The world of finance is rife with conflicting information and get-rich-quick schemes. Just starting the process of wealth management, retirement planning and investing can be overwhelming.
Fortunately for those of us non-wolves of Wall Street, financial planners exist.
While every financial and investment firm is different and each person walking in the door has different needs, these professionals provide critical support to their clients’ fiscal aspirations.
But the clients could make their own goals easier to achieve by remembering some basics. We surveyed a few of these professionals from across the state to gather those tips.
Start early
Alex Arendall, vice president investment advisor of Mitchell, McLeod, Pugh & Williams in Mobile, says clients should start the process of working with an advisor or planning for retirement as early as possible.
“So, you find people coming in in their late 50s or early 60s thinking they should be retiring around 65,” Arendall says. “The problem is they weren’t preparing for that when they were 25. Now they’re getting the message that what they’ve got saved will last them maybe five or six years. You see them kind of get bug eyed thinking they were supposed to be retired. We have all kinds of charts and graphs that show the effect of starting early versus starting mid-career or late-career, and the difference is exponential just because of the compound growth that happens over time.”
Don’t panic
Getting an earlier start isn’t the only thing that Arendall, who has been in the industry for almost two decades, suggests his clients do more consistently. One of the more important issues he faces with his clients is overreacting to near-term events or the news — especially since COVID-19 arrived.
“Whether it’s inflation or Ukraine or interest rates going up or a pandemic, on a bigger scale, that’s been going on for two years now, you’re going to have events that happen,” Arendall says. “The market is going to fluctuate. If you think you’re going to time the market going in or out of any of those events, you’re going to be wrong 99 percent of the time. There are some people who get lucky and make headlines, but it is just that — luck.”
The Alabama grad says he saw a lot of people panic at the beginning of the pandemic in 2020, and it cost them dearly.
“We had multiple people call when the market tanked at the beginning of COVID saying ‘Take it all out; take it all out. I want to take all of my cash and go stuff it in a mattress,’” Arendall says. “Turns out to be the worst thing that could have happened. The market rebounded very quickly and was even up by the end of 2020. Those people that panicked, overreacted and bailed out missed that quick rebound. We kind of have to hold hands and make sure everybody is going to be okay sometimes. A steady, long-term approach is going to win the old tortoise and the hare race.”
Focus on what you can control
Similarly, Evan Crouse, of Warren Averett in Huntsville, wishes his clients would look less at their accounts during times of volatility. Short-term decisions based on short-term events can have long-term consequences, he says. He had clients in 2008 who had a knee-jerk reaction to the housing crisis and market slump, and those decisions affected their position negatively.
“You look back at that event, and we’re recovered from that, and markets have done quite well,” Crouse says. “There were many people who opted to get all the way out of their investment strategy and go to cash. This person that I met with was looking to retire around 2020, and they were going to be able to have a good retirement. They essentially got out of an investment strategy because of the crash. Of course, they didn’t see it coming, so they did it after it happened, and their accounts were down. They went to cash and stayed very safe, but then their retirement was about half of what it could have been. Their lifestyle and their account balances would have been very different if they had stayed in a diversified, moderate investment strategy that they were in beforehand.”
That kind of story is, unfortunately, too common in times of market uncertainty. Crouse says he also wants his clients to take that example and remember to focus on what they can control. He says many people walk through the door and focus on the market returns and what’s happening in the short-term because that is what is publicized in the news.
“We’re seeing accounts move on kind of an hour-by-hour, day-by-day basis, but that’s outside of our control,” Crouse says. “Rather than focus on that, we focus on what you can control.
“From an investment management perspective, that would be having a properly diversified portfolio that’s durable for multiple market outcomes and tailored for your specific situation. It would be controlling your spending, investing consistently over a long period of time. Then it would also be having a plan that includes things outside of traditional investments like tax planning strategies, making sure you have estate documents in place — things like wills, durable powers of attorney and health care directives, having proper insurance to protect your financial life and your family.”
Plan first
Also in Huntsville is Brian Hinson, of Bridgeworth Wealth Management. He encourages clients to slow down and clearly define their financial goals before diving headlong into the investing arena. He says those goals should be communicated thoroughly to their financial planner and documented.
“The goals and dreams can kind of vary across the board,” Hinson says. “We try to foster those discussions and ask questions and communicate and understand what our clients are saying is important to them, and then, of course, provide our expertise and guidance.”
Once those goals and dreams have been identified, it’s time to establish a plan — a comprehensive financial plan that Hinson and his colleagues call active and measurable. Don’t slip the plan into a binder and bury it on a shelf, Hinson advises — stay attentive to the plan and the related long-term strategies.
“It’s very important to make sure that there’s a process in place to quickly update and adapt that plan as goals change, as dreams change, as unforeseen life events happen,” Hinson says. “A premature death, a disability, a lot of different circumstances can throw obstacles — if not pitfalls — into a plan that’s established. It’s really important to make sure there’s a process there to then go back through these steps to make sure things stay updated and relevant in each situation. That is where our clients have the greatest success, which comes from having that plan and gaining the confidence and clarity from the plan that’s in place that then allows each part, including investment planning, to flow more effectively.”
Effects of Compounding
Savings*
Saving early and often, and investing those funds, can have a tremendous impact on your nest egg at retirement due to the power of compounding.
In order to have a $250,000 nest egg by age 65, the following chart estimates how you would need to save each month depending on when you start:
Fees*
The power of compounding is also evident when considering the impact of management fees on an investment portfolio. In the example below, both investors start with $250,000 in savings and want to be able to withdraw $25,000 per year in retirement. By paying just 1% more in investment fees, Investor A will run out of money nearly 4 years earlier than Investor B.
*These illustrations assume annual returns of 8%. Historical performance does not guarantee future results. The performance is hypothetical and is not indicative of any particular investment or actual client portfolio.
Crystal Castle and Mike Kittrell are Mobile-area freelance contributors to Business Alabama.
This article appeared in the May 2022 issue of Business Alabama.
