Do You Need a Financial Advisor After You Retire?

Oct 26

Not everyone needs a financial advisor after retirement, but retirement is often when financial planning becomes more complicated—not less.

I think there’s a reasonable argument that some people don’t need a financial advisor while they’re working.

You’re 45 years old. You’re putting money into your 401(k) every paycheck. You own a few index funds. You have 20 years until retirement. There may not be that many decisions to make.

Then you retire.

Now you have $2 million or $3 million sitting in accounts you’ve spent your entire life being told not to touch, the paycheck stops, Social Security decisions show up, Medicare enters the picture, taxes become more complicated, and eventually Required Minimum Distributions start forcing money out of your retirement accounts.

This is somehow the point when people decide they don’t need financial planning anymore?

I think retirement is often when financial advice becomes more valuable, not less.

But there’s a big caveat: your advisor actually needs to be doing financial planning. If all you're getting is investment management and a quarterly statement, I think it's completely fair to ask what you're paying for.

Accumulation Is Actually the Easy Part

I don't mean accumulating money is easy. Saving $1 million, $2 million, or $3 million takes decades of discipline, good decisions, and usually a successful career.

But the mechanics are pretty straightforward.

Save money. Invest it. Diversify. Don't panic every time the market falls. Keep doing it for a few decades.

Retirement is different because now the money has to do something.

It has to create a paycheck. It has to survive market declines while you're withdrawing from it. It has to work alongside Social Security. It has to account for taxes, Medicare, Required Minimum Distributions, healthcare costs, and whatever else life throws at you.

And unlike your working years, you don't necessarily have another paycheck coming next Friday to fix a mistake.

That's a different ballgame.

The Paycheck Disappears, but the Bills Don’t

This is probably the biggest psychological adjustment I see when people retire.

For 30 or 40 years, money comes into your checking account every two weeks. You spend some of it. You save some of it. Then one day the paycheck stops.

Now what?

If you need $10,000 a month to live and Social Security provides $5,000, where does the other $5,000 come from? Which account should it come from? How much should you withhold for taxes? What happens when you need another $30,000 for a new car?

Those sound like simple questions until you start answering them.

Should the money come from your IRA? Your taxable account? Your Roth? Should you realize capital gains? Does taking more from the IRA push you into a higher tax bracket? Could it increase your Medicare premiums two years from now?

Retirement income isn't just setting up a monthly transfer from an IRA.

At least it shouldn't be.

Investment Management Changes in Retirement

I don't think your investment portfolio should suddenly become ultra-conservative the day you retire. If you're 65 and healthy, some of this money may need to last another 30 years. You still need growth.

But I also don't want a retiree with every dollar exposed to the stock market when they're depending on that portfolio to pay the bills.

That's why I like having roughly five years of expected portfolio withdrawals outside the equity portion of the portfolio, depending on the situation.

If you need $100,000 a year from your investments, I want to think about where the next several years of that income is coming from before the market falls—not after.

Because eventually it will fall.

If stocks drop 30% and you need $100,000 for living expenses, I don't want our first conversation to be, “Well, what should we sell?”

I'd rather already know the answer.

The job of the advisor isn't to predict the next bear market. Nobody can consistently do that. The job is to build a retirement plan that doesn't require us to predict it.

Taxes Become a Much Bigger Part of the Job

This is probably the area where I think traditional investment management falls shortest.

Retirees can have enormous opportunities to manage taxes, particularly in the years immediately after retirement.

Maybe you retire at 62. Your salary disappears. You haven't started Social Security yet. Required Minimum Distributions haven't started. You suddenly have a window where your taxable income is dramatically lower than it was during your working years.

What are we doing with it?

Maybe we should convert some traditional IRA money to a Roth. Maybe we should realize capital gains. Maybe we should accelerate income into a lower-tax year rather than waiting until RMDs force it out later.

Or maybe we shouldn't.

The point is that somebody should be looking.

I don't think good retirement tax planning means trying to pay the least tax possible this year. Sometimes intentionally paying more tax today can reduce what you pay over the rest of your life.

That's a planning decision, not an investment decision.

Your IRA Is a Tax Bill You Haven’t Paid Yet

I think people sometimes look at a $2 million IRA and mentally treat the entire $2 million as theirs.

It's not.

There is an unpaid tax bill sitting inside that account.

How large that bill eventually becomes depends partly on what you do between now and then. If the account continues growing and you never take distributions beyond what you need, eventually RMDs can become substantial.

Then one spouse dies.

Now the surviving spouse may have essentially the same IRA, much of the same income, and a less favorable tax situation because they're filing as a single taxpayer.

That's the widow's penalty, and it's one of the reasons I don't like waiting until somebody is 75 to start thinking about retirement taxes.

A financial advisor working with retirees should understand that investments and taxes aren't two separate conversations.

They're the same plan.

Social Security Is More Than “Take It at 62 or 70”

Social Security is another area where the answer gets oversimplified.

You'll hear people say, “Always wait until 70.”

Or, “Take it as soon as you can because you don't know how long you'll live.”

Neither is a retirement plan.

The right decision depends on your health, longevity expectations, other assets, spouse's benefits, survivor benefits, taxes, spending needs, and what you're trying to accomplish during the years before Social Security begins.

Sometimes delaying Social Security creates a valuable window for Roth conversions. Sometimes a spouse's benefit makes the decision more complicated. Sometimes somebody simply needs the income earlier.

I don't need an advisor to tell every 62-year-old the same thing.

I need an advisor to understand how Social Security fits into everything else.

Medicare Can Become a Tax Problem Too

Most people understand that making more money can increase their income taxes.

Fewer realize it can also increase their Medicare premiums.

IRMAA can increase Medicare Part B and Part D costs for higher-income retirees, and the calculation generally looks back at income from two years earlier.

So that big Roth conversion, capital gain, or IRA withdrawal may have another cost attached to it.

Does that mean you should never cross an IRMAA threshold?

No.

I think people sometimes get way too obsessed with avoiding IRMAA. If paying a little more for Medicare allows us to execute a Roth conversion that potentially saves substantially more in future taxes, I'm perfectly willing to have that conversation.

Again, I care about the total result.

Saving $1 in Medicare premiums while costing yourself $5 somewhere else isn't good planning.

Someone Needs to Tell You It’s Okay to Spend the Money

This part of financial planning doesn't get enough attention.

A lot of successful retirees don't have a spending problem.

They have the opposite problem.

They've spent 40 years accumulating money, and they're terrified to use it. They can afford the trip. They can afford the second home. They can help the kids. They can buy the boat.

But every withdrawal feels like they're doing something wrong.

Sometimes one of the most valuable things I can tell someone is: You're fine. Spend the money.

I don't think the purpose of a retirement plan is to maximize the amount of money you leave behind unless that's specifically your goal.

If you're 72 years old, have more than enough money, and want to take your entire family on a trip while everybody is healthy enough to go, I want the financial plan to help answer whether you can do that confidently.

Not tell you that your Monte Carlo score might drop from 96% to 94%.

Estate Planning Starts Becoming Real

Estate planning feels theoretical when you're 40.

It becomes a lot less theoretical at 70.

Who is going to handle things if something happens to you? Are the beneficiaries correct? Does your spouse understand the finances? Are accounts titled correctly? Does your family know who to call?

And from a financial-planning perspective, what happens to the assets after the first spouse dies?

This matters even more now because inherited retirement accounts can have very different distribution requirements than they did years ago. Leaving a large traditional IRA to your children can also create a completely different tax result than leaving Roth or taxable assets.

Your estate attorney handles the legal documents.

But somebody needs to make sure the financial plan and the estate plan are actually talking to each other.

What Should a Financial Advisor Actually Be Doing?

This is where I think retirees should be willing to ask harder questions.

Let's face it: if you have $1 million or $2 million and you're paying an advisor around 1% a year, that can easily be $10,000 or $20,000 annually. At that point, your advisory fee may be one of the largest recurring bills in your household.

That doesn't automatically mean the fee is too high. But it absolutely means you should know what you're getting for it.

If the answer is investment management, a quarterly statement, and a couple of meetings a year, I think that's a fair reason to ask harder questions. For that kind of money, I think the advisor should be helping with retirement income, taxes, Roth conversions, Social Security, Medicare, RMDs, estate coordination, spending decisions, and the bigger picture.

The fee isn't the problem.

Paying a large fee for a small service is the problem.

If you're paying an advisor every year, what exactly are they doing?

Are they reviewing your retirement income strategy? Are they looking at taxes before year-end? Are they discussing Roth conversions? Are they helping decide where withdrawals should come from? Are they monitoring your portfolio relative to your spending needs? Are they looking at Social Security, Medicare, beneficiaries, estate planning, and Required Minimum Distributions?

Or are they managing a portfolio, sending you a performance report, and taking you to lunch twice a year?

Investment management matters.

But for someone already retired, I don't think it's enough.

Do You Need an Advisor to Pick Investments?

Maybe not.

I'll say something that probably isn't great marketing for financial advisors: building a diversified investment portfolio isn't that difficult anymore.

You can buy low-cost index funds. You can own the entire U.S. stock market with one investment. You can build a perfectly reasonable portfolio without paying somebody to pick stocks.

If the only thing your advisor does is choose mutual funds, I'd question the value too.

The harder part is figuring out how those investments fit into your retirement.

How much risk should you take? Where is the next five years of spending coming from? Which account should fund it? What happens to taxes? When should Social Security start? What happens when one spouse dies? How much can you safely spend?

That's where I think the value is.

Some People Really Don’t Need a Financial Advisor

I don't think everyone needs one.

If you enjoy managing your finances, understand investments and taxes, have a relatively simple situation, don't panic during market declines, and are willing to keep up with changes to tax and retirement rules, you may be perfectly capable of doing this yourself.

There's nothing wrong with that.

But be honest about what you're actually willing to do.

I've met plenty of people who say they enjoy managing their investments. What they mean is they enjoy picking stocks.

That's not the same thing as retirement planning.

If you love researching investments but haven't modeled your future RMDs, reviewed your beneficiaries in five years, considered Roth conversions, or figured out what your spouse is supposed to do if you die tomorrow, you may be managing the part you enjoy and ignoring the parts you don't.

That's human.