I remember recent posts by Plan Invest Escape and Slowly Sipping Coffee about bad advice from the experts, the so-called financial planners. The post itself and the comments from others about bad experiences with advisers can really raise your blood pressure. But you don’t even have to hire them. Sometimes just reading their posts online is enough to expose the empty suits. One of those nuggets was on Kiplinger (via Yahoo! Finance) today on why, ostensibly, the 401(k) is not a good option to save for retirement, see here.
This financial planner actually makes a half-way decent point that if (and that’s a big “if”!) your projected marginal tax rate is higher in retirement you want to max out the Roth options today (Roth IRA, back-door Roth, Roth 401k). Nothing wrong with that. But for most folks the marginal tax will be lower in retirement because their adjusted gross income (AGI) will be significantly lower:
- Only up to 85% of Social Security income counts towards AGI
- You no longer save for retirement and pay no more payroll tax, so you can achieve the same disposable net income with much less gross income putting you automatically into a lower tax bracket
- You might move to a lower (or zero) income tax state
- You now live off your capital gains and (long-term) dividends which are taxed at a zero (federal) rate in the first two brackets and withdrawals of principal from taxable accounts are not income
Another reason for maxing out your 401k: during your early retirement you can keep your ordinary income low and live off your dividends and then keep rolling your 401k to an IRA and then to a Roth IRA for the ultimate Roth conversion ladder, see Go Curry Cracker and Mad Fientist. You get the best of both worlds: a tax advantage while working and then a zero cost (or at least very low-cost) Roth conversion while retired. I’m sure our so-called financial planner hasn’t thought about that.
And it gets worse. Inexplicably the so-called financial planner also makes this jaw-dropping claim:
“Do you really want to be in a lower tax bracket when you retire? Think about it. Do you want to retire with a lower standard of living? You save for 30 years, and if you do a good job, you get to retire into the SAME standard of living. This means you will have about the same amount of income, which means the same tax rate. But now your home is paid for, your children are gone, and your tax deductions have vanished.”
If your house is paid off you can sustain the same level of after-tax-after-house-payment consumption with much lower income. True, you lose the deduction, but the cash-flow impact of having no more mortgage and no more mortgage deduction is a net positive, last time I checked. Same if the kids left the household. The guy disproves his own point. In the same paragraph. Do they teach this stuff in the CFP curriculum?
And then this quote:
“Reason #3: You are now a target[.] You might agree that the good folks in Washington, D.C., have a spending problem. But how are they going to pay for it all? You can bet your last dollar that they all know that there are trillions of dollars sitting in 401(k) and 403(b) plans that have never been taxed. This is like candy to a baby, and they want it. Do you really want the bulk of your retirement dollars sitting in the crosshairs of a government with a spending habit?”
True. But 401k distributions are already taxed at ordinary income tax rates upon withdrawal. The rates might rise somewhat and that’s definitely a concern. When projecting tax rates during retirement, maybe add 2-5 percentage points. But I doubt that would make the 401k suddenly unattractive because you could have a significantly lower AGI to sustain the same level of consumption. But if the guy is so concerned about politicians targeting retirement savings, what keeps those same greedy politicians from targeting Roth IRAs? What if populist politicians see all those rich lawyers and doctors (Sorry, Physician On FIRE) who tucked away large sums in their Roth IRAs? Could there be a temptation to double-dip? You betcha! Or what if the tax increase comes in the form of a consumption/value-added tax? Capture the Roth withdrawals that ways!
But the biggest whopper is saved until the end with this recommendation:
“Look into “maximum-funded life insurance” as a 401(k) option. Be careful on this one, but if you have a really good financial person on your side, they can help you set it up in the proper way.”
There is always an angle. I mean, there is always an angle when dealing with pathological, uhm, professional salespeople. Out of nowhere comes the recommendation for some product that they like to sell at their financial planner office; no doubt a high-fee product with lots of commissions for the financial planner. They got their foot in the door at Yahoo! Finance, fifth post from the top with a link to the Kiplinger page. That alone should bring lots of traffic to their site. Why put in such a shameless and thinly-veiled sales pitch? Out of nowhere, with no explanation of why life insurance is such a good substitute for a 401(k)! Pretty shoddy analysis finished off with a bad sales pitch. I will keep managing our money in-house. If I still need advice I will consult folks listed on our blog roll. For free.
So many financial planners are shady. It’s discouraging how often you have to wade through the weeds to get to the flower you were promised.
“wade through the weeds to get to the flower you were promised”
Hi zeejaythorne, thanks for stopping by. Haha, that’s a great analogy. I’ll make sure to use that quote in the future!
Just another reason to DIY your finances. As this financial planner demonstrates, there are too many conflicts of interest. Probably a 401(k) doesn’t generate managing fees, but life insurance does.
Yup, that Kiplinger article has conflict of interest written all over it!.
Thanks for stopping by!!!
Thanks for the acknowledgement of our post. Appreciate it.
Mrs PIE and I still get a newsletter from our former advisor. Mrs. PIE was threatening last night to pull a few gems of wisdom from it and make a post out of it. Some of the stuff is just comedy material, it really is. Our former advisor is a genuinely nice guy with lots of good attributes but his newsletter rants are hilarious and painful at the same time.
Hi, Thanks for stopping by! Definitely looking forward to seeing some of those nuggets of financial planner insights!
Apology accepted. 🙂 The sad thing is, if you haven’t taken the time to understand what you own spending, income, and tax treatment might look like in retirement, you could easily buy into the concepts put forth in the “article”. I didn’t read it, other than the excerpts you included here, but I’ve read more than enough to know that it’s largely inaccurate for many people. and of course, there’s a reason. For shame.
I wouldn’t take this article, or even hundreds of anecdotes, as an indictment of financial advisors as a whole. I’m a DIY guy but many DIYers vastly underperform the markets, due to emotionally charged bad decisions (buy high, sell low). As I’ve pointed out in The Top 5 ways to manage your money, DIY occupies the #1 (best) and #5 (worst) spots. http://www.physicianonfire.com/top-5-ways-to-manage-your-money/
Cheers!
-PoF
Thanks. Agree, we shouldn’t condemn the entire industry. For the DIY investors that seem to get it always wrong, your #5 folks, there is a value-added. (Nice blog post by the way, which I hadn’t seen before)
Also I’m sure there must be something these guys can add that is indeed valuable that none of us ever thought about, maybe some tax tricks. But, as someone expressed it somewhere here, you will have to go through a lot of nasty weeds to find the prize-winning roses.
Since 2 years, I have no complaints on my personal advisor and his network… It works pretty well for us. He know me in and out, is always there for us, even in the middle of the night, in the morning when I wonder what to do. And het charges no fee!
Thanks to the rich community and my interest in the subject, we now are our own advisor, picking the products we want. I will not work for everybody. It works fine for us.
Hi ATL! That’s a great way to put it. Nice to have a financial planner who manages money like it’s his own … because it is his own money, haha!
I have to say that I agree with you on financial advisors. I shouldn’t say that I don’t trust them but a part of me says that they are also mindful of the bottom line, that is, the money or profit that they will get from helping you. This is why I tend to believe in educating oneself about finances (e.g. retirement and investment) prior to making any moves even this moves mean hiring a financial advisor.
Hi Allan, thanks for your comment! Yup, we think the same way. We can’t do everything ourselves. For car repairs, appliance repairs, etc. it’s best to outsource. But financial stuff is easy to do yourself and saves you a ton of money.
I don’t trust financial advisors because I interviewed for a position to become one! It was for a position with a well known investment firm who gave me one HUGE sales pitch on their training program. I left with a list of crap funds I would be required to sell and the numbers they expected me to meet. I understand this was a business that needed to yield a profit, but I turned it down because I morally didn’t have it in me to sell others a lousy product just to make a lousy commission.
Wow, thank you so much for sharing your experience! We are very glad you didn’t go to the “dark side” and it’s good to have you in the FIRE community!
The spread of personal financial blogging is going to put off work most financial planners.
I create my website with this purpose to help as much people as possible to become financially literate and independent so all the so-called financial planners get wiped out.
Society will not miss them. They are useless to the system and only take away real wealth from others.
However, even virus are part of our ecosystem, and I think God had created them with a purpose. However, until today, I don’t see any benefit in having a virus in my body like cancer or something else.
The same apply to financial planners.
What is the point to pay them a commission when successful investing can be written down in a post blog? (This sound like a challenge)
Has anyone an idea?
Hi, thanks for the comment. I like the idea of financial planners eventually being driven out of business when people become more informed, thanks in part to all of us, the blogging community. It’s an uphill battle, though, because wherever you look, the image of finance as inaccessible rocket science is sold. But personal financial planning is not that hard and one can find lots of good information on the web. Cheers!
I know there are a lot of crappy financial advisors out there. There are also lots of crappy mechanics and landscapers. I was an FA for over 6 years and I can tell you a) I never, ever saw my firm make a decision that went against our clients’ best interest, and b) I personally never made a decision like that either. There are many, many people that NEED advice. But that’s hard to see for someone who believes they can do it themselves and thinks everyone else can, too.
ERN, you mentioned it’s best to outsource having your car fixed. But YOU can fix your car! You might screw it up, it might be painful and you might even possibly end up spending more fixing problems you caused than the original problem. But you can do it! And the same goes for investing. A little good advice can go a LONG way. You just have to pass by the people giving the bad (or worse sleazy) advice in order to get it. As a wise person said months ago: “you have to wade through the weeds to get to the flower you were promised.” Kind of like trying to find a financial blog that actually consistently gives good info!
As a bonus aside: One of the benefits of a good advisor is they should keep someone from making emotional buy high/sell low decisions. Dalbar puts out a study that I love – we, as humans, suck emotionally at investing. I haven’t read the most recent one, but they’re all generally the same. Here’s a link: http://www.qidllc.com/wp-content/uploads/2016/02/2016-Dalbar-QAIB-Report.pdf
Agree with the emotional aspect. But you can also buy JL Collins’ book and educate yourself how not to overreact to a market dip. I don’t need a financial planner for that.
And certainly, please stay away from that clown who wrote the Kiplinger piece!
More reasons for lower taxes in retirement
SS benefits are rarely taxed at local levels and 38 states give them a tax break.
Elderly get larger personal deductions
Savings are generally taken at the highest marginal tax rates.
Tax rates continue to fall despite the overwhelming agreement among economists that rates need to rise.
Agree! I think that even the (temporary) Trump tax rates will remain for the lower personal tax brackets. Once they are close to expiration there will be too much public pressure to make the rates in the first 2-3 brackets permanent! 🙂
Interesting read. I am trying to persuade my 25 year old nephew to get moving on his Roth and savings in general. I recommended setting up an account independently through fidelity. I could guide him on this as well, and feel I have enough experience to do so. He then spoke with an advisor and this is what was said –
–
– “When I asked about using an account like Fidelity vs. Edward Jones he pretty much said that he can do better… Even tho the fee is around .5% for an account you would do yourself online and he is around 1.5% or so, The difference that it would make with them managing it would still be worth more.
He gave me this article and encouraged me to study up on Active Vs. Passive Investing.
https://www.ifa.com/articles/vanguard_takes_deeper_dive_into_advisor_alpha/
—-
What do you think about his advisors reply and if you read the cited article, do you really think an actively managed account is worth 3%?
TDubbs, I’ll give you my two cents as someone that was an advisor with Edward Jones for six years:
-If the advisor is touting “better performance”, that may be accurate but not a very good selling point. The goal of the advisor is to make sure the investments are appropriate, and to look at the big picture for advice. Roth vs Traditional? Mortgage vs savings? Life insurance vs self insurance? Etc.
-I think he’d be even cheaper than the .5% if he did it himself via index funds on Vanguard. But the question is: Does he -want- to? Some people just don’t want to do this stuff and would rather pay someone else to do it – like plumbing and cleaning. That might drive you nuts, but it’s very common.
-A note on performance: The most commonly used fund company at EDJ is American Funds. They’re a great company in general and their US Equity funds are absolutely the best in the business as far as I’m concerned. Check out AGTHX (higher returns) and AIVSX (lower volatility) as examples. Again, total return isn’t everything (and often for clients it wasn’t even a top three concern, believe it or not) but over meaningfully long periods of time they are quite good. They do OK during bull markets (the last ten years), good during flat markets, and great during downturns. I’m still with EDJ and mostly Amfunds to this day, despite all my “wisdom”. And I AM a total return guy for my personal money.
For you nephew: Lay it out like I did. “If you want to do it yourself properly, invest the time and energy to do it right. If you don’t, are you willing to pay someone else $x/yr to do it?” Just like when I hire my mechanic for an oil change, but fired my house cleaner.
Thanks for the reply and good analogy. For a young investor maybe an advisor might help initially. Hopefully he will read up, get excited, and educated about finance and eventually go solo with his $$$.
Good point! Or use the Wealthfront offer for free management until $10,000, then move the money after that, haha!
I’ve seen those estimates, too. Even if all those subcomponents of the 3% are correct, most of them you can do yourself, like cost-effictive funds. I don’t need an adviser to show me Fidelity/Schwab/Vanguard passive funds. One item that individual investors get wrong is the “loosing your nerve” issue. Buying when equities are high, selling wen they are low. But even for that there is a simple solution: inform yourself, buy Jim Collins’ book, automate your savings and maybe, maybe, maybe hire an adviser by the hour for a few hundred dollars once a year to get unbiased advice. I wouldn’t pay an advisor 1%+ to generate that imaginary 3% adviser alpha…
I like the way you think. With some research and reading I bet he could forgo the advisor quickly. And I do believe it is imaginary. You win some – you lose some.