Eventually, we all find the unassembled shed in our front yard and think “Oh, (insert expletive).” This ceiling of complexity often comes in retirement when our financial lives look nothing like they did for the last 40 years. Don’t fret — you may want to figure it out, and you may be able to. But you may just need someone to help you for a few hours every year. There are many more project-based advisers today than there were a decade ago. Or, you may be ready to hand over the reins for at least a portion of the work. In this case, you should find solace in the money you’ve saved getting this far.
I recently bought a handsaw to cut a hole in our drywall in order to install an access panel in front of our main water shut-off. I also had to Google many of the words I just typed. It took several hours and was (really) messy. Despite that, I was very happy with myself. Riding that wave of confidence, when we ordered a new shed, the thought crossed my mind that I could put it together. When a pile of lumber and a few boxes of hardware arrived, that idea fizzled. I couldn’t even figure out how to get the wood to the backyard…
I credit Jack Bogle for a generation of DIY investors in the first camp — they can cut the hole and are probably better off going at it on their own. That said, everyone has gaps, including the many retired CPAs we have worked with. Below are the three areas where I see the most room for improvement.
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1. Insurance planning
I have an insurance license and have passed the insurance planning course of the CFP® curriculum. Additionally, I spent six years with ING, which has a gigantic insurance business. My family uses an insurance agent. There are things I advise on, including life, disability and long-term care, and even within those umbrellas, I tie in an insurance agency to fill any gaps. The world is too broad and dynamic, in my opinion, to stay on top of insurance needs unless it is all you do.
Many people early in their careers are dramatically underinsured on the life and disability front. As they get closer to the end of their careers, as assets grow, and as liabilities decrease, the pendulum swings. They often keep unnecessary and expensive life insurance. Those same folks are then more likely to be underinsured when it comes to personal liability and long-term care insurance. None of these topics are covered in Benjamin Graham’s The Intelligent Investor.
2. Using spreadsheet software
When working with engineers, I have pored over spreadsheets that I know I could not create and probably couldn’t even conceive. Don’t get me wrong — they put you miles ahead in terms of planning, but a spreadsheet software program such as Microsoft Excel or Google Sheets can almost never serve as a replacement for a financial planning or portfolio analytics tool. Here’s why:
- Volatility. I have seen Monte Carlo simulations built into Excel spreadsheets, but short of that, using an average rate of return is going to give you the wrong answer, even if it’s conservative. The market doesn’t return 6% every year, which means during years of distribution and market downturns, your projection is going to have a big dent in it.
- Portfolio analysis. I don’t see too many people trying to use Excel as a vehicle to analyze investments, and I think it would be a fruitless effort. I do think you could use it to tell you your stock/bond breakdown, but beyond that, tools like Morningstar, Kwanti and YCharts are going to be much more useful.
- Taxes. Often, folks will estimate an effective tax rate and reduce income by said rate. While this may not be wrong on an average basis, that’s not how taxes work. Taxes change every year based on what’s happening in your life. Our nauseatingly complicated tax code makes this especially problematic when you are retired. More on this in the next section.
We use RightCapital, along with a slew of tax and portfolio tools, to try to ensure we are covering every angle. Here’s a free version of our planning software.
3. Tax planning
I blame complexity and lack of accessible software for this one. Often, the process of tax planning is completely neglected, and tax filing is very much a process of crossing your fingers and hoping for a refund.
In the world I live in, our clients rely on a CPA to be looking in the rearview to make sure they’re not missing anything in the year that has already happened and rely on a CFP to look through the front window to try to minimize the damage that may be coming. We often play both roles.
In retirement, your tax rates are likely to bounce around quite a bit based on what’s happening in your life and your income sources. I urge you not to just ignore this but to try to take advantage of low-tax years by recognizing income and doing just the opposite in high-tax years.
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