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Working with a financial expert can kickstart your savings through avenues you don’t even know. A financial advisor can help you identify ways to increase your retirement readiness without sacrificing your current standard of living through optimized tax-efficient investments.
Despite advisors offering a leg up, approximately 40% of workers said they didn’t know who they could go to for financial or retirement advice, and just one-third of workers and retirees work with a professional financial advisor according to the Employee Benefit Research Institute. Here are all the ways your retirement savings can benefit from the help of a financial advisor.
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5 Ways Financial Advisors Can Affect Retirement Savings
To put it simply, a financial advisor is a professional who provides clients with financial advice. There are many types of financial advisors, but some of the most commonly used for retirement planning are certified financial planners (CFPs), chartered financial analysts (CFAs) and chartered financial consultants (ChFC). Areas of expertise and costs vary by type of advisor.
Financial advisors focus on retirement planning work with their clients to create long-term goals and outline what steps they need to take to meet those goals. As a result, financial advisors can benefit your retirement savings in the following ways.
1. Maximizing Tax Efficiency
Over time, your income and investments will—hopefully—grow. You’ll owe taxes on the profits from your investments, known as capital gains taxes, when you sell investments or assets. You can also benefit from making certain types of investments now that can reduce your taxable income. A good financial advisor or certified public accountant (CPA) will recommend tax optimization strategies to minimize your tax burden.
For example, a financial advisor may recommend one or more of the following strategies based on your income and tax bracket:
- Tax-advantaged accounts. Your financial advisor will help identify tax-advantaged accounts you can use, such as health savings accounts (HSAs) that allow you to contribute money from a pre-tax basis and grow the earnings tax-free. Your withdrawals can be used for qualified health expenses tax-free. And once you turn 65, you can use the HSA funds without paying the usual penalty for ineligible expenses.
- Backdoor Roth IRA. In some cases, an advisor may recommend converting a traditional IRA to a Roth IRA; you’ll pay taxes on the converted amount, but your future withdrawals in retirement will be tax-free.
- Maximizing tax deductions. A financial advisor or CPA can ensure you’re claiming all of the tax deductions and credits you’re eligible for to minimize your tax bill.
It’s hard to overstate how much of a difference proper tax planning can make in your eventual retirement balance.
If you invest $10,000 today and continue to contribute $20,000 every year for the next 30 years, earning a 10% average annual return with a 24% top marginal tax bracket, here’s what your final balance would look like based on the type of account you have.
| Type of account | Pre-tax 401(k), traditional IRA or HSA | Tax-free Roth IRA or Roth 401(k) | Taxable Account |
|---|---|---|---|
| Balance after 30 years | $3,464,374 | $3,464,374 | $2,195,974 |
A financial advisor can help you identify which accounts are available to you and determine how to prioritize your investing in each. High earning years may be better for contributing pre-tax dollars. Low earning years may be the time to contribute to Roth accounts and complete Roth conversions. A financial advisor will be able to tell you how much to contribute to each and when.
2. Asset Allocation
As an investor, deciding what types of investments to invest in and what percentage of your portfolio should be invested in each asset class—such as stocks, bonds and cash or cash-like assets—can be one of the most difficult and important decisions you can make.
A financial advisor will review your current financial situation and develop a portfolio based on your goals, age, current savings, monthly contributions and risk tolerance.
For example, the asset allocation for someone with decades until retirement may be 80% invested in stocks and 20% in bonds to take advantage of market growth over the long term. But someone closer to retirement age typically cannot take on so much risk, so their focus may be on preserving their money with modest gains. For those investors, their portfolios may be 85% bonds and only 15% stocks.
3. Portfolio Rebalancing
As you save and invest for retirement, your portfolio’s asset allocation can shift over time as market conditions change and the value of your investments fluctuate. For example, bond prices may decrease, driving down the value of the bonds in your portfolio, and stock prices may increase. You need to rebalance your portfolio to ensure it’s aligned with the right level of risk to maximize returns.
With portfolio rebalancing, your financial advisor will monitor your investments and adjust your portfolio by buying or selling assets to maintain the agreed-upon asset allocation.
Although you can rebalance your portfolio yourself, portfolio rebalancing can be a time-consuming process, and it requires constant monitoring of your investments. Having an advisor handle it instead can simplify your finances and make it easier to stay on track.
4. Handling Withdrawals
Once you enter retirement, you may be unsure of how much money you can safely withdraw from your retirement fund and the impact of those withdrawals on taxes. An advisor will help you create a withdrawal strategy that satisfies required minimum distribution requirements and also allows you to have enough income for your lifetime.
If you’re worried about your money not lasting long enough, your advisor will also work with you to create a budget and spending plan. If your savings are insufficient for your retirement goals, your advisor may recommend other strategies, such as delaying retirement or reducing your withdrawal amount to extend your savings and give your investments more time to grow.
5. Optimizing Social Security or Pensions
If you’re eligible for Social Security or an employer-provided pension, your financial advisor can assist you with navigating those benefits.
With Social Security, your advisor will work with you to determine when is the best time to begin receiving payments and, if applicable, how to handle spousal or survivor benefits. If you have a pension, an advisor can help you decide between taking a lump sum payment or accepting annuity payments.
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Planning for Retirement
Retirement planning can be a complex process, and if you find it challenging or overwhelming, the expertise of a financial advisor can be invaluable. Your advisor can provide you with a personalized, strategic roadmap to help you reach your goals. And as your needs change or major life events happen, your advisor can help you adjust accordingly so you can retire in comfort.
Even if you don’t find planning for retirement challenging, checking in with a financial advisor throughout your working years can help you ensure that you’re staying on track. A good financial advisor can help identify ways to make your financial life more efficient so you can save more without feeling deprived.
