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MAY
08
Generation X and the Financial Planner

Need groceries for dinner but don't want to go to the store?

Don't worry, there's an app for that.

 

Trying to get around New York, and too macho to ask for directions?

Don't worry, there's an app for that.

 

Need to change a flat tire and don't want to call AAA?

Don't worry, there's an app for that.

 

Yes, it's true: there is an app for just about everything. I admit it. I am guilty. I often choose the path of least resistance, or least verbal resistance, when I need advice on something. Our lives have become so automated, that the role of another living, breathing human being, in even the most important decisions in our lives, has been called into question. People have become an inconvenience.

 

While the question of whether or not a financial planner is a necessary piece of the puzzle is certainly not a new one, it seems to have renewed steam with Generation X and the Millennials, whose goal, it seems, is to speak to as few people as possible in the course of their daily lives. The rise of things like robo-advisors, and low-cost platforms like Fidelity, Scottrade and the like, have those of us who are under 50 thinking we can do everything ourselves, and cut out the unnecessary fees associated with doing business with a financial advisor.

 

Well, I have to let you in on two little secrets. One, its true...you may be able to get similar, or even slightly better returns, by investing on your own or using a non-human advisor for yourself. There! I admitted it. Do you want to know the second secret? If you are judging a financial advisor, or planner, based on investment returns alone, then you are judging us by entirely the wrong metrics. It would be the equivalent of judging a doctor on the change in your blood pressure from one year to the next.

 

A recent study by Professor Terrance K. Martin, Jr., Ph.D of the University of Texas-Pan American and Professor Michael Finke, Ph.D of Texas Tech University recently published a study in the November 2014 issue of the Journal For Financial Planning, in which they dig deeper into this very issue, and prove, conclusively, that a financial professional in your corner is not only a good investment, but a necessary one, if you are going to achieve your retirement goals.

 

Why is this especially important for Generation X and Millennials, even though we are so far away from retirement? The reason is simple. Savings decisions made in the early stages of the life cycle (i.e., in your 20s, 30s and 40s) have a disproportionately large impact on retirement preparedness. Furthermore, this disproportionate impact has a LARGER impact today than ever before because pensions, employer matches and social security are going the wrong direction, and the burden of retirement funding has fundamentally shifted from the government and the employer to the individual. Think about this fact...according to 2012 data from the Social Security Administration, more than one-third of retirees obtain 90% of their retirement income from Social Security.

 

With life expectancy rising, and the social security system in great long-term peril, that is simply not a strategy that anyone under 50 can rely on. Not to mention, the current maximum benefit at full-retirement age is less than $32,000. As the cost of living inflates, the system gets worse, and we live longer, is this really the dream retirement any of us had in mind? I think not.

 

So now that the burden lies with us, let's examine what we are doing, as generations, to save for retirement. Well, according to the Employee Benefit Research Institute, only 38% of all private workers are contributing to their 401(k), 403(b) or other employer sponsored plan.  Furthermore, research suggests that on average, individuals ages 35-45 are saving between 9%-19% less than they need to in order to predict a comfortable retirement, and that most households would need to increase their savings by 20% to be able to live the same way in retirement as they do today.

 

To summarize, most Generation X and Millennials are saving too little, if at all, in their employer retirement programs, saving too little, if at all, outside of it, and are at significant risk to be unable to live a comfortable retirement without a change in strategy.

 

This is where a financial advisor or planner comes in. I told you a dirty little secret earlier, but it bears repeating...investment results are not the reason for or correct measure of a financial professional. You can achieve similar — or in some cases slightly better — results on your own. However, what cannot be denied, is that in this study, average retirement wealth, as examined by survey year (1994–2008), showed clearly that households with a comprehensive strategy to retirement planning consistently recorded higher mean values of accumulated retirement wealth. 

Here are some of the more interesting results:

 

·         While only 11% of participants were using a comprehensive planner, those 11% saved 51% more than those doing it themselves (13% of participants) and nearly 300% more than those with no plan at all (a shocking 70% of participants).

·         For the five year period of 2004 to 2008, those who used a planner saved 8% more for retirement than those who self-directed their retirement savings, and 194% more than those with no plan.

·         Education and income level of the client did not matter. No matter the level, those who used a comprehensive planner experienced greater retirement savings than those whose strategy was self-directed or did not have a plan at all.

 

So how is it that having a planner so significantly impacted retirement savings, despite the fact that returns were not necessarily higher? The study suggests three ways:

 

1.      The process of estimating retirement income, as provided by a planner, motivated the households to save more because it helped the client formulate a more realistic idea of what they need and how they will get there.

 

2.      Planners help clients improve retirement savings behavior by increasing awareness of the consequences of low savings, by reducing time, energy and stress-related choices, and by improving investment performance and tax efficiency of household portfolios.

 

3.      Planners provide an unemotional look at retirement savings progress and can more effectively suggest portfolio changes, savings allocations, and other related advice that a client cannot garner on their own because of their close emotional proximity to the results of the situation.

 

In conclusion, the same way that WebMD can provide useful medical information, that can be helpful in determining what your medical symptoms MIGHT show, there is no replacement for seeing a doctor to determine your health. Just as there is no replacement for seeing a comprehensive financial planner when making important financial decisions that will impact your life for years to come. So while there may be an app for many of the things we need to care and think about on a daily basis, there is no app that replaces the knowledge and expertise of a financial planner.

 

Sources

A Comparison of Retirement Strategies and Financial Planner Value, by Terrace Martin and Michael Finke, The Journal of Financial Planning, November 2014



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 Securities offered through American Portfolios Financial Services, Inc. Member FINRA/SIPC (FINRA/SIPC). American Portfolios Financial Services, Inc. and American Portfolios Advisors, Inc. are not affiliated with any other named business entities mentioned.

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