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Money January 2013

Financial Fortitude

Fees or Free: How Are You Paying Your Financial Planner?

By Karen Telleen-Lawton

The differences among financial planning fee structures depend on what they are offering. Some insurance agents, stock brokers, or accountants will “run your numbers” and provide a plan which takes advantage of their particular offerings as part of the solution. There may be no upfront charge because they are making money on commissions and fees.

Q: My husband and I have been pretty responsible financially all our married lives. We have a shrinking mortgage, kids in and out of college, an assortment of retirement funds, and dreams of traveling more. We think we’d like to go to a financial planner. What’s the difference between a fee-only and fee-based planner? Are there other kinds? My broker says he’ll give me a plan for free.

A: First of all, I commend you in wanting a third pair of eyes to review something as important as planning the rest of your lives. After making so many good decisions, such as paying down a mortgage, providing for your children’s educations, and saving for retirement, you’d hate to come up short.

The differences among financial planning fee structures depend on what they are offering. Some insurance agents, stock brokers, or accountants will “run your numbers” and provide a plan which takes advantage of their particular offerings as part of the solution. There may be no upfront charge because they are making money on commissions and fees.

There are also “fee-based” planners whose main product is a comprehensive plan, for which they charge either a flat fee or a fee based on your net worth, your investable assets, or some other measure. Fee-based planners often provide advice on cash flow, insurance, investments, taxes, retirement, and estate planning. But they also sell products integral to the plan, such as insurance, annuities, or stock commissions.

A fee-only planner makes money only through client fees for service. Because of this, they do not have conflicts of interest in the advice that they provide. The advantage of going to a fee-only planner is the assurance that your interest is your planner’s highest priority. The disadvantage is he or she is not a “one-stop shop.” While fee-only planners may refer you to an attorney, accountant, or insurance agent, they will not be making a referral fee.

So, can you get a plan for free? It depends on what you mean by “free.”

 

Q: I’m in my early 50s and have paid into Social Security my whole working life. I’ve saved in 401(k)s also, but since the crash I’m feeling like I’ll be depending on Social Security more than I thought I would. I need to know the truth. Will it be there for me?

A: Let’s start with the bottom line: Yes. Social Security is working just as it was designed to do since 1935. Every year the program trustees meet to analyze the health of the fund over the next 75 years, so there are no surprises. Currently, the trustees project that if no changes were made, there is enough cash to pay full benefits until the year 2032. Changes have been made periodically, and the formulas are due for updating to extend the funds into the next century.

Social Security was designed as a pay-as-you-go system, such that current retirees are paid out of current workers’ taxes, with the surplus invested in a trust fund. This trust fund is invested in special-issue securities: obligations of the U.S. government. They pay an interest rate in line with U.S. Treasury marketable securities. Because they can be redeemed prior to maturity at face value, the principal is not subject to interest rate fluctuations. That is, the funds are very safe.

While you wouldn’t want to depend on Social Security for your entire retirement income, Social Security replaces up to 90% of income for people with very low incomes. The percentage is smaller for higher incomes. Social Security tax is capped at $113,700 in 2013, so higher income people don’t pay as much in – or get as much out, percentage-wise. On average, current retirees count on Social Security for about 40% of their income.

One of the major tasks of the trustees is to propose changes to reform the system so it can keep paying in full. The formulas for paying into Social Security and the formulas for drawing upon it and paying taxes on it need adjusting, as has been done periodically. For example, originally the base amount on which you paid tax captured 90% of national income. The current base ($113,700) only captures 85% of national income. One fix would be to raise this amount so that it again captures 90%. Other “fixes” that are being considered include raising the payroll tax, increasing the tax on benefits, changing the benefit formulas, and continuing to raise the retirement age.

The top line is, support your lawmakers in making the changes needed to keep this invaluable system healthy.

 

Karen Telleen-Lawton, CFP®, serves seniors and pre-seniors as the Principal of Decisive Path Fee-Only Financial Advisory in Santa Barbara, California (http://www.DecisivePath.com). You can reach her with your financial planning questions at This email address is being protected from spambots. You need JavaScript enabled to view it. .


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