The Problem with Living on Social Security Alone, Longevity and Retirement Savings Disconnect, and Missing the Airport – Links

A wooden bridge spans a small brook with colorful trees in the background

I know you have other things on your mind right now, but don’t forget about retirement planning. If your only income is from social security, it’s going to be a lean ride.

Are you missing the airport? Yeah, me too. There’s something about the energy, the potential, the anticipation of the next adventure.


Retirement

Can you live on social security alone? – (USA Today)

Of course, it depends. But if you do, don’t expect much extravagance in your life. How you can supplement your retirement savings.


The retirement savings disconnect – (Barrons)

“Americans’ optimism about their longevity comes at a time when planning for retirement has become more complex.”

Along with this longevity comes a healthier and more active retirement. Make sure your savings keep up with this new reality.


Travel

A lifelong traveler takes a journey inward – (The Washington Post)

I hope that we will be able to travel, interact with, and witness the world again shortly. When we do, it will certainly seem strange. But when has travel not been strange?


There’s a second wave of COVID-19, so be careful where you travel – (Chriselliotts.com)

Use common sense and avoid crowds. The article contains some useful links if you’re researching a location. It’s going to be a long winter, folks.


Missing the airport – (The Points Guy)

I miss the buzz of an airport. I miss the mass of people in motion to see loved ones or going on vacation. I miss the anticipation of far-flung destinations. Now, if I could only get there without going through a metal detector.  


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    Financial Advisor David Tuzzolino

    David Tuzzolino, CFA, CFP®, is the Founder and CEO of PathBridge Financial, a firm that specializes in providing comprehensive financial planning and investment management services for clients that are nearing retirement and love to travel.

    The Vanlife, the Emergency Fund and Struggling to Save for Retirement – Links

    3 Arch Path bridge in Greece, surrounded by fall trees

    Retirement

    Your friend and mine – the emergency fund – (PBF)

    Why start an emergency fund? My article for the week.


    How to avoid RMD mistakes – (Yahoo Finance)

    You’ve finally made it to retirement, and you’re looking forward to spending the hard-earned money you’ve been collecting for decades. Leave it to the government to make it a royal pain in the butt – the complexity of RMDs.


    Americans are struggling to save enough for retirement – (Forbes)

    Only read this if you have a strong stomach. The synopsis – you need to take retirement planning and savings into your own hands as the traditional aids such as pensions are disappearing. I can’t emphasize enough to save aggressively from a young age because you are ultimately responsible for your retirement standard of living.


    Francisco Cervelli retires – (CBS Sports)

    Francisco Cervelli was more than a catcher for the Pittsburgh Pirates; he was a colorful character the fans loved. I have no doubt it was the same in New York, Atlanta, and Miami. Some of his best years were spent with the Buccos, and I was fortunate to see him play more than a few times. His energy was always high, and his love of the game was always apparent. You didn’t need to be a Pirates fan, or a fan of baseball at all, to be swept up in his enthusiasm and fun-loving spirit.

    Unfortunately, he battled concussions throughout his time in baseball, and his retirement announcement is at least partially the result of this struggle. Cervelli has decided to put his health before his career, and I applaud him.

    I keep thinking that the current pandemic will go away one day, and everything will return to near-normal. However, as time goes by, the further away from our old normal we get. One thing that we won’t see is the ever-smiling Francisco Cervelli playing baseball.

    Good luck, Francisco!


    Travel

    The #VanLife – (TDAmeritrade)

    Have you been dreaming of the vanlife in retirement?


    Travel contests – (theLuxuryTravelExpert)

    Who doesn’t love free stuff! Ok, I’m usually not one to start signing up for free things on the internet, but I think this pandemic is taking its toll. The majority of these are only for U.K. residents, but there are a few in there for everyone else. A couple of free nights in Rome and five all-inclusive nights in Antigua jumped out at me. Caveat – don’t blame me if you get overwhelmed with emails after entering one of these.


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    Financial Advisor David Tuzzolino

    David Tuzzolino, CFA, CFP®, is the Founder and CEO of PathBridge Financial, a firm that specializes in providing comprehensive financial planning and investment management services for clients that are nearing retirement and love to travel.

    Why Start an Emergency Fund?

    A man with a crazy gray wig and red glasses yelling representing the life of the party

    There is nothing less sexy in personal finance than the emergency fund.

    Yes, I realize that contemplating death while diving into a life insurance policy is no fun either, but I’ll save that for another day. While the emergency fund may not be the overindulgent life of the party, it is definitely the dependable friend who will get you home and safely into bed.

    The hierarchy of savings is a popular topic in personal finance. Search for the phrase in Google, and you’ll see what I mean. I like to think of an emergency fund as the foundation of the saving’s pyramid. It should be the first place you save money. Yes, even before you jump on Robinhood to start trading options.

    Michael Kitces included a fantastic version of the pyramid you can find in his article – “The Hierarchy Of Tax-Preferenced Savings Vehicles For High-Income Earners.” It appears below.

    A colorful pyramid illustrating the hierarchy of savings

    How much should I save?

    The most common recommendation is to save enough to cover 3 to 6 months of expenses. Solid advice. But how do you know which number is right for you? Ask yourself the following questions.

    • How many sources of income does my family or I have?
    • How stable is my job?
    • How quickly would I be able to get another job?
    • Do I have substantial investments that are reasonably liquid outside of my emergency fund?
    • What percentage of my monthly spending is discretionary, and can it be cut in an emergency?

    It can be difficult to answer some of these questions accurately but err on the side of adding an extra month or two in savings if you’re in doubt.

    What makes an emergency fund so important?

    There’s no better way to derail your retirement plans than to pile on some high-interest debt because you lost your job. Your emergency fund is there to provide funds when life throws an unfortunate surprise at you. 

    A brown shoe about to step on a banana peel

    An emergency fund also gives you options. Panic over a lost job, a medical emergency, or a car accident can result in rushed, poor decision making. If you find yourself unemployed, would you rather calmly look for a new position that fits your career goals with a company you admire or grab the first job that comes along because you’re desperate for income?

    Do I have to worry about this? I make some serious coin!

    Given the importance of establishing an emergency fund, it’s sad to see only 28% of people in the U.S. have savings equal to six months of expenses, according to the Federal Reserve. And before you dismiss this as a problem for Generation Z, the same survey shows that only 39% of people over 55 have savings to cover six months. But high-income earners are rock-sold, no? Not really. Only 54% of earners in the top quartile could cover expenses for half a year using emergency savings.  

    What’s even worse? This survey was completed well before COVID-19. I’ll take a wild guess that savings levels are even lower now for many Americans.

    Even with a high income and substantial retirement savings, an emergency fund is a good idea. Retirement savings are great – for retirement. If you have to access retirement accounts in an emergency, there may be penalties, taxes, and fees. You will also miss out on the growth those investments would have delivered, potentially setting back your retirement goals.

    When should I access my emergency fund?

    Uh, in an emergency? True, but try to define what this means beforehand. An emergency should be a serious, unexpected financial event that must be addressed. Medical bills, car repair, a job loss are all reasons to tap your fund.

    A toy ambulance

    I work with travelers, and I know the pandemic lockdown has been difficult. You might believe that a trip to Paris after you’ve received a COVID-19 vaccine is an emergency of mental health. But, no, while possibly an emergency, it’s not a good reason to tap your fund.

    How to build it?

    Put your emergency savings into a separate account. Setting up an automatic withdrawal from either your paycheck or a checking account is the best way to fund it. I emphasize automatic, so it happens without effort on your part. It may take time to meet your emergency fund goal, but religiously making a deposit on a set schedule works well.

    Where should I put it?

    Liquidity is the key. Emergency money should be saved in a place that can be accessed quickly. A high-yield savings account or a money market account is ideal, and both are insured by the FDIC up to $250,000. Don’t get cute and reach for a higher yield by putting your emergency fund into an investment product that might lose value, is not insured, or is not readily available when you need it. Also, there are many financial institutions that are competing for your business, so look for accounts that will not charge you a fee of any kind. Bankrate is an excellent resource to find the best yielding money market accounts.

    How else will an emergency fund benefit me?

    An exciting part of having an emergency fund, yes, I said exciting, is it gives you financial flexibility. You can use this flexibility to save some serious money. How, you ask?

    Do you have a low deductible on your auto or home insurance? An emergency fund can allow you to raise the deductible and save money over the long term, assuming you’re not accident-prone.

    A common question asked by travelers – Do I need travel insurance during COVID? The answer may be no if you have a hefty emergency fund, and your only possible loss is financial, measurable, and manageable.

    If the possible loss can be strictly defined and equal to 10% of your emergency fund or less, I’d recommend passing on the insurance. On average, you will come out ahead financially in the long run. However, if you have a history of making claims, you have a habit of losing things, or you can’t sleep thinking about being uninsured, then buying travel insurance is a good idea.

    If you do need to access your emergency fund, replenish it as soon as you can. It won’t help you much if you drained it last year and forgot to fill it back up.

    Summary

    Fully funding a liquid account that is to be used only for emergencies is an essential first step in financial planning. The account can reduce stress, present you with options, and save you money. Unforeseen events will happen in your life, and it’s always better to be operating from a position of financial strength and security than having to scramble around to see which long-lost relative will float you a loan. Get this foundation of financial savings right, and you’ll be on your way to retirement glory.


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    Financial Advisor David Tuzzolino

     

    David Tuzzolino, CFA, CFP®, is the Founder and CEO of PathBridge Financial, a firm that specializes in providing comprehensive financial planning and investment management services for clients that are nearing retirement and love to travel.

    Don’t Wait to Save for Retirement and Can You Have Too Much Travel Insurance? – Links

    Stone path leading to a castle

    Retirement

    Common retirement mistakes – (The Retirement Manifesto)

    The danger of waiting to save for retirement is clear as 48% of retirees retired earlier than expected. This can lead to some significant shortfalls in the retirement bucket, including the travel portion. The moral of this story is to save often and early.


    What to do if you’re near retirement and get laid off – (Forbes)

    All too many people are suffering through untimely layoffs during the pandemic. Here’s what to do if you take this opportunity to retire. The same moral as above applies.


    Travel

    Resource Guide for Travelers – (PBF)

    I put together a comprehensive resource guide for travelers trying to decide when to hit the road again. If you’re like me, you’ve been ready for months. 


    How do you know if you have too much travel insurance? – (Forbes)

    There are thousands of articles telling you to load up on travel insurance, but only a handful that will walk you through the process of determining if you have too much. It was great to have the chance to contribute to Christopher Elliott’s article.


    30 of the Best Nature Views in the World – (TheSuiteLife)

    There’s no better place for social distancing than nature. And while you’re out there, it’s nice to have an unforgettable view. Of course, “out there” in this instance appears to be some rather posh digs, but beggars can’t be choosers.


    Are you aching for a road trip? Every state’s restrictions on interstate travel – (ValuePenguin)

    If you are like me, you’re dreaming about fall road trips. Unfortunately, not everyone wants you to visit their state. Here are each state’s restrictions.


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    Financial Advisor David Tuzzolino

    David Tuzzolino, CFA, CFP®, is the Founder and CEO of PathBridge Financial, a firm that specializes in providing comprehensive financial planning and investment management services for clients that are nearing retirement and love to travel.

    How Not to Screw Up Your HSA or Social Security, and Dogs May Help Us Travel Again – Links

    A wooden pathbridge fords a creek green field

    Retirement

    Beware the Bucket List – (PBF)

    Most people mention travel as one of the main things they would like to do in retirement, yet 67% don’t budget for it. If you’re a traveler, this lack of planning can be devastating to either your retirement savings or your retirement travel dreams. 


    No one tells you this about taking social security early – (fedsmith)

    This is why you need a financial advisor! (Extreme bias here.)


    In your 50’s? Time to reassess your retirement plan – (CNBC)

    You’re running out of time to course-correct.


    Not investing HSA funds is a huge mistake – (USA Today)

    An HSA could be one of the best retirement accounts in your arsenal.


    Travel

    Coronavirus sniffing dogs – (AP News)

    A vaccine would be fantastic, but until then, steps like this will go a long way to getting us back to some sort of “normal” travel environment. I wonder if it would be possible to just walk around all day with one of these dogs?


    Travel wipes out ethnocentricity – (The Washington Post)

    I have been a huge fan of Rick Steves ever since my first trip to Europe. His guides are never afraid to offer an opinion – a good interview during the pandemic.


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    Financial Advisor David Tuzzolino

    David Tuzzolino, CFA, CFP®, is the Founder and CEO of PathBridge Financial, a firm that specializes in providing comprehensive financial planning and investment management services for clients that are nearing retirement and love to travel.

    The Best Revenge is Traveling Well, Moving in Retirement and Travel Trends for Fall – Links

    A small Japanese Garden bridge with a lush green background

    Retirement

    Living an upscale lifestyle on a Social Security budget – (CNBC)

    Is COVID-19 making you want to retire, but your retirement savings are lacking? Retiring abroad is an option. A list of things to consider before making the move.


    The 5 Biggest Mistakes Made by Travelers Planning for Retirement – (PBF)

    There are plenty of landmines on the path to retirement, but these five are especially relevant to travelers. 


    Moving in retirement – housing decisions to consider – (CNBC)

    A thoughtful article about retirement and the critical decision-making process regarding where to live. Retirees discuss their experiences and share their conclusions. 


    Travel

    How boomers are dealing with Covid-19 and the loss of freedom – (nextavenue)

    This is exactly why you shouldn’t wait to travel and mark items off your bucket list.


    The best revenge is living traveling well – (The Points Guy)

    I think the Points Guy is spot on. 2021 could be a huge year for travel. I hope I’m lucky enough to take out my revenge on 2020 through a phenomenal trip for the ages.


    Travel trends for the fall – (Travel Pulse)

    There is no doubt – people are ready to travel. In fact, 59% of travelers are ready to jump on an international flight. I know! Seems high, but I’ll take their word for it. Trends for the rest of the year and 2021. 


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    Financial Advisor David Tuzzolino

    David Tuzzolino, CFA, CFP®, is the Founder and CEO of PathBridge Financial, a firm that specializes in providing comprehensive financial planning and investment management services for clients that are nearing retirement and love to travel.

    The 5 Biggest Mistakes Made by Travelers Planning for Retirement

    Three pictures of travel destinations lay on a map next to a old film camera

    Do you like to travel? Are you looking forward to a future when your leisure time will be measured in months, not seconds gained by cutting your 30-minute lunch “hour” short?

    A man checks his watch and is pressed for time

    There are pitfalls particular to travelers when planning for retirement. This article will help you avoid them so you’ll be ready to retire and tackle the next chapter of your life with confidence.

    Not Budgeting for Travel in Retirement

    A retirement study published by Merrill Lynch reveals that 84% of retirees over the age of 50 have done “hardly any” planning for leisure activities for the next ten years. And 67% have not budgeted for travel in retirement.

    The best retirement plan in the world is useless if it doesn’t include spending on travel in retirement. For the first several years, retirement-bliss is often filled with bucket list travel, which can be extremely expensive. Your new RV, a trip to the Galapagos Islands, and the two-week African safari won’t be cheap. Sure, your travel spending may decline after this initial period, but it tends to stay elevated for people who love to travel.

    Failing to plan for travel will present you with two difficult choices. Either come up with the money from other places in your budget or miss out on the travel you love.

    Why not build travel into your retirement budget in the first place? Your future self will thank you for it.

    Not Acquiring the Right Health Care Insurance

    Medicare will not cover you in an emergency when you’re traveling internationally, except for very limited circumstances. If you’re a traveler who plans on leaving the U.S. in retirement, you need to make sure you’re insured in another way.

    Some Medigap policies and Medicare Advantage plans will cover you outside of the country, but not all. There are also time constraints to this coverage. For example, Medigap policies will only cover you for the first 60 days when traveling.

    There is also travel insurance that can be purchased on a one-time or annual basis. A year-long policy may be less expensive, depending on how often you are traveling.

    Some credit cards will also pay your emergency medical bills when traveling. Read the fine print carefully, but for travelers without an ongoing plan, this can be a good way to cover yourself without having to shop for a new policy each time you leave home.

    As a traveler, it’s important to objectively analyze your needs and make an informed decision as you approach 65. How much is each insurance option? How much of your medical bills will each alternative pay? What is your exposure if you have a severe medical emergency? Are there time limits when traveling?

    There are enrollment periods when signing up for the government plans, so if you decide to make a change, you might have to wait a while. This is another reason to prepare for the critical decision concerning health care well ahead of time.

    Another concern is early retirement. Travelers that retire before 65 must find health care insurance before Medicare kicks in. Alternatives include the Health Insurance Marketplace, a spouse’s insurance, or a part-time job that provides the benefit.

    Not Using the Right Credit Card

    Finding the right credit card as a traveler can be a warm fuzzy feeling. You will earn miles or points, you will not have to pay foreign transaction fees, you will have access to airport lounges, and sign up bonuses can be tremendous – equivalent to a free flight or more.

    Remember the medical insurance we discussed earlier? Some higher-end cards will not only cover you in case of a medical emergency when traveling, but also include rental car coverage, trip cancellation insurance, lost luggage reimbursement, and medical evacuation coverage.

    Two credit cards with stellar benefits are the Chase Sapphire Reserve Card and the American Express Platinum Card. The Points Guy does an excellent job of explaining the benefits of each. Don’t be shell-shocked by the $500 plus annual fees, as most semi-frequent travelers will easily recoup the cost via attractive benefits such as a $300 annual travel credit and reimbursement of TSA pre-check fees.

    If you’re using the wrong card, you could be missing out on thousands of dollars. That’s money you could spend on another trip!

    Paying Too Much in Taxes

    Raise your hand if you’d like to pay more in taxes. I didn’t think so.

    A woman raises her handMaxing out your retirement accounts is one of the best long-term, tax-saving moves you can make. If you work for a company that matches your contributions to a retirement plan, such as a 401k or 403b, make sure you’re at least investing enough money to capture the entire match. There are many additional tax-advantaged plans you may be eligible for, including an IRA, Roth IRA, SIMPLE, SEP IRA, etc. Use them to save aggressively.

    Do you have access to a Health Savings Account (HSA)? Max it out, and try not to touch the funds until retirement. An HSA presents the opportunity for you to deposit money before tax and withdraw it tax-free. Pay for your current health care needs with after-tax cash instead.

    People who love to travel don’t have to worry about what they are going to do in retirement, because…well, they love to travel. This can lead to early retirement and a prolonged period between a high-income career and the required minimum distributions that must be taken from retirement plans.

    During this stretch, you may find yourself in a lower tax bracket when you retire, which presents the perfect opportunity to convert an IRA or a Rollover IRA into a Roth IRA. You’ll be taxed on the conversion, but this can be your chance to take advantage of a lower tax bracket. This money will grow and be distributed tax-free. It’s better to be taxed early, while in a low tax bracket, then wait until you are forced to take money when you may be pushed into a higher tax bracket. This maneuver can be complicated, so I recommend checking with a financial advisor to see if it’s a good fit for your situation. For do-it-yourselfers who want to dig into this topic, Kitces.com has detailed information on the conversion here.   

    Waiting Until Retirement to Travel

    Waiting to travel can be the biggest mistake you make as a traveler when planning for retirement. If the COVID-19 pandemic has taught us anything, it’s – don’t wait until retirement to travel!

    Few quotes hit home now, during our coronavirus-hellscape, more the one from motivational speaker Wayne Dyer – “Do it now. The future is promised to no one.”

    (David Tuzzolino caveat: “You might want to wait until the pandemic dies down before “doing it now,” but I’m sure you get my point.”)

    Don’t make the mistake of waiting until retirement to start checking items off your bucket list. Things change; you might not get the chance if you wait.

    Your health can deteriorate rapidly, or new responsibilities can come along that make traveling problematic. Money issues may crop up.

    If you love to travel, plan diligently, and create an extra-long list of retirement destinations, events, and experiences. However, the worst thing you can do is sacrifice the present by delaying your travel dreams for a tomorrow that may never come.


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    Financial Advisor David Tuzzolino

     

    David Tuzzolino, CFA, CFP®, is the Founder and CEO of PathBridge Financial, a firm that specializes in providing comprehensive financial planning and investment management services for clients that are nearing retirement and love to travel.

    Travel Insurance – Do You Need It? and Sweet Mont Saint Michel Drone Footage – Links

    A bridge between two buildings high above the street in Mont Saint Michel, France

    Retirement

    Do you need travel insurance? I make a case for why you might not, even in today’s uncertain times – (PathBridge Financial)

    “Never ask a barber if you need a haircut.”


    What to do with the money you didn’t spend on travel this year – (Simple Dollar)

    Two fun and two responsible ways to use your 2020 travel budget. Why not a little of both?


    The importance of sticking to your investment plan – (Dividend.com)

    “The COVID-19 pandemic has been an interesting case study in the importance of sticking to an investment plan.” How did you do?


    Retirement Planning for Travelers – what it is and what the heck I’m trying to do around here – (PathBridge Financial)

    I wanted to create a financial advisory firm that did things a little differently. In what way? Here are the details.


    Travel

    It’s strange what a pandemic will do to a traveler. In an attempt to quiet my wanderlust, I’ve turned to drone footage. Here are three of my bucket list destinations shown from a perspective only a well-piloted drone can provide. Trust me; these are cool.

    Mont Saint Michel

    I have always been drawn to this town and would love to spend the night wandering its streets after the day-trippers leave. There’s lots of drone footage of the town teeming with tourists, but I thought this was perfect considering the pandemic.


    Grand Canyon

    Here’s some drone footage a little closer to home. I drove by the Grand Canyon once in the middle of the night, but youthful and foolish, chose not to spend time in the area. It remains on my U.S. bucket list. 


    Cinque Terre

    I have been to Italy several times, but there’s so much I’ve yet to see. The Cinque Terre and Lake Como are on the top of my list for next time.


    If you’d like to subscribe to my newsletter, you can do so below. You’ll also get a PDF that shows you exactly what a comprehensive retirement plan for travelers looks like. Thanks for reading!

     

     
     
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    Financial Advisor David Tuzzolino

    David Tuzzolino, CFA, CFP®, is the Founder and CEO of PathBridge Financial, a firm that specializes in providing comprehensive financial planning and investment management services for clients that are nearing retirement and love to travel. This summer you’ll find him watching drone footage while anxiously awaiting a return to normal travel. 

    Travel Insurance, Bridges That Breath Fire, and Medieval Wine Windows – Links

    Dragon bridge in Vietnam. The sky turns pink and purple in the distance, the dragon bridge in the foreground

    Retirement:

    Travel insurance for seniors – (Forbes)

    What kind of travel insurance is crucial in retirement? I’ve got you covered…my quote in Forbes.


    Try not to be pessimistic about retirement – (The Motley Fool)

    Your financial plan should allow you to sleep soundly. If not, it’s time to revisit your plan.


    Creating a retirement budget – (the balance)

    One of the most important steps in determining when you can retire is to put together a detailed retirement budget. If you’re a traveler, make sure to include those bucket-list items that can be significant.


    Housing

    What it’s like to buy a house in a pandemic – (Bankrate)

    If you’re one of the many Americans looking for a new home (my hand is raised), you will find this article interesting. Three families discuss their experience. 


    Travel

    I went on my first trip since the pandemic started and here is what it was like – (PBF Blog)

    My first trip since the pandemic started was just what I needed. My account of easing back into travel.


    Simply planning a trip can work wonders for your mental state – (Travel to Wellness)

    I knew it! So there’s a reason I enjoy planning a trip tremendously…science!


    Medieval ‘wine windows’ are reopening in Italy – (New York Post)

    When the world gives you lemons…spruce up your Medieval wine window.


    Considering the whole bridge theme here at PathBridge Financial, how come I’ve never heard of the Dragon Bridge in Danang, Vietnam? There are many ways to describe a bridge: scenic, powerful, tranquil, but firebreathing!?! Cap tip to Kara and Nate for introducing me to this water spitting, firebreathing structure.


    Off the beaten path in South America – (Travel Pulse)

    It may be because I had a Patagonia jacket when I was a little kid, but I’ve always been fascinated with the area.


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    Financial Advisor David Tuzzolino

     

    David Tuzzolino, CFA, CFP®, is the Founder and CEO of PathBridge Financial, a firm that specializes in providing comprehensive financial planning and investment management services for clients that are nearing retirement and love to travel. 

    Is Paying a Financial Advisor Worth It?

    The Benefit Of Hiring A Financial Advisor?

    What if I told you that using the investment management services of a financial advisor will make you $2.6 million richer? And this number doesn’t include the benefits of financial planning or rely on magical investment returns that trounce the market. 

    An exaggeration? Unrealistic? It depends on your specific situation. Read on, and I’ll tell you how I arrived at this number below, and you can decide for yourself if it makes sense or not.

    If you are in the mood to entertain some of my goofiness, please read this post straight through. If you would like to skip directly to the meat of this post, jump down to the section titled: The Worth of a Financial Advisor Trust me. I won’t be offended if you jump ahead.

    The Most Horrifying Phrase a Financial Advisor Will Ever Hear

    It was a stormy night, and cold rain pelted my office window. The streets of Pittsburgh were dark and empty. All souls, with any sense, had sought dry, warm cover.  I decided, after a long day of work, it was time to brave the storm and make my way home where a roaring fire and two fingers of whiskey awaited.Financial Advisor Office

    I grabbed my fedora, trenchcoat, and umbrella from an antique, wooden stand behind my desk. As I turned to leave, there was a loud crack of thunder and a flash of lightning that bathed my office in a bright glow. A serious-looking woman appeared before me with a large briefcase. “I’m in need of comprehensive financial planning,” she said.

    “You’ve come to the right place,” I responded, admiring her financial prudence.

    She shifted nervously from one leg to the other and hesitantly added, “However, my husband says ‘It’s not worth paying a financial advisor.’” A bolt of lightning struck close by, and the sound of thunder ripped through the office. A flood of light crashed through the window and illuminated my horrified face.   

    Thanks for sitting through that. I’ve always wanted to write a great-American detective novel. And after looking at a calendar that’s pretty full of financial advisor stuff, I realize it’s not going to happen anytime soon. Now on to the good stuff.

    The Worth of a Financial Advisor

    Most work a comprehensive financial advisor performs can be assigned to one of two buckets: investment management and financial planning.

    This article will cover the first bucket – investment management.

    For much of the data in this article, I lean heavily on research performed by Vanguard and published in a whitepaper titled: “Putting a value on your value: Quantifying Vanguard Advisor’s Alpha®. “ Vanguard’s research concludes that a financial advisor can add approximately 3% to net returns for clients, but “…the actual amount of value added may vary significantly, depending on the client’s circumstances.” I dive into the details below.  

    Investment Management

    It’s no secret you can deposit your retirement savings at Vanguard, a firm that offers inexpensive mutual funds and exchange-traded funds (ETFs). If you do it yourself, you can avoid an advisor’s management fee, which is usually about 1%. Score! That’s a significant savings!

    Less well known is that Vanguard has done research measuring the value of a financial advisor’s advice. The benefit of using an advisor? Approximately 3% a year! Even after taking into account an advisor’s 1% fee, the difference is significant.

    Using a $500,000 portfolio to illustrate, the 3% benefit of using an advisor equals $15,000/year, or $10,000/year if your advisor charges a 1% fee. And this is not a one-time gain. On average, it occurs every year and compounds over time.

    I put together an example to illustrate the benefit of using an advisor below. Before I continue, I feel like I need to put on a lawyer hat. No, I am not a lawyer.

    The following is an example and not intended to apply directly to your situation. It is simplified to illustrate a valuable point. Please perform your own calculations, which will be specific to your individual situation. You can find a straight-forward investment calculator at omnicalculator.com.  Or, better yet, ask a financial advisor to do a personal, detailed analysis. If you’d like to dig into the exact numbers used to calculate the following returns, please see the appendix at the end of this article.

    There are many moving parts in this calculation, and I attempted to use fair assumptions. These numbers may be considered aggressive or conservative, depending on individual scenarios. I am also assuming Vanguard’s research is accurate and reliable. So, let’s get on with it!

    How valuable is using a financial advisor according to my calculations? A $500,000 portfolio that consists of 60% equity and 40% will be ahead by over $2.6 million over a period of 35 years.The Benefit Of Hiring A Financial Advisor?

    How is this possible? In my example (again, please see the appendix for specifics), I have the financial advisor managed portfolio returning an extra 2% per year. The 3% benefit of using an advisor is reduced to 2% to cover the average advisor’s fee.

    We know that Vanguard’s research states that financial advisors help the average investor earn returns, which are approximately 3% higher than if they manage their own investments. But where does this additional return come from?

    Behavioral Coaching

    The most significant benefit of working with a financial advisor is behavioral coaching. Vanguard indicates an advisor adds 1.5% of return by helping clients through the emotional rollercoaster that is the stock and bond market.

    When the markets are seemingly up every day, and discount brokerage commercials are screaming at you to put a second mortgage on your home and invest aggressively so that you can live the Yacht Life, your advisor will be there to remind you of your long-term plans.

    The Yacht Life

    When the market has dropped 20%, and the financial media is predicting the end of times, it’s difficult to ignore the nausea you feel each time you look at your brokerage statement. When CNBC covers half your TV screen with the bright red emergency of the day, and your instincts are screaming at you to sell, your advisor will be there to remind you of your long-term plans and reduce the panic you’re feeling.

    I know what you’re saying to yourself: “This emotional investor is not me!” However, it very likely is, and studies have shown it. It’s easy to look at a financial plan in times of calm and rationalize a 20% drop in your portfolio as perfectly acceptable. It is much harder to stick with your long-term financial plan when the market is down significantly, the economy seems to be worsening, and every investment pundit with access to the media is screaming – “There’s no end in sight!”

    Spending Strategy

    You may be thinking: “Saving and investing is the hard part. I think I’m pretty capable of spending without any help.” Surprisingly, a spending strategy can be complicated, and clients who use a financial advisor can generate an extra return of up to 1.1% a year on average.

    Clients with a mix of taxable and tax-advantaged accounts, who are in a high tax bracket, have the most to gain. But just because you’re not spending money yet, doesn’t mean an advisor can’t help you with a spending strategy. Setting up both taxable and tax-advantaged accounts in preparation for retirement will give you the flexibility to keep your tax rate level when you start withdrawing funds. It will also help you avoid income spikes that could launch you into one of the top tax brackets.

    Asset Location

    The type of account you use to hold different investments is important and, if done correctly, can generate an extra 0.75% of return per year. Tax-efficient investments such as passive equity ETFs should be held in taxable accounts. Less efficient investments that aggressively produce income, like most bonds, should often be held in a tax-advantaged account. The expected holding period will also influence the decision of which type of account to use. Again, clients in a high tax bracket with a mix of taxable and tax-advantaged accounts have the most to gain.

    Cost-Effective Implementation

    Vanguard research measures the potential benefit of moving toward low-cost funds to be 0.34% in return per year. This advisor benefit may be viewed as easily replicable by clients who are investment-savvy and don’t mind taking the time to research investment options. Truthfully, constructing an initial, low-cost portfolio is not difficult if you have the investment knowledge and patience to complete the task. 

    However, the difficult part is the ongoing monitoring of the initial portfolio once it is established. Existing funds may have a change in strategy, a change in management, or not perform well when compared to their benchmark. Any of these changes may make it necessary to find a replacement fund. Even funds with passive strategies must be monitored to make sure the original investment thesis remains in place.

    There have been over a thousand new ETFs created in the last five years. New funds that hit the market may have lower fees or execute a desired strategy better than an existing holding. This ongoing monitoring is time-consuming and can be tedious for people not interested in the nuance of investing.

    RebalancingRebalancing

    Vanguard determined that, on average, portfolio rebalancing resulted in a benefit of 0.26% per year. Rebalancing keeps the original asset allocation steady by adding or trimming holdings periodically.

    Researchers compared two portfolios that had similar risk characteristics. One was regularly rebalanced, and the other was not. The rebalanced portfolio had higher returns.

    Even more importantly, rebalancing is a risk-reduction tool. When one asset class outperforms, it will grow to a larger weighting in the portfolio. Risk can increase beyond the original expectations if left unchecked.

    Reality

    Does an advisor really deliver 2% in additional returns after fees? Possibly, but real life is messy, and every situation is different. The key point is, even if we attribute an increased return of only 0.5% to an advisor, the benefit over a 35-year time frame can be in the hundreds of thousands of dollars. Plus, by handing off the time-consuming task of managing your investment portfolio you’ll have more time to do the things you love, such as spending time with family, traveling, or writing that great-American detective novel.

    Appendix:

    Here are the numbers I used:

    Present Value (of the portfolio): $500,000

    Expected Return using an advisor: 7.1%. The average return of a 60% equity / 40% bond portfolio over the last 92 years has been 8.6%. I subtract 1% for advisor fees and .5% for mutual fund/ETF fees.

    Expected Return without an advisor: 5.1%. The average return of a 60% equity / 40% bond portfolio over the last 92 years has been 8.6%. I subtract 3% to account for the underperformance calculated by Vanguard research and .5% for mutual fund/ETF fees.

    Period: 35 years

    Compound Frequency – yearly

    The value of $500,000 becomes $5,515,711 at 7.1%.

    The value of $500,000 becomes $ 2,851,445 at 5.1%.

    *These final portfolio values are not adjusted for inflation.

    Assumptions:

    A 60/40 portfolio will average the same returns in the future as the past 92 years.

    The client does not reduce their equity holdings as they approach or move through retirement. A client might want to invest more conservatively as they age.

    The advisor fee is a constant 1%, whereas, in reality, most advisors will reduce their fee as assets grow and pass certain thresholds.

    For simplicity, taxes are not included.

    The benefit of using a financial advisor is illustrated in this example as a smooth 3% per year. In reality, this benefit is choppy, and timing is unpredictable.


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    Financial Advisor David Tuzzolino

     

    David Tuzzolino, CFA, CFP®, is the Founder and CEO of PathBridge Financial, a firm that specializes in providing comprehensive financial planning and investment management services for clients that are nearing retirement and love to travel.