Over the last twenty years, I’ve witnessed many mistakes. Heck, I’ve made many mistakes myself. However,through the years I’ve noticed that a few of the most critical seem to be what derail most financial plans.

At the time of writing this, we’ve just come through one of the most volatile stock markets in history. We’re on track to end the year with high double digit returns across all major averages, with the NASDAQ 100 advancing over 40%. Yet just a few months ago we saw a 35% S&P decline due to the Coronavirus panic and economic collapse. We went through the academic definition of a recession, two negative quarters of GDP and saw unemployment go from historic lows to historic highs. Navigating through this as an investor has been difficult and as an advisor, I would say 2020 was the most crucial year in the history of our firm. Thankfully, we helped many avoid critical mistakes; however, now we’re talking with new folks who weren’t as fortunate. While we cannot change the past, I find it very important to at least relay these mistakes to you so that in the future, when we go through another period of extreme uncertainty, you don’t fall prey to these critical errors.

Before I begin, just a bit of a background on me. I am the founder and chief investment officer of Joule Financial. We are an independent RIA located in central Kentucky serving clients throughout the US. I started as a stockbroker at the peak of the dot-com bubble in 2000 and shortly thereafter, I hung up all commission licenses and struck out on the fiduciary path as an fee-only advisor. I often tell folks ‘we were a fiduciary before a fiduciary was cool.’

I’m a CNBC commentator and have appeared on Bloomberg, Fox and countless radio programs throughout the US. I am an adjunct professor of finance at the University of Kentucky, my alma mater – Go CATS! – and an adviser to the Board of Trustees, which oversees the University’s $1.5B endowment. Joule has grown from $0.00 when I began the firm to over $200MM in assets under management. You can always learn more about our firm HERE.

Enough about me, let’s get into the good stuff. Here are, in my opinion, the top 5 mistakes made by those approaching or in retirement. Don’t let these happen to you!

1.) Misunderstanding Risk – We live in a day and age of customization. Right brain, left brain, visual learner, audible learners, folks who can’t handle gluten, those that can, and everything in between. Do you subscribe to Netflix? Guess what…they’ve spent billions understanding what you favor and make suggestions accordingly. Amazon?…ditto. Yet when it comes to investing, most people are still following the standard ‘age-based’ risk tolerance measure. If you’re 60, you should be 60/40 stocks/bonds or if you’re 40 maybe 70/30. At the end of the day, most folks are guessing when it comes to risk tolerance and hoping they get it right. The reality is, this guessing leads to a significant misunderstanding of just what can happen.

Rather than ‘age-based’ risk tolerance, I encourage you to approach your risk level, equating any potential loss to the actual dollar amount invested. For example, if you look at your portfolio today and find yourself 60% invested in equities for a $500,000 portfolio, this means you have $300,000 in the stock market. If we go through another 50% decline are you ok seeing the portfolio decline a total of $150,000? If not, your risk is simply too high.

Leading up to the most recent election I was asked constantly if I thought the market would “crash.” While I did not, my answer was always rooted in the belief that no-one ever knows for sure; however, we could look unemotionally at what a ‘crash’ would look like and discuss the potential losses, thus helping us make an educated decision.

I would typically review a portfolio saying something like “Well, you are 50% invested, which means a 30% decline would result in a 15% decline of your portfolio. Therefore, based on your total balance of $500,000, you would experience a $75,000 loss, basically taking you back to where you were last year. Are you ok with that?” More often than not, the client would breathe deeply and feel much better with the real understanding of the risk they were taking headed into the election.

When it comes to risk, it is far better to understand the return you need to achieve in order to meet your goals, thus determining what the appropriate allocation would be in order to have the best chance of attaining that return. Once you have determined the appropriate allocation, you can gain an understanding of the historical performance of that allocation, as well as the volatility, and then determine if you’re comfortable with that risk. If you aren’t comfortable with the risk, then something must change.

Risk is one of the most critical components of the stock market and a long-term financial plan yet, typically, it is only briefly discussed if it is discussed at all. The misunderstanding of risk is therefore the first, and in my opinion, most critical mistake of all.

2.)Not Enough Cash – Just because you’re retired and using the resources you’ve been saving doesn’t mean an emergency fund becomes obsolete. In fact, it is our view that the standard 3 – 6-month emergency fund required while working should actually be stretched out to 12 months during retirement. Not only does this help give an investor peace of mind but allows them the additional liquidity needed in order to wait for market recoveries.

If the typical American retires around age 65, with a life expectancy of 88, the investment time horizon throughout retirement is approximately 23 years. Many folks believe that the minute they retire their risk tolerance and thus market exposure should be zero. Well, in the interest rate environment we’re in, where the 10-year US treasury is paying a whopping 1%, the reality is that most folks must remain invested to a certain degree in order to at least keep up with inflation. This means that your investment time horizon isn’t your date of retirement but, in fact, your date of death.

Due to the longevity of your investment time horizon, the odds suggest that you will continue to see market declines. In fact, as noted by the graphic below, you will likely see quite a few. In a typical 20-year investment time horizon, an investor can expect to see 3 or possibly 4 market declines of 20% or more with the average recovery time of 425 days. This means that while the equity portion of your portfolio is recovering, it is critical to not only have a portion in fixed income or bonds but also an emergency fund to cover the time it would take for the market to recover and replenish any portfolio losses.

In our experience, it isn’t the portfolio or systematic contributions that create any lasting problem through market declines but the one-time expenses that creep up that may mandate a sizable withdrawal during an unfavorable market time. The last thing you want to do when the equity markets are down 20% is to compound the pain by having to withdraw an additional $20k for a new roof.

As you begin to think about retirement or maybe already find yourself there, assess the emergency cash position you have out of the market or any investment account. Is it sufficient to carry you through 12 months? If not, this may be the first agenda item to consider.

3.) Unplanned Expenses – Health Care, Inflation, Taxes

I won’t spend too much time on this but rather present the facts and just the facts. Health care is the second largest retirement expense, second only to a home mortgage. If you have your home paid off, critical in my opinion during retirement, you can expect health care to be your largest expense.

Above is a nice chart from the CEX 2017 Database outlining the average annual health care expenses, per person, in America. This is a hefty amount that is going up with inflation each year. Unfortunately, we see so many folks NOT planning for this and completely missing the mark when it comes to paying for these expenses during retirement. These expenses must be factored into your retirement plan, it’s as simple as that.

Taxes: Unfortunately, there is a big misunderstanding when it comes to taxes and the difference between income taxes and capital gains. At the time of this writing there is a HUGE advantage to paying capital gains taxes over income taxes, yet I continue to see people rushing out to buy annuities with non-retirement money for their ‘perceived’ safety. Don’t even get me started on annuities. One of the biggest drawbacks, outside their outrageous fees, is the fact that any distributions of gains from an annuity end up being taxed as ordinary income and NOT capital gains. For example, if you invested $100,000 into an annuity and actually made money, thus growing the annuity to $120,000 in a few years, when you wanted that money they would send you a nice 1099 for $20,000. This could not only take you up a bracket but impact the taxation of your social security. While we’re not CPAs, we have been around long enough to understand that this is a dangerous proposition. Most people fail to grasp the real ramifications of taxation during retirement when it comes to social security, pensions, RMDs, dividends, interest and even annuity payments.

In the planning process, taxes must be taken into consideration and unfortunately, as we all know, it is a moving target. Other than misunderstanding risk, I’ve seen the misunderstanding of taxes play a huge role in derailing retirement goals, which in my opinion is inexcusable.

Inflation: Like the other two expenses mentioned, I’m not sure I need to spend much time on this other than to say, it’s a biggie. We’ve become accustomed to low inflation in this country for many years. Sure, we’re paying more for beef and health care, but the last television set I bought was a fraction of the cost of my first and I cut my cable bill in half eliminating traditional providers and adding Netflix and Hulu.

I won’t spend too much time on this subject here but if you understand basic economics you know it’s darn near impossible to pursue direct stimulus, forgivable PPP loans and other rounds of direct payments to citizens and not devalue the currency while at the same time significantly increasing the money supply. We have one variable missing, which is employment; however, should that come roaring back as we reopen the economy, its ugly cousin INFLATION shouldn’t be far behind. I am of the opinion that what we haven’t seen since the ‘70s may be coming at us and cash on hand, outside of your 12-month emergency supply will erode considerably. Not preparing for higher than recent average inflation is a big mistake in my opinion.


4.) Fees, Fees & More Fees – I’ve been in the business over 20 years and for 18 of those years I’ve been charging a flat 1% fee for management of assets. Inside accounts we use index sector ETFs, individual equities and other investments that have relatively low expenses. I’m confident that our clients know exactly what they’re paying and what they’re getting for that expense, yet each and every day when I talk to new folks it is clear: most haven’t a clue what they’re paying.

The math is staggering when it comes to investment returns over several years, combined with excessive fees. If an individual were to invest $10,000 per year, with an annualized 8% rate of return the difference between a 1% fee and a 2% fee would be $172,713.64. According to AnnuityExpertAdvice.com, the average annuity charges between 3% and 4% of your account value per year. The difference between a 1% fee and a 3% fee on the scenario mentioned above results in a missed opportunity of $313,122.51. I won’t even calculate the 4% or you may fall out of your chair and notch up those health care costs.

Hidden fees inside actively traded mutual funds, excessive management fees, annuity fees and yes, even trading fees can all be brutal when it comes to a long-term financial and retirement plan.

The first step is to calculate exactly what you’re paying. If you don’t know how to do that, I’d start with morningstar.com, which would give you the gross expense ratio for any fund you may be invested in. If you happen to own an annuity, the prospectus will reflect that information, although you may have to dig a bit for it. Make sure you add any direct advisory fees and once you’re done calculating, simply make sure you are ok with the value you are receiving for the expenses you are incurring.

For our 1% fee, we pursue comprehensive financial and retirement planning. We work directly with tax advisers, lawyers and other financial ‘team’ members needed for the holistic approach. Sometimes, even then, a client doesn’t need to pay that sort of fee for the guidance they need. In that case we refer them to a self-directed option.

Over time, the silent killer of investment returns and therefore a retirement plan, are excessive fees. What are you paying?

5.) No plan, No roadmap – This last one may be a bit anticlimactic but it had to go on the list. When I first started in the business – young, hungry and full excitement – I worked with anyone that was interested. Often a person would allocate a portion of capital my way looking to improve their returns over their existing advisor or broker (there were still brokers then). I didn’t mind this competition as I was full of ‘market spirit’ trying to pick the best investments and outperform my peers. Some years I did, others I did not, but one thing kept happening: after a few years with a client they would inevitably need the money and the account would leave. An emergency would take place, a business would falter, cash flow during retirement wasn’t properly calculated or in certain instances tragedy would strike and capital was needed immediately regardless of where the market was trading or how the account was doing. I’ll never forget when one day it hit me like a ton of bricks: ‘these people who are entrusting their capital with me have no plan when it comes to using this capital through retirement. Regardless of how I perform they’re going to tap it all and sometimes run the risk of running out of money.’ It was at that moment I stopped ‘taking money’ and started ‘providing a comprehensive service.’

If someone wanted to work with us, we began looking at the big picture making sure that before anyone gave that retirement notice, they had all their ducks in a row and were prepared to live the life they were accustomed to without running out of money. In fact, we began running calculations to determine how to keep increasing their wealth in retirement, if at all possible.

Slowly but surely, folks caught on and planning became the focus of our practice. When someone becomes nervous about the market, we review the plan and run different scenarios regarding bear market returns. Need to make a big distribution for a large purchase? Let’s look at the plan. College funding? Let’s look at the plan. Early retirement…plan. How much insurance to have? Plan. Second home in Florida? Plan. You name it, it comes back to the plan.

This is second nature in our firm and the main reason I believe we’ve been growing at such a rapid rate. Yet when I meet with folks across the country it is clear, we’re still an anomaly.

Imagine setting off on a cross-country journey with no map? How about navigating a mountain hike with no trail map? You get the idea.

A plan must encompass all areas of your retirement, pre, during and post. It must review anticipated distribution needs and determine a distribution schedule. It must review tax implications and other expenses such as inflation, health care and unexpected long-term care. It should all be within your financial advising relationship and if it’s not, well, it may be time for a change.

All of the pitfalls I’ve covered here should be addressed within a plan along with goals, objectives and expectations. Unfortunately, most people have no plan and are therefore guessing and hoping things work out. This is why, ‘No Plan’ is our final and by far most important potential pitfall we see on a daily basis.

I hope you’ve enjoyed this piece. This is not a one-off, fly by night article but rather a real look into the challenges I see folks facing each and every day. I appreciate you taking the time to read through it until the end.

Until next time