If you think of the secrets to a top-notch retirement, you'll probably come up with the usual suspects: save a lot, invest it well, and so on. Here's one you might not have thought of, though: get professional help.
The value of seeking assistance with your finances is nothing new to me -- The Motley Fool, for which I've long written, is in the business of offering such help. But it wasn't until I chatted with Scott Holsopple, managing director of retirement solutions with The Mutual Fund Store, that I got some concrete illustrations of the value of guidance.
Holsopple offered two key bits of data. First, a Financial Engines report issued in May found that those who get help can improve their portfolio's performance by about 3 percentage points each year, on average, over those who don't. Further, per an ING study titled "Retirement Revealed" those who consult an advisor tend to sock away more money for retirement. Let's delve a little more deeply into each report's findings on the value of getting help.
The ING "Retirement Revealed" report offered lots of eye-opening statistics, such as this: The average contribution to an employer-based retirement plan is 10% of income for those who use an advisor and just 8% for those who don't. The average total retirement savings is $110,000 for those who don't use an advisor and $172,000 for those who do -- a 56% improvement!
This information is useful, but there's more to know and think about. For example, while saving 10% of your income is much better than saving 8%, many of us should aim for contributions of 12%, 15% or even more, especially if we're late in getting started saving for retirement. Obviously, those whose retirements are 40 years away can contribute less -- but if they sock away more, they can set themselves up for an early retirement. And those who are just getting started a decade before retirement need to be aggressively saving.
Know, too, that a nest egg of $172,000 is far preferable to $110,000, but if that's all you end up with come retirement, you may still be in trouble. Many of us should shoot for $1 million by retirement, though a smaller amount may suffice as well. As a rough guideline, note that retirees often aim to withdraw 4% of their retirement savings per year. So savings of, say, $300,000 would yield $12,000 annually. Combined with all your other income sources, such as Social Security, will that be enough? Only you can say.
A key factor in a retirement account's success is how briskly it grows over time. Financial Engines from 2006 to 2012 studied the performance of employer-sponsored retirement plans for more than 723,000 people, some of whom took advantage of "help" (defined as target-date funds, managed accounts, and online advice) and some of whom who did not. They found that "the annual performance gap between Help Participants' and Non-Help Participants' median returns was 3.32%, net of fees." Three percentage points may not seem like a big deal, but it is. As the report explains: "This difference can have a meaningful impact on wealth accumulation over time. For a 45-year old Help Participant it could translate to 79% more wealth at age 65.3." Consider that if you have $50,000 socked away and it averages annual growth of 7% over 20 years, it will total $193,000. But if it grows at 10%, it will become $336,000.
Managed accounts can be helpful because financial pros oversee your money and make many decisions for you. (Just watch the fees, as many charge a lot, and not all managers are equally skilled.) Target-date funds can help because they allocate your money in categories such as stocks and bonds, making adjustments over time (e.g., shifting from stocks toward bonds) as you approach retirement. Online advice can also also valuable, because online calculators can help you model what your nest egg may look like if you keep up current practices, and they can let you tweak several variables to see how your situation might improve if you, for example, make bigger annual contributions or change your asset allocation.
Other ways for people of all ages to seek financial guidance include reading up on financial matters online and in books, talking with and learning from your friends and relatives, and seeking out a financial pro on your own (you'll find a host of fee-only advisers at napfa.org).
This secret to a successful retirement -- getting advice -- is powerful. But so are others you'll run across, such as working for a few more years, exceeding the traditional 10%-of-income contribution to your retirement account, and investing better. Of course, a good financial advisor can help you make the most of these suggestions, too.