Tax reform has faded from the news this week. But if it were enacted, how would it affect the way you invest for retirement? Read on to learn more in this month’s update.
Retire later to live longer
Want to live to 105? Follow the advice of a longevity expert who did and you’ll have a better chance than most. Read the article in Money.
Will tax reform impact your retirement plans?
Tax reform is on the minds of every lobbyist in Washington, but the publicly announced plans have been thin on details. So thin that we don’t know what will even be proposed by the White House, let alone enacted into law. But there’s one policy idea — about the way retirement income is taxed — that keeps coming up that could have a big impact on your retirement. I wrote about what (if enacted) this change would mean for you. Read my column in Forbes.
The 401(k) is failing most people. By almost any metric, it’s an inferior solution to the pension that came before it. The 401(k)’s main benefit? It’s better for your employer. I’m encouraged that this once contrarian pessimism about the 401(k) is increasingly taking hold. Ben Steverman wrote about the many groups of people who have been left behind by this shift to the 401(k). Read the article in Bloomberg.
Thoughts worth more than a penny…
All financial advice is conflicted. I mean it. Each financial advisor or insurance agent is conflicted in their own way.
This is worth remembering because in recent times fee-only RIA advisors have been hailed as a savior for those touting fiduciary advice. But what does that mean? The definition of what a fiduciary must do in specific situations can often be vague.
The dominant way RIAs, who are generally fiduciaries, are paid is as a percentage of the amount of your assets they manage. You ask the RIA to oversee a $1,000,000 portfolio and you might pay $10,000 a year to them (1% of Assets Under Management).
But why is AUM a better system? If the RIA isn’t actually picking stocks for you, why should their compensation be tied to how your portfolio performs? Shouldn’t the RIA be compensated for the advice they actually provide, most of which isn’t related to your portfolio allocation at all? Alas, a true financial advisor isn’t an equity and bond overseer, but rather your financial coach.
Here are several specific ways that getting paid based on how much you have invested in the market creates a misalignment of incentives between you and your fee-only RIA:
- More incentive to have you in equities because of their higher growth potential, meaning higher potential fees in the future.
- More incentive to have you spend less in retirement because it would mean more assets in your portfolio for longer and higher potential fees in the future.
- More incentive to advise you to take Social Security before age 70 because it would mean more assets in your portfolio for longer and higher potential fees in the future.
- More incentive to spread the advice they provide over a longer-than-necessary time horizon so you don’t jump ship.
- Less incentive to recommend something like an income annuity, where your assets would be transferred by an insurance company (and no longer subject to their fee).
This isn’t to say that a financial advisor who is paid on commission is any better. The conflicts of interest a commission-based advisor has are arguably worse. Some believe that financial advisors that charge an hourly rate are the best, but there’s no data that their clients actually have better outcomes. It’s a difficult topic to even broach because there’s no perfect answer and the data is scant.
The best approach: constantly be looking out for your own best interest knowing that your financial advisor (however he or she is paid) likely isn’t.
I was inspired to write about this topic after reading this RIA tell-all. It’s worth a quick read. I’ll write more about this topic soon, but I’ll stop there for now.
Finally, thanks for keeping up with us, and hello to our new readers! If you were forwarded this by a friend, give them a big thanks from us and sign up here for monthly updates on how longer lives are changing the health and financial preparations we make.
To Your Continued Longevity,
Matt and the Blueprint Income Team