Solid Retirement Plans Are Undermined By Complexity

9 Strategies to Avoid the Trap

Some future retirees are held back from developing a realistic retirement plan because they’ve been led to believe constructing one is highly complex.

Those in retirement may think that their investment mix and instruments should be complicated because simple doesn’t work.

Both lines of thought are dead wrong.

Unnecessary complexity can outright undermine your secure retirement by either causing you to delay planning, or to develop a plan that’s far too complex to effectively track and execute.

It’s a simple reality that retirement plan complexity causes confusion.

Of course every situation is unique. In fact, we believe that the right financial and retirement plan for you is as unique as your DNA.

But that doesn’t mean it has to be complicated. There are simple truths that are the foundation of financial security and retirement planning.

For instance, you can only build wealth by living below your income.

And higher returns come with higher risk.

That compound interest is an incredible force whose power can only be unlocked by time.

And that the earlier you begin with retirement planning and funding, the more secure your retirement will be.

These are all simple truths. Easy to understand. Straightforward to execute.

Simple truths form the bedrock upon which a secure retirement it built.

Then, as warranted, more detailed strategies can be built upon that solid foundation.

But introducing unnecessary complexity when it’s not additive to your results can be devastatingly counterproductive.

Things like creating a trust if you don’t really need one.

Spreading your assets among too many investments to the degree you undermine your objective of diversification due to overlap. And because it’s hard to track actual results.

Putting your money in a complicated annuity that is worst-in-class in terms of returns, restrictions, and fees.

Investing in instruments like options if you don’t fully understand the mechanics and the risks.

Opening 35 credit cards with a cumulative $60,000 outstanding balance, and making the monthly payments by check.

Departing from your plan without cause.

Scattering key documents like insurance policies, titles, wills, estate plans, brokerage information, and important vital records throughout the house, without any filing system.

My aunt and uncle, regrettably, did every one of these. And this unnecessary complexity was a key factor that accelerated the destruction of their secure retirement.

Their retirement plan complexity caused confusion.

One of the greatest benefits of building wealth, and eventually a secure retirement, is the peace of mind that comes from knowing you’re in control of your financial future.

Complexity serves to undermine your peace of mind in several ways.

It can make you question your actual progress.

It leads to poor decision making, sometimes at the worst possible times.

Complexity continually poses the nagging question of whether there’s a financial disaster lurking around the corner, caused by some factor you overlooked because you didn’t understand all the moving parts.

Given that unnecessary complexity so dangerous, what are the best ways to avoid it?

It’s quite simple.

1. Develop a realistic plan that delivers the retirement you deserve, using the most straightforward approach. Start by envisioning your ideal retirement, and then identify the financial requirements to bring it to life.

2. Avoid the temptation to continually ‘tweak’ your plan, especially your investment mix. Depart from your plan only after it’s absolutely proven to require an update. Even then, do it carefully and only make financial changes once the new plan has been validated by a third party, like a fee-only financial planner.

3. Don’t get pulled into investment or estate management constructs just because they are the new thing of the moment. Subprime mortgage backed securities, once promoted as the new shiny thing, were partially responsible for the meltdown that caused the Great Recession. They were considered a ‘can’t lose’ investment until they imploded, flushing billions of investors’ cash down the drain.

4. When you’re considering a new investment, take the time to fully understand the risks, fees, track record, and how the salesperson or issuing company makes money. Not exciting research, but you may be investing an amount of cash that took years of hard work and sacrifice to amass, and you deserve to aggressively guard that money. If you don’t want to do the research yourself, consider hiring a fee-only financial planner, attorney, or other trusted source to objectively analyze the potential investment. The fee is a small investment to increase your peace of mind that you’re committing your hard-earned savings to the most favorable alternative, versus picking a worst-in-class option like my aunt and uncle did.

5. Don’t rely on the advice of friends and family who are not producing documented results. Everyone has an opinion, and most are well meaning, but bad advice, regardless of intent, can still cost you. Even more important, if you’re approached by a financial salesperson offering ‘free advice’, understand how they’re getting compensated. This will help you assess whether they have your best interests in mind.

6. Take extra care if you are considering investing in ETFs or ETNs. These can be powerful tools that help you optimize your portfolio and pursue specialized investment themes. They are, however, more complex and higher risk than they may appear on the surface. For instance, crude oil ETFs and ETNs can lead some to believe they are investing in an instrument that precisely tracks the daily price of oil. While that may be true within a few days of movement, over a period of weeks or months performance can diverge widely from the underlying commodity or index the ETF or ETN is supposed to track. That doesn’t make these bad investments, just understand they are powerful tools that are ideal for some strategies, but wealth destroying for others. Buyer beware.

7. Understand the benefits and drawbacks of broad legal structures that are available to optimize and protect your retirement assets. For instance, for some, forming a trust is the perfect tactic to meet their objectives. For others, it’s a costly and complicated option. Consult an objective resource who can help guide you to the right solution for your situation and goals.

8. Automate your day-to-day finances as much as possible. Use auto debit to pay your bills. It’s convenient, the withdraw will happen at the latest possible date, you’ll never be late due to the post office or forgetting to mail the check, and you won’t have to remember to sign into your online account to make the payment. Automation also works wonders on the savings side. Doing things by hand is simply too complex and invites mistakes that can compromise your credit rating.

9. When it comes to managing your financial records, commit to keeping everything in a central location for easy retrieval. Have a single area in your home where records are stored. Place important ones in a fireproof container. Keep your electronic records in a single directory, filed by year and type, and back up that directory often. Put irreplaceable records, as well as an electronic back up of important documents, into safe offsite storage, like a safe deposit box.

New financial products will debut every year. New doesn’t mean bad, but it does demand that the savvy investor understand the risks, rewards, and fees.

If you switch from a proven investment to something new, be sure the move is warranted, that your expected returns justify the risk, and that you have a clear and fast exit plan if things don’t work out as anticipated.

Finally, some financial salespeople promote the idea that complexity leads to better results. But one of the greatest investors of our time does not agree.

Bill Gates was asked about the best advice he ever received from Warren Buffet. His reply? Keep things simple.

If that advice is good enough for one billionaire to share with another, shouldn’t it be good enough for us?

Complexity is not your retirement friend. It can lead to the destruction of the retirement you deserve. Keep things simple and you’ll never regret it!

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