Financial Frontlines®

This is a tough one.  Why?  Because it is only by working with an advisor over some time that you really know whether the relationship will meet your expectations.  There are subjective personal and professional issues at stake besides the technical issues.  That said here are some tips to help you whittle the selection process down.

Credentials are an easy start.  Some are better than others; something is usually better than nothing.  I suggest you get the advisor’s card, go home and Google the letters after the name.  The more comprehensive the required courses, the completion of a board test, adherence to a code of ethics/standards, and continuing education requirements, all indicate a higher level of competence and product knowledge.  Credentials indicate the advisor is interested in expanding professional knowledge and staying current.  However, it doesn’t mean the advisor knows how to use all investment possibilities nor has the necessary products available for his use and your needs.

Expertise.  The key consideration is the advisor’s expertise.  When it comes right down to it, in the financial world there are countless ways to help a person reach their financial goals.  You want someone who knows most of the possibilities, has the most investment/insurance options available to them, and will custom design a plan that best suits your personal needs and desires.  You don’t want a one-trick-pony who knows only a few things or will work (in his own benefit) to make his few options work for you.  You are the key piece in the relationship.  Your person should be working for your benefit and have the most tools in the toolbox (and be willing and able to use them) to develop the most perfect game plan specifically for you.

Where you look matters.  Generally speaking, banks tend to offer banking solutions; insurance companies offer insurance solutions, and brokers offer investment firm solutions.  Bank advisors within a bank’s investment department can be more like investment firm brokers.  Be wary of advisors who see annuities as the solution for most situations.  An annuity is an insurance product with investments, lots of strings, and fees (not that an annuity is a bad product when used properly).  Independent advisors who open accounts and manage portfolios still work through a firm that handles the accounts and investments so they may be limited by that firm’s offerings or policies.  Independent advisors who offer only advice for a fee and don’t open accounts or manage your money are the most unbiased—but you have to assume a bit more work on your part.

ABC; Always Be Closing.  Every advisor who opens accounts, recommends investment options and manages the buying/selling of the investments is a salesman.  They have to put food on the table and please their bosses—not necessarily in that order.  Their job performance is directly related to how much money they make for their company and that is related to them closing the deal with you.  If one investment offers more money to their company (and them) than another, there is a natural bias.  Technically, advisors are supposed to do the best thing for the client; but who’s to say what’s best?  Most decisions are subjective and anything can be spun to sound like the best option for you.  So when you consider a specific company to act as your advisor, think about where their greatest revenues will come from…insurance?…company specific products?…services with lots of fees?  Ask them.  Never be shy.  A good advisor doesn’t mind explaining the details and respects a knowledgeable client.

See Part 2—Some Finer Details

Ask this question of ten different financial planners or servicemembers and you are likely to get ten different answers!  Retirement savings for the Active Duty component can be tricky, since the typical “rules of thumb” from the private sector don’t apply terribly well to the military compensation structure.  Several factors that make it more challenging include:

• If you live off-post, 20-40 percent of your compensation comes as non-taxable benefits, so do you count just base pay or total compensation when figuring out how much to save?
• If you are planning to make the military a career…how do you factor military retired pay into the picture?  Most online calculators assume any pensions start at age 65…but military members often start drawing retired pay in the early-to-mid 40s.
• Where do I save?  The Roth IRA vs. Thrift Savings Plan (TSP) continues to rage across wardrooms, ready rooms and TOCs across the country.

Here are a few things to consider when deciding how much to save while on Active Duty:

• Consider saving a minimum of 10 percent of your total pre-tax compensation, including base pay, BAH, BAS and any special pays.  For example, if you are an 0-4 (over 12) with base pay of $6,088, BAH of $2,586 (DC Military Housing Area with dependents) and BAS of $203 per month, your total monthly compensation is $8,877…so your target monthly savings should be $888 per month.  While this is a pretty big bogey, aggressive savings early allows you to ease off in your late 40s to early 50s, when you are most likely to have the demands of large mortgage payments, college costs and possibly carring for aging parents.
• Starting early pays huge dividends.  If you are 35 years old, saving $750 per month and earning an 8 percent average annual rate of return you will have approximately $1.12 million at age 65.  If you delay your savings plan until age 40…a mere 5 years…your account would grow to approximately $713,000…a $499,000 difference.  Talk about expensive procrastination!
• Should you use a Roth IRA or the TSP?  Consider using both and splitting your retirement savings equally between the two.  Money directed towards the TSP reduces your current taxable income and grows tax-deferred, but the proceeds are taxable when you take the money out in retirement (Exception: TSP contributions made while the servicemember is deployed in a tax-free combat zone or contingency operation are segregated and remain tax-free, even in retirement).  Roth contributions are with after-tax dollars, grow tax-deferred and are available income tax-free on withdrawal, provided you take them out after age 59.5 or five years after the first contributions, whichever is later.  One big benefit so the TSP is that the annual investment management fees are around 1 percent (or more) lower than the average mutual fund expense ratio, making it much less expensive.  Don’t think 1 percent makes a difference?  Consider $30,000 invested in the TSP (expense ration of 0.06 percent) and $30,000 invested with ABC Mutual Fund (expense ratio of 1.2 percent).  Both earn an 8 percent average annual rate of return over the next 20 years.  The money in the TSP would grow to approximately $143,000.  The money in ABC Mutual Fund would grow to approximately $116,000…a $27,000 difference.
• How much can you spend from your nest egg in retirement?  A good rule of thumb is the “4 Percent Solution”.  Basically, figure out how much extra you will need annually in retirement after military retired pay (if you stay for 20) and Social Security, divide that by 4 percent and that will give you a rough idea of how much you will need in your nest egg.  For example, if you determine you will need an extra $55,000 per year at age 66 to meet your retirement income needs, your nest egg will need to be about $1.38 million ($55k divided by .04) to support that withdrawal annually and keep inflation at bay.

Obviously, your situation is unique, so visit MOAA’s Financial Calculators or make an appointment with a fee-only, hourly financial planner through MOAA’s sponsored financial planning partners The Garrett Planning Network to determine how much you should be saving towards retirement.

Happy planning!