Thankfully, they’re both smart. He’s a microbiologist; she’s an attorney.
They liked their advisor and said he’d put together a comprehensive financial plan for them. They just wanted to do their due diligence and get a second opinion before implementing it.
So we dove right in and I started flipping through the 43-page document. I tried to maintain my composure as long as I could, but I couldn’t hold my tongue for very long.
“This is BALDERDASH!”
I’m pretty sure it’s the only time I’ve ever used the word “balderdash” in regular conversation. I immediately wondered if I’d been a little too brash, but then they both smirked.
“We wondered if that might be the case. It seemed a little too good to be true.”
Thankfully, they were astute enough to come get a second opinion. After all, you don’t get jobs in microbiologizing and lawyering without a relatively high level of intelligence.
But a lot of people don’t bother with the second opinion, which concerns me.
The truth was that their “advisor” wasn’t even someone they’d met in person. The company that administers his 401(k) had said, “Hey, were you aware that we provide free financial advice to highly compensated employees like you?” Which is code for, “Hey, we’d like to get our hands on all of your money, instead of just the money that’s in your 401(k), so if we have this guy give you a call and then overwhelm you with a 43-page document that makes it look like we know what we’re doing, maybe you’ll move all of your life savings over to us, yes?”
The problems with this plan included, but were not limited to:
- Of the 43 pages, 35 of them were boiler plate filler that had nothing to do with their specific case.
- The plan assumed a rate of inflation of 1%. Nope, that should be more like 3%. So their income needs later in life were going to be much higher than the plan projected.
- The plan assumed a cost of living raise on their Social Security of 2.5% per year. Nope, that should be more like 1.25%. So their Social Security income later in life was projected to be much higher than it actually will be.
- In the first five years of retirement, he projected that they’d withdraw 15% of their portfolio each year! But that actually worked out fine in his fantasy world, because he also projected that they’d earn 17% on their investments each year, so all is well. (I think this was the part where I felt the “balderdash” word roll off my tongue).
After combing through this dumpster fire of a “plan,” I felt compelled to find out more about the advisor who had constructed it. I looked him up and discovered the least surprising news of the day—the fact that he’d filed personal bankruptcy a few years ago. Of course he had. Because he doesn’t understand how math works.
Now, if they’d implemented this plan, it’s not as if this advisor would have disappeared to Belize with their money. But they would have been operating under the assumption that they were in much better shape than they actually are. After some real analysis, we determined that, in order to have the retirement lifestyle that they want, they need to work about two years longer than this plan indicated that they should. And they were fine with working the extra two years, they just wanted to know what they needed to do.
Here's the point. Most of these “plans” that get handed out by big brokerage firms don’t involve any actual planning. It’s all based on formulaic, cookie-cutter assumptions that have nothing to do with the specifics of your life. And, as we saw in this particular case, they’re often riddled with ridiculous assumptions.
When you’re looking for a financial advisor, you want someone who can apply wisdom to your situation, not just somebody who can allegedly punch a few numbers into a software program.
If the financial advice you’ve gotten isn’t tailored to the specific details of your life, get a second opinion. That’s what smart people do.