Last week, I met with a certified financial planner (CFP) to discuss my impending early retirement.
My employer offers their minions free sessions with these supposed financial wizards. The goal? To help folks pave the way for a well-funded exit from the working world at the standard age of 65.
As someone who believes everyone should manage their own finances, I’d never before met with a planner or adviser of any kind. This is mostly due to the fact that these folks have a potential conflict of interest — they can (and do) make money by providing advice that benefits them rather than their clients.**
CFPs in particular are obligated to “at all times place the interest of their client ahead of his or her own.” Still, within that requirement, there’s room for advisers to skirt around the ethical line, occasionally resulting in sub-optimal or even downright bad planning for the individual.
At any rate, my primary motivation for having a consult was to review my own plans to exit the working world with a professional. You know, as an information-gathering experiment, or, as the kids say, “for kicks.”
In addition, I wanted to demystify the experience. Most of the financial books I’ve read discourage the use of advisers or brokers. While I’ve always agreed with the basic logic behind this advice, I won’t attempt to hide my curiosity: I wanted to understand exactly how these types of meetings go.
I held a few assumptions going in — that this person would do the following very uncool things:
- Never, ever tell me outright that I could retire. Not until I am 65, anyway — regardless of how much money I’ve saved, or what my annual expenses are.
- Sell me product I don’t need.
- Make a suggestion to roll my Vanguard 401(k) into Fidelity’s services, because hey, he’s a Fidelity rep.
- Balk at some of the trickery I planned to use in order to access my tax-advantaged accounts well in advance of the standard retirement age.
Let’s see how he did.
The Rep
How about a fist bump? Can we do that instead? A fist bump for Doom?
I walked into a company office where my adviser had taken up temporary residence.
He rose to greet me. I noticed he was slim and dressed conservatively with a collar shirt and tie — no jacket. Couldn’t have been older than 30. When I shook his hand, it felt a little limp, but he looked me right in the eye and introduced himself. He seemed confident enough.
We sat down and shot the breeze for two minutes. What department do you work in. How long have you been with the company. Sure is cold out, isn’t it? Yep, it sure is. Blah, blah. The usual.
Finally he cut to the chase and asked my reasons for scheduling the appointment, and I told him that I wanted advice on my retirement plan.
He says great! That’s what he’s here for. How far along in the process am I?
Well, that’s the thing. I’m pretty sure I’m done. Hoping, anyway.
Seriously? You can’t even be 40 yet.
38, actually.
To his credit, after this initial burst of surprise he calmed down quickly and ran me through the standard process.
We’ll see about that. Fidelity has some calculators that will take your numbers and provide a report. Do you mind working through that exercise?
That sounds perfect – it’s what I’m here for.
This brings us to…
Round 1: The Calculators
If the calculator doesn’t tell you what you want, break it.
Over the next ten minutes he plugged my financial data into Fidelity’s retirement application.
- Yearly Expenses: 20K
- 13K essential, AKA floor
- 20K ideal, AKA ceiling
- Social Security Estimate: 1546 starting @62 (earliest age)
- Assets:
- 620K 70/30 stock/bond split held in various accounts (taxable, 401(k), Traditional IRA, Roth)
- 70K cash/CD
- Note: The data provided to the rep is a little stale and understates my real balances by 4-5%.
Instantly his computer screen pops up a chart that indicates overall success.
Note: The Fidelity calculator “defaults to poor market performance.” My adviser couldn’t tell me exactly what this meant other than, quote, “in 90% of the historical market scenarios run, the asset allocation performed at least as well as the results shown.” So it’s a modified history-based calculator — probably not all that different from cFIREsim underneath the hood.
I asked him to run the numbers again, this time without any social security benefits whatsoever, and the calculator still returned a successful report, albeit a shakier one.
I’ll also point out that he wasted a couple of minutes of our time questioning my spend rate. He simply couldn’t comprehend that I spent less than 20K/yr on myself, even after I explained that this figure assumed a paid-off residence and relatively low taxes, and, by the way, it’s just me — one person. My wife has her own asset sheet and will be executing a somewhat different plan — she has a rental property and a pension.
Moving on. He asked me how I planned on accessing my retirement assets prior to age 59 1/2 and I went over the Traditional IRA-To-Roth Pipeline Strategy detailed in my blog. I also explained that I’m holding about 3 years of living expenses — a current year in cash and the other two in laddered CDs.
My adviser said that he only recently heard of the pipeline method but agreed that it would work just fine and help keep my tax burden low. He also mentioned Substantially Equal Periodic Payments (SEPP) AKA 72(t) distributions as another way to tap those retirement funds. SEPP could function as a partial backup plan in the unlikely case that laws behind the pipeline strategy become invalidated.
Next, he voiced concerns about potential inflation. I explained that investing in the stock market is a partial hedge against inflation. At the very least, it’s better than holding mostly bonds, which usually fare worse in high inflationary environments than ETFs. Besides, if the U.S. undergoes hyperinflation, like Germany did in the early 1920s, no retirement plan will be safe. On that, we both agreed.
Next subject: Health care. I said I’d get on the ACA (“Obamacare”) and take a cheap high-deductible plan, and he said: OK.
We talked about the safe withdrawal rate as well. In his opinion, the real SWR for a 70/30 stock/bond split was about 4%. At this point I agreed, mentioning the Trinity studies, but much to my surprise he said he’d never heard of them.
Still, in the end, he cleared me to quit. I was absolutely floored. When I came into the meeting I thought there was no chance in hell that a rep from a financial company was going to say it was perfectly fine for me to retire, and yet that’s exactly what he did.
But he wasn’t quite done yet.
Round 2 : The Sell
At this point, we’re about half an hour into our meeting, and I figure we’re done — I’m getting ready to leave. It is precisely at this moment when he tries to sell me stuff.
- He urged me to move my funds into Fidelity from Vanguard, saying that their expense ratios had grown “much more competitive over the years.”**** I said no, stating my preference to own funds in a fiduciary trust. At this comment, he responded that it could be in my best interest to have all of my funds managed by the same organization for ease-of-management. I said: You’re right. I’ll be moving my Fidelity balances over to Vanguard after I leave my employer for precisely that reason.
- Then he tried a different tack, saying that Fidelity offers superior funds, complete with active managers who will beat the market due to their incredible comprehension of the financial markets. I immediately informed him that a) I’m an index investor, and b) most actively managed funds fail to beat market performance after you factor in things like expense ratios and other associated costs e.g. short-term-capital-gains in taxable accounts. He disagreed, but we moved on because we didn’t have time to start pulling up spreadsheets and arguing the point. I know I’m right — end of story.
- After noting that I would likely end up with millions in the bank toward the end of my life, he showed me Fidelity’s charitable giving website. Although I’m all for giving money to causes you care about, I see no reason to go through Fidelity — no thanks.
- He mentioned a Fidelity Visa with 1.5% cash rewards. Again, not interested.
That was about all he could think to offer me for the day, which was fortunate, because I was getting ready to tell him to shut the bleep up.
Round 3: Weird Suggestions
Like, far-out dude. We’ve entered the psychedelic zone.
So we’re forty five minutes into the meeting, leaving us with at least fifteen minutes to kill prior to his next booking.
It’s here that he embarks on the third part of our conversation: The One Where He Tries To Give Me Insane Advice.
- He said if he were in a similar situation, he’d hold more cash– at least several years more cash. When I asked why, he explained that he believes the market may be flat or worse over the next decade, and he’d therefore take a conservative position. This comment didn’t shock me at all — there are a quite a few reputable publications that estimate very low growth for the medium term (5-10 years) in US Markets. Still, I will not be following this advice, and neither should you — it’s market-timing. Bad.
- Then he went on to suggest bucketing funds by decade. For example: Take 200K, which is designated for “decade 1” and put it into a mix of lower risk vehicles: gold, cash, and short-term securities. Take another 200K, your “decade 2” money, and put it into slightly riskier funds: long term securities, some domestic stock. Then put the rest of it (200K+) into riskier assets where you can afford to have very long time horizons. Foreign and emerging markets would foot the bill.
I couldn’t help myself: I challenged him on these ideas, telling him that I disagreed. Bucket creation is essentially timing-by-decade.
The only reason you’d want to hold cash for the first ten years, for example, would be because you believed that the markets would be flat or negative over that period. Following your so-called beliefs and whims is precisely the opposite of index investing. You are instead following a hunch. I informed the Fidelity rep that no amount of hand-waving would make me accept that his suggestion is anything other than an attempt to predict the future and therefore time the market.
As an added negative, if you take this approach, you’re invalidating the results of history-based calcuators like cFIREsim or FireCalc because you’re breaking their assumptions — namely, that you have a single allocation and you stick to it over the specified duration. Like I said: Very Bad.
So I pressed him: I asked him to tell me how his bucket idea mapped to the Fidelity Retirement Planner tool that we just used to green-light me. Was that calculator aware we might be taking this approach? Could we configure it to change the model to something closer to funding-by-decade? Answer: No.
At this point he conceded, advised me to stick to the plan I’d already created, and shooed me out of his office.
Summary and Takeaways
First, let’s look back at expectations. I assumed that he’d a) tell me I couldn’t retire, b) sell me stuff, c) express skepticism regarding the Roth pipeline method and d) suggest a rollover of my assets into Fidelity’s funds.
The only surprise was on a) retirement approval. He agreed that I could go ahead and pull the plug on employment. This shocked me because it’s not in Fidelity’s best interests for anyone to retire. Obvious: They make money holding your assets. They don’t want you to spend a dime.
Still, he did try to sell me stuff, did recommend a rollover into Fidelity, and did have some doubts about the Roth pipeline method — namely, whether or not it could be counted on indefinitely. (This is, to be fair, a valid concern.)
A couple of other final thoughts:
- He didn’t provide anything of use that couldn’t be found in good financial books or by reading the ERE/MMM/Boglehead Forums. There was no secret sauce or magic recommendation that hasn’t already been discussed to death on the ‘ol “internets.”
- In fact, many of the threads posted in the financial sections of online forums are far more sophisticated and useful than this particular guy’s advice. Point? Our meeting was validation that financial advisers have limited use, especially for people who are willing and ready to some self-training in this area. It was instructive to see first-hand that I wasn’t missing out on anything. (Yes, I know, this guy is a sample size of just one, but he was Fidelity trained and certified so he must be at least somewhat representative of what you’re going to get.)
- He gave some bad advice, plain and simple. Holding a ton of cash because you think the market is going to crash soon, and/or bucketing by decade is market timing. If you want to decrease risk as you get older, it’s better to slowly increase the bond allocation in your portfolio over the years. Look into target funds if this idea appeals to you, as they do this automatically as you get closer to your retirement date.
I’ll grant him this: For an unsophisticated, unmotivated investor who had no interest in learning personal finance or retiring on the early side, his advice would have been perfectly acceptable.
But that doesn’t meet the description of readers of this blog, who are extremely smart and want to be in control of their own assets.
Bottom line: I haven’t missed out over the past 15 years of my investing life by not having someone tell me what to do with my earnings. In fact, the opposite is true: I’m richer, because I haven’t been paying bloated expense ratios over the years.
So when it comes to getting an adviser, just say no. Chances are, you’ll end up richer, too.
** CFPs are required to keep your interests at the forefront of any and all discussions. This is different than a broker, for example, or a straight-up investment adviser, who might have much more significant conflicts of interest. Even so, I found this particular rep was applying ‘spin’ in an attempt to get me to move funds into Fidelity, which was frankly not in my best interest.
***If you’re not sure about the distinctions between different types of advisers and you are, against the advice of this post, seeking one, please read up on them and be safe — and skeptical.
****After our meeting, I followed up on the statement re: Fidelity’s expense ratios being more competitive lately.
I compared the Fidelity Freedom K 2040 fund (FFKFX) against it’s Vanguard equivalent, the Target Retirement 2040 Fund (VFORX).
Discovery? Utter bullshit. FFKFX is .66%, VFORX is .18%. On 500K of assets, that .48% difference amounts to nearly $2,500 a year. In addition I found that FFKFX is actively managed; Fidelity doesn’t offer passively managed (indexed) target retirement funds as of this writing (Jan 2015). This means that this fund will frequently under-perform its market benchmark — and indeed, it did last year, earning 5.5% when it should have earned 7+.
Stick with Vanguard.
***** I’m sure there are some genuinely great CFPs out there who always work in the best interests of their clients. If you’re one of them, that’s terrific – the world needs more of you and less of the kind that likes to play with ethical boundaries.
Living a FI 
Great post! I have been curious about how meeting with a Financial Planner would work out in terms of early retirement. While I still have a good 4 years until I pull the plug, I have been entertaining the idea of meeting with someone just to make sure I am not making some sort of glaring mistake. Its good to know you tested this out and found that you didn’t learn anything more than you really already knew!
There’s no harm in meeting with an adviser, as long as you don’t make any knee-jerk decisions based on their input (and, of course, the consult is free..)
You can do your fact-checking later and choose to either accept or ignore their guidance. Thanks for the comment!
Not sure about Target Retirement Funds, but Fidelity has its Spartan series, which IS competitive with Vanguard. I know because that’s the best option we have through the Alchemist’s 401(k).
What’s your take on Betterment and their TLH+ stuff? Lots of love for them recently but currently their fees are too high with my low asset pool compared to Vanguard.
You bring up another interesting point about investing with Fidelity: You probably won’t have access to all of their fund offerings unless you work there. Fund availability is determined by the specific Fidelity plan your employer provides. If you’re in with Vanguard, there are no such restrictions.
Fidelity does have a target 2040 fund which is indexed (FBIFX) and is a closer, though not identical, comp for VFORX. .16 expense ratio, too, not bad. Not part of my own employer’s plan, though. When I wrote this article I chose the closest analog available and that happened to be VFORX at .66.
I’ll acknowledge, though, that this means the CFP was a little more honest re: competitive costs than I initially believed — a good thing. Might have to rename this post to Top One Thing I Learned, etc.
Another comp, for fun: .07 – Fidelity Spartan 500 index fund, FUSVX, Vanguard 500 Index Fund (VFIAX) – .05. That’s straight apples to apples, as the funds are identical in function. Although a .02 difference isn’t much, it’s still a difference, and Vanguard gets the edge.
re: Betterment.
Con: .15% surcharge on top of underlying funds for 100K+ portfolios.
Pro: Auto rebalance
Pro: Auto loss harvesting
So listen. There are two basic types of investors out there. Type A) does it because they enjoy it. Type B) Dislikes it but participates because it’s a means to an end.
For Type B investors, who would rather be doing almost anything but run numbers and are terrified of making a mistake, Betterment is probably worth it. But for Type A investors, it’s probably be better to retain full control. Rebalance yourself. Gain and loss harvest yourself.
On LH+
-TLH+ will result in quite a bit of additional activity on your IRS filing at the end of the year as funds are moved around to generate the losses. This activity will increase the likelihood you will get flagged for an audit.
-The lower your income (and therefore tax bracket) the less valuable it is to loss harvest. So particularly for people in the ER phase of their lives, it doesn’t make sense to me to use this strategy. However, if your earnings are high (making loss harvesting more valuable) it might change your evaluation.
-Loss harvesting is relevant for taxable accounts only, and most people do not have sizable taxable accounts.
-Moving money from a current broker to Betterment in a taxable account will trigger a gain event that must be taken into account when working through the evaluation.
-Probably only makes sense to use Betterment if you’re just starting a taxable account, i.e. you’re accumulating from scratch.
I’m a type A investor. I re-balance once a year and do the evaluation for loss and gain harvesting at the same time. And I’ll be in a pretty low income bracket starting this year. Plus I don’t want to hit that taxable event mentioned above. When you take these things together, Betterment isn’t right for me, especially at this stage of my FIRE trip. But that doesn’t mean it isn’t a good choice for other people. You just need to be aware of your situation before making a decision.
I’ll definitely be following both MMM and the Mad Fientist’s experiments with Betterment with great interest over the years. And next year I’d like to see if anyone from the MMM forums using TLH+ gets an unexpected visit from the IRS.
Really appreciate the thoughtful response!
LivingaFI, I just got done reading all your posts. All of them. Every single one. I wanted to thank you for sharing your experience with the world. This has been a truly engaging, interesting, motivating, and thought provoking series of posts. It has helped me enormously. I hope writing it helped you too.
Hey, these posts were not meant to be binged! 🙂 Thanks for the comment, and you’re right, I have enormously enjoyed putting the content of the blog together.
Great post! I’ve been looking for a post like this, as I had the same expectations as you. Although I’ve never personally sat down with at CFP, I did have an experience with one as an intern in college. My first job was with a smaller accounting firm which had a small wealth management division. As an intern, I got to sit in on one of the client meetings which I enjoyed. During the meeting the CFP never tried to sell the client a specific fund or insurance product or anything. They took a look at the client’s portfolio as a whole, and just recommended “hey maybe you should bump up your life insurance since you’re the sole bread-winner and maybe at your income level you should bump up your retirement contribution.” I don’t believe they had any affiliation with a specific brokerage-house and therefore would make there money just on the 1% (or whatever there rate was on your investable net worth) and have quarterly or annual meetings with their clients.
The issue with “advisers” that are affiliated with a specific bank or broker is that they have a vested interest in “selling” their bank or broker’s products to earn the most income for themselves. I think anyone with an “adviser” title with their client’s best interests should not have an affiliation with a bank or broker. Once again great post!
Great comment – you raise a terrific point, which is that independent CFPs (read: not employed by a major firm) are far more likely to provide advice that individual investors can fully trust.
This jives with my experience with our Ameriprise CFP, no specific fund or insurance, just a good review and advice. As for the 1% fee: I resisted that for a while, because dammit everything is on the internet, I can do it myself! For me/us the value is in suggesting appropriately investments for my age (I tend conservative/crazy bag lady so going more aggressive has probably earned the 1% and then some) and setting goals. My husband (then boyfriend) and I would never have had many of our Big Life Goals talks without our Financial Advisor’s prompting.
Our advisor has been very supportive of our early retirement goals (age 50) and actually has a few other clients who retired quite early.
I’m a bit surprised you also got the clean bill of health on your plan, but hey sometimes people can surprise you.
By the way, found your blog via MMM forums and I also binge read 90% of it over the weekend. Love your stuff and your job series was excellent. It inspired me to also do a more detailed look back at my own career. So thank you for the honesty and keep up the excellent writing.
If you ever decide to do a post on your own blog re: ‘detailed look’ at your employment history, please drop me a line — I’d love to read it. Thanks for stopping by.
Great post. I’m not 100% surprised that the rep cleared you for retirement, but it was good to hear about a first-hand account.
I had a conversation with a friend of mine who is a financial planner (accounts of $500k or more), and he basically follows the 4% rule when talking about retirement withdrawals, and thinks that my math is sound. He mainly just disagrees with how possible it is to get there by age 40 (or earlier). I also asked if he thought he could beat the market, because I thought that charging 1% management on top of fund fees was a bit nuts. He frankly stated that he could NOT beat the market, and that his services were not really for someone who knew what they were doing with their investing (me). His services were a “peace of mind” for folks who had money and didn’t bother to constantly learn about the market, etc.
Thanks for the cFIREsim shoutout!
That 1% management fee effectively turns your 4% SWR into 3%, making it necessary to save quite a bit extra in order to hit your original (4%) annual spending goal without taking on increased risk. Put another way, if you needed 20K/yr for annual spending, by the 4% rule you’d only need 500K — but if your manager is pulling 1%, you then need 600K instead, an extra 100K.
I love cFIREsim and the recent improvements are great.
I just looked at this article — or Fidelity advertisement, I can’t tell which — talking about the retirement age and thought back to this post. Here is a great quote that displays Fidelity’s bias against retirement.
“You’re not supposed to be allowed to retire for 35 years or 25 years and just sit there and do nothing,” he says. “You have to work longer and save more. The equation is relatively simple. Whether you call that a crisis or just an unpleasant fact of life, it is what it is.”
http://finance.yahoo.com/news/why-you-won-t-retire-early-150043644.html
Hi LAF!
I’ve been an internet lurker for a while but I just wanted to drop by and say that I have really enjoyed your blog so far! I’m a young ‘un (24) and recently started my first office job. My employer also provided a free meeting with a CFP. The CFP I met with actually laughed at me (like it was a totally weird thing for me to be contributing to my retirement plan at such a young age) and informed me (as if talking to a kid): “You’re going to be a millionaire by the time you’re 65!” He then went on an unsolicited spiel about the power of compound interest.
It was…unhelpful.
I have a personal FIRE goal of 10 years so it’s awesome to be able to learn from your experiences.
>> “You’re going to be a millionaire by the time you’re 65!”
Too funny. If you’re only 24, you can make it by your mid-30s with a decent salary, a bit of market growth, and a great savings rate. But that would likely be beyond your own CFP’s comprehension.
hi livingafi, we have quite a bit in common it’s great reading your posts….i also went for a free financial check up session about 4-5 months ago, run by my superannuation (Australian pension fund), with similar objectives of both cross checking and curiosity. It was completely useless and incapable of any retirement calc pre 65 years old. But the good thing coming out of it led me to google around and discover the FIRE blogosphere so at least there was a happy ending!
One small comment on round 3 weird suggestions. The first one to switch into cash, while I agree it’s market timing and based on some economic viewpoint that could easily be wrong, I wonder if there still might be some validity to this thought but for different reasons. I’m thinking back to 6 months ago went I heavily researched bogleheads, IIRC it was a sticky post by R Ferri on AA, where he lists 2 or 3 valid reasons to change your AA. One of those is at the time of FIRE, but not based on market forecasts as per this CFP, the reason being due to the change in your willingness and need to take risk. The example I remember was a rich couple retired many times over who had their portfolio heavily in Nasdaq shares and lost nearly all of it requiring them to have to work again, there was just no need to do that…. However regarding the decade buckets, I’m also hugely skeptical, all these complex proposals just strike me as a way to embed more management fees!
Thanks for the comment and suggestion – I’ll check out R. Ferri’s post. Always open to considering different options. I would like to mitigate the sequence-of-returns problem, but haven’t read anything to thoroughly convince me that there’s a safe alternative. Maybe this will be it…
Enjoyed this post; I’ve read your others a few months ago. When you’re considering “things to do after retirement”, you know you should consider writing; you’ve got a knack for understated humor and narrative that would translate well to fiction, I think.
My wife is actually a Fidelity rep; I am not going to show her this post. 🙂 The Fidelity employees I’ve met are a decent bunch, by and large, and are far less pressured to sell than employees of somebody like Merrill Lynch. That said, they are still salespeople. They’re salaried rather than being commission based, at least, but their bonuses are tied to the money they bring in (or prevent from leaving).
Yeah, best if you don’t share this post with your wife — thanks for that. I know there are some all-right CFPs out there, and even after my experience with the gentleman described here, I’d still include him in that group, as he seemed well-meaning enough. He appeared ill-equipped to deal with the drawdown challenge, but his strengths may have been elsewhere, like getting people to increase savings rates.
I’ve considered writing, but the real problem is that you have to have something to say first. Right now it seems like the only things that want to come out of me have to do with the work grind, FI, and leaving it. 🙂 Maybe something else will strike me after this has sufficiently faded in the rear-view mirror. And thanks for the warm remarks!
Fidelity manages my Companies retirement as well. I’ve had that same meeting. I was at the time hypothesizing on my ability to retire 5 years from then with x number of rentals, making y/month. He helped plug in all the numbers and said yup, you can retire in 5 years. He was impressed with where I was and my plan. He dickered some on my spend rate in retirement. I to mentioned my low spending habits. I also stated my husband had his own plan that this was just for me. I was green lighted. It is now 3 years later and I am ahead of plan thanks to the market and an early purchase of another rental. I am tempted to call them again for another free consult, to see if they green light me to FI now:)
Sorry about necroposting, but I’ve finally “filled in the gaps” and gotten caught up ( <- see what I did there). Good post! Not surprised the rep tried to sell you on their products. I've come to the conclusion that what would be most valuable would be speaking to a fee-based/fee-only financial advisor (fiduciary), and that most of the value they add is not directly about the money. Advice about things like trusts, wills, CYA stuff, maybe estate planning down the way. Some folks put a high value on the peace of mind this might give them.
Looks like you made the correct decision to ignore his market timing advice. Following that would have missed out on considerable growth since then. Nice work