planning isn’t a once-and-done process. At Covenant Wealth Advisors, we schedule a series of meetings—at no cost to you—to get to know you and develop a retirement plan that aligns with your goals and values.
Before the first meeting, we’ll ask you to complete a brief questionnaire to help us understand your financial picture. During the meeting, we’ll sit down together to discuss your current situation, your financial goals, and your vision for retirement.
During the second meeting, we’ll explore strengths and weaknesses in your current strategy, explain our investment philosophy, and offer our recommendations for your retirement plan.
If you feel that we’re a good fit and you’re happy with our recommendations, we’ll develop a detailed financial plan that covers retirement planning, tax planning, charitable giving, and any other elements we discussed. We’ll work together to implement your plan, and schedule regular checkups to track your progress and make adjustments.
Covenant Wealth Advisors is one of the only independent and fee-only retirement planning firms in the Richmond and Williamsburg areas. As Certified Financial Planners, we have a fiduciary duty to look after your best interests now and in retirement. We believe retirement planning should be proactive and anticipate your changing needs and circumstances, not simply respond to them. We want you to be confident in your ability to meet retirement on your own terms.
If you’d like to see how we can help you achieve your retirement goals, get in touch today to start the conversation.
Mark Fonville, CFP®
Mark is the President of Covenant Wealth Advisors, a wealth management and fee-only financial planning firm in Williamsburg and Richmond, VA.
Dislcosures: Covenant Wealth Advisors is a registered investment advisor. Past performance is no guarantee of future returns. Investing involves risk and possible loss of principal capital. The views and opinions expressed in this content are as of the date of the posting, are subject to change based on market and other conditions. This content contains certain statements that may be deemed forward-looking statements. Please note that any such statements are not guarantees of any future performance and actual results or developments may differ materially from those projected. Please note that nothing in this content should be construed as an offer to sell or the solicitation of an offer to purchase an interest in any security or separate account. Nothing is intended to be, and you should not consider anything to be, investment, accounting, tax or legal advice. If you would like accounting, tax or legal advice, you should consult with your own accountants, or attorneys regarding your individual circumstances and needs. No advice may be rendered by Covenant Wealth Advisors unless a client service agreement is in place.