Would you like a financial planner with that?

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A reader asked questions about choosing a financial planner:

First time to your blog. Thanks for setting it up. I am retired military working for a defense contractor and contemplating retirement. Your financial experience parallels mine (except for the no-longer employed part). I am an engineer. In addition to retirement pay I have several IRAs and 401Ks and have pretty much done it all myself up to now. Actually basically have watched my net worth go up in good times and down in bad. However, frugality has resulted in enough assets for full retirement to be in reach.

The nagging question I have now is how do I set up my finances for the rest of my life? Do you have any information on the pros and cons of “financial planners”? What do I look for? What is the selection criteria? How do I select the best one? Does any organization rate them? What about the popular ones with military retirees such as FirstCommand or USAA? Would it be better to go to a bank?

Thanks for your questions!

If you’ve been doing your own financial planning then I suspect you’re not going to be happy with someone else doing it for you. Most retirees start withdrawing about 4% per year from their portfolios, and if their financial planner charges 1% to manage that portfolio then that fee is usually the biggest line item in the retiree budget. Let me go through your questions and help you sort out your options.

Financial advisers have certifications and requirements designed to keep you clear of the miscreants, but the rules won’t protect us from the incompetents. There are federal regulations and there’s a national association. You can be advised by several well-known military veterans who are also financial planners. (Rick FerriFrank Armstrong, and Eric Haas come to mind.) The latest trend is fee-for-service instead of annual retainers, but it depends on how much personal service you want.

FirstCommand, at the turn of the century, was involved in a number of complaints and lawsuits for their extremely expensive financial management of their clients. By the time you’d invested for 20 years with them your high up-front loads still resulted in an average annual expense ratio of over 2%. In my opinion the company destroyed its credibility and is struggling to build a new reputation. Some of my shipmates have no idea how to handle their investments and FirstCommand’s authoritative “we know best” attitude is the enforced discipline that these shipmates need to keep saving their money. The reality is that some people don’t want to spend the time or the effort to learn how to handle their money. They don’t even know how much money they spend now, let alone what they’d spend in retirement, but they’re happy to have FirstCommand “taking care of them”. I suspect you’re operating at a higher level of sophistication than these investors and FirstCommand’s services.

As a financial services firm, USAA is an outstanding insurance company and an excellent bank. Their CDs and their mortgage rates have been competitive with Navy Federal Credit Union and Pentagon Federal Credit Union. They have some of the Internet’s best educational material on their website (see my blogroll links and “Recommended reading” list). However, their funds have higher expenses than large firms like Vanguard and Fidelity, and USAA’s advisers charge comparatively high fees. If you decide to go with a large financial-adviser firm then USAA probably understands military pensions better than Fidelity or Schwab, and definitely better than Vanguard. USAA is well ahead of FirstCommand. I’d certainly recommend USAA ahead of any bank even without knowing the other bank’s name.  But you can do better on your own.

You probably got to your current financial situation by being frugal and very good at saving money. The military’s COLA pension and cheap Tricare help veteran retirees cope with inflation. Your investments largely keep up with the market’s performance. The most difficult financial-management challenge you face is developing the self-confidence to manage your retirement assets. The next challenge is having the emotional “sleep at night” comfort to maintain that confidence through the next recession– and to not sell out at the stock market bottom.

I think that confidence comes from education. You could start by reading the blog’s posts in the “finances” category from oldest to most recent. If you like what you’re reading then buy the book (all royalties go to military charities).  The book’s  contributions from 50+ other service members and veterans include personal stories, examples, analyses, and recommendations that go beyond this blog.

You have plenty of other Internet resources. To set up your finances for retirement, you could start by reading the Bogleheads wiki on asset allocation. Keep in mind that a military pension (with its COLA) is the rough equivalent of I bonds, so you could put 2-3 years of your retirement expenses in cash and tilt your other retirement assets toward stock index funds. If you wanted guaranteed excitement then you could invest in small-cap stocks and commodities with the potential for (possibly) higher returns, or you could simply pick a large-cap stock dividend fund that will yield 2-3%/year in dividends and grow another 3-5%/year with very little volatility. If you’re not comfortable with volatility then you could split your retirement assets between Vanguard’s total stock market index and total bond market index funds… rebalance once a year and then go surfing.

The service members and veterans who helped write our book are all posting at the Early-Retirement.org discussion board. Your question is an excellent one that you could post there for more advice. You’ll hear a lot more about FirstCommand and USAA, too!

If (after all this educational research) you feel more comfortable with a financial adviser, then try to find one like Rick Ferri. You could read his posts on the Bogleheads discussion board or his website or his books. He understands military pensions (he’s a Marine aviator) and he’s a very good communicator with low expenses. It’s hard to beat that combination.

Keep an eye on this blog through Facebook or Twitter, or subscribe to it via e-mail. The next post talks more about investor psychology and asset allocation.

Related articles:
Military retirement spending: how much will I need?
Retirement finances: what will I spend?
Military retirement: how much can I really spend?
Back to the Trinity Study

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WHAT I DO: I help you reach financial independence. For free. I retired in 2002 after 20 years in the Navy's submarine force. I wrote "The Military Guide to Financial Independence and Retirement" to share the stories of over 50 other financially independent servicemembers, veterans, and families. All of my writing revenue is donated to military-friendly charities.

  1. Thanks! That seems like a fast way to find a local planner.

    I remember that Vanguard also used to offer fee-only financial planning, although some of their customers complained of “cookie-cutter results” that were heavy on some of Vanguard’s less-popular funds.

  2. If you are thinking about a fee-only financial planner, I would recommend an advisor from the Garrett Planning Network (http://www.garrettplanningnetwork.com/). I used their site to find a planner in my area, and it was well worth the few hundred bucks (I think is was about $550) I spent for a comprehensive review of my situation and specific recommendations. It provided me with years worth of piece of mind, and with fee-only planning, you only pay for what you need.

    Comment? Question? What's on your mind?