Annual Review: 7 questions for your adviser

If you work with a financial adviser, it’s a good idea to get together at least annually to review your accounts.  As we get ready to transition into a new year and as our government grapples with the issues surrounding the “Fiscal Cliff,” now may be a good time to call your adviser and schedule that meeting.  Below are seven questions you can ask to make sure that your retirement planning stays on track.

Are there any actions I need to take before the end of the year?  Most of the questions below can wait until next year, but for obvious reasons, you need an answer to this one before December 31.  With changes expected to both dividend and capital gains taxes in 2013, review your holdings and ask your adviser what actions, if any, you should be taking before yearend.  Also, if you are 70 ½ or older you will likely need to make a Required Minimum Distribution (RMD) from your retirement accounts before the end of the year.

How did my investments perform relative to their peers?  It is difficult to gauge performance by returns alone.  If your stock mutual fund drops 20 percent does that mean that it’s bad?  Not if similar funds dropped 40 percent.  When monitoring performance, it’s important to have either a benchmark or peer group that you’re measuring against.  Your adviser should be able to review your holdings and see if the managers you’ve hired are earning their fee.  If so, great.  If not, changes may be in order.

Is my asset allocation still appropriate?  Your portfolio is likely made up of a variety of different asset classes such as U.S. stocks, foreign stocks, small cap stocks, government bonds, corporate bonds and municipal bonds.  How much you have in each area is referred to as your asset allocation.  The balance will vary based on a number of factors such as your age, risk tolerance, goals and outlook for the global economy.  As your circumstances change and as market movements alter your allocation, it is important to meet with your adviser and rebalance your holdings to get them back in line.

Is the amount of risk I’m taking still appropriate?  Investing too aggressively can result in significant losses to your portfolio.  Investing too conservatively can mean that your investments don’t keep pace with inflation.  Either of those outcomes will reduce the purchasing power of your money in retirement.  Work with your adviser to make sure that the amount of risk you’re taking is still appropriate for your circumstances.

Am I saving enough?  There are a number of assumptions that go into calculating how much you need to save in order to retire.  Even small errors in those assumptions can have drastic changes in the predicted outcome.  Rather than making a plan and then waiting 20 years to see if it works, it’s important to make small adjustments along the way.  With each new year, you have new information relating to things like investment returns, savings rates and taxes.  It’s important to evaluate that new information and ask your adviser “Based on these new realities, am I still on track to reach my retirement goals.”  If the answer is no, talk through any needed changes.

Is my withdrawal rate sustainable?  Of course, this question is only appropriate if you’re already retired and drawing income from your portfolio.  Running out of money is a major fear for many retirees.  To avoid that problem, it is important to have a sustainable withdrawal rate.  A suitable rate depends on a number of factors including investment returns, inflation, longevity and even luck.  A popular rule of thumb is to limit withdrawal rates to 4 percent, but everyone’s circumstances are different, so work closely with your adviser to make sure your income lasts.

Do you recommend any other changes?  A good adviser is realistic and honest.  Rather than telling you what you want to hear, he or she is paid to give you straightforward advice that will help you accomplish your goals.  Not only that, but a good adviser should be able to look at your total financial picture and offer comprehensive advice.  Take advantage of that knowledge and experience and ask what, if any, other changes are necessary.

The annual review is an important element to the client-adviser relationship.  It is an ideal time to evaluate performance and make necessary adjustments to help you reach your retirement goals.  Pick up the phone and schedule a meeting today so you can start the New Year off right. 

~ Joe

I originally published this article at www.fpanet.org.

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