Expert Insights for Smart Financial Planning

How Do You Really Know How You're Doing for Retirement?

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It's natural to try to compare the car you drive, the vacations you take and the home you live in to that of your neighbors, friends and co-workers, but it won't give you the accurate picture you need to tell where you stand.


One of the most common questions advisers get from clients about their retirement plans or investment portfolios is: How am I doing? The root of that question could speak to how individuals are tracking against their goals, how they’re tracking against their peers, or a combination of the two. Either way, the American public lacks the expertise to properly assess their well-being.

SEE ALSO: Advice for Investors Worried About Today's Tumultuous Stock Markets

As an individual investor, it’s hard to compare yourself to something you can’t really see. We can observe the houses people live in and comment on their paint jobs or that new patio in the backyard. We can see the cars they drive. Through social media, we can even find out where they vacation and gain insight into the way they live their lives. However, very few people have any visibility into the underlying finances and wealth of their friends and neighbors.

There are very few concrete ways to measure yourself against where you should be at a particular life stage. As a result, it’s natural to wonder how we are doing compared with our friends and neighbors. It’s easy, and tempting, to actively compare yourself to others. But looks can be deceiving. Some people may appear to be doing better than they actually are, or vice versa.

With that in mind, how is someone supposed to know how they’re doing? Before individuals can even put themselves in a position to answer that question, they need to take note of several key planning guidelines. Here are four things to keep in mind from 30 years’ worth of experience.

1. Goals Are the Foundation of Every Good Plan

The first problem with comparing yourself to someone else is that you likely have no sense of their goals and objectives. You’re really comparing apples to oranges. If you don’t have your own goals to begin with, then the comparison becomes even more difficult. Most financial professionals recommend developing goals as the first step in effective financial planning. They should be SMART goals — Specific, Measurable, Actionable, Realistic and Time-Bound — a popular version of the goals coined by business consultant George Doran in 1981.

For some, this task may be easy and something you can do yourself. However, many individuals lack the knowledge, skills and experience necessary to create actionable goals on their own. A recent survey by The American College of Financial Services highlighted that 80% of those ages 60-75 received a failing grade when quizzed about their retirement income. Without taking this step, and doing it well, financial planning does not truly serve its purpose, and you’ll never be able to know how you’re doing.

2. Effective Analysis Requires Professional-Grade Tools

Goals without disciplined analysis provide a woefully inaccurate financial picture. You must be capable of analyzing both where you are now and where you will be in relation to your goals – given certain assumptions. You need to know how the decisions you make today impact the trajectory of your finances in the future. More than that, you need to understand how different circumstances can impact that trajectory — for example, a layoff, promotion or other key life change (such as marriage, divorce, birth, death, etc.).

There are some tools that the general consumer can use to help analyze their goals and holdings, such as the FINRA retirement calculator or Morningstar retirement tools, but they are seldom as robust as what financial professionals use. Many consumers don’t realize this, which is part of the reason why 1-in-3 Americans don’t have a full understanding about what financial advisers do. The tools available to financial professionals, like Monte Carlo Simulations, contain advanced algorithms to help realistically project the probability of certain events occurring — thus making it easier to plan.

This analysis phase also requires a full understanding of any potential benefit programs available to investors. More and more it has become relevant that people consider benefit plans offered by their employers in their planning assumptions, if applicable. Individuals need to take into account personal, financial and professional resources available that come from their industry, profession or specific employer.

See Also: Disaster-Proof Your Retirement Plan

3. Implementation Should be Without Limitation

Implementation is the point at which change must take place for people to improve their financial standing. It’s the point at which goals and analysis become the catalyst for taking important action steps, and which include an array of financial strategies and resources to help clients achieve those goals. But, what often goes unnoticed is that not all providers of advice and products have access to all of the appropriate strategies and financial vehicles that an individual might need. For example, many wirehouse based advisers do not provide insurance products, which are not only a core component of comprehensive financial plan according to the CFP board, but also sometimes an effective cornerstone in a tax diversification strategy.

At the same time many of the independent boutique asset management firms do not provide safe money strategies for income that can be achieved through the use of fixed or variable annuities. The same limitations may exist for investors who go it alone. “Open Architecture” is a financial industry term, growing in popularity that describes firms that have very little or no limitations on the types of products and strategies they can provide to clients. McAdam is an Open Architecture firm because of the flexibility it provides to advisers and clients. We highly recommend to any investor that they determine whether their adviser or platform has any limitations on the strategies they offer, before entering into any long-term financial relationship.

4. The Best Laid Plans Often Go Awry (and that’s OK)

In the investment world, we’ve come to know two truths: An individual’s circumstances change over time, and so do the financial markets. Oftentimes, an individual’s circumstances change more than the financial markets do. Because of those two truths, no plan that is crafted today will remain the same over any appreciable time frame. Every financial plan needs a comprehensive review at least annually, and sometimes more often as circumstances may dictate — for example, as an individual gets closer to their retirement goals. Many of the decisions that must be made with respect to retirement are incredibly important, sometimes complex and often irrevocable.

Observing these guidelines will provide a much more tangible answer to the most common retirement questions. Whether you choose to work with a financial professional or manage the process yourself, one thing is for certain: Comparing yourself to others is not a good way to make a financial plan.

Like so many things when it comes to investing, there’s never one plan that consistently works for everyone, so measuring yourself against friends or neighbors won’t tell you what you need to know to make the right financial planning decisions for you. The right solution depends on a number of factors, like a person’s specific objectives or their risk tolerance. You may evaluate those differently than your friends, and thus need to determine those factors independently. Once you start doing that, you’ll start asking the right retirement questions and then you will be able to truly evaluate how you’re doing.

See Also: 5 Topics Couples Should Discuss Before They Retire

Phil Simonides, CFP®, is Senior Vice President at www.mcadamfa.com, where he oversees the firm's Washington, D.C. metro, Chicago, Boston and central New Jersey offices. As a member of the executive team, Simonides serves as the Chair of Advanced Planning at the firm, specializing in strategies for high net worth individuals and families, and business owners. He joined McAdam in 2011 after having spent the majority of his 29-year career at Ameriprise Financial.

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