There is value in retirement planning, but it can't be measured

I know there is a lot of value in what I do. And I know many advisors similarly provide a lot of value, especially those who do detailed financial and tax planning and not just investment management. However, it’s impossible to quantify that value.

It’s intellectually dishonest to claim to be able to put a numeric value on retirement planning & investment management advice, most of which is hypothetical and based on educated guesses about what may happen decades into the future.

For example, virtually all advisors provide investment management; picking stocks, bonds, mutual funds, exchange traded funds, etc. for their clients. Yes, there is a lot of potential value to add in good investment management; using funds with low expense ratios, helping prevent clients from making irrational and emotional decisions with their investments, etc.

However, the actual value realized from professional investment management services can only be recognized years after the fact. It would require the advisor and client measuring the value of the client’s portfolio under the advisor’s guidance vs what the portfolio would have been had the client continued investing on his or her own. In reality, no one actually keeps track of the what would have been scenario. And even if they did, looking back, we can only make guesses about what the client would have actually done over the years.

Social Security claiming strategies is another area where there is a lot of potential value to be had, but we can’t measure it today.

For example, if you’re single and have a long life expectancy, chances are it would be best for you to delay starting Social Security as long as possible to get the maximum benefit when you do start.

If you live well past your 80s, that advice will have paid off and been worth a lot. If, however, you unexpectedly pass in your 60s before starting Social Security, that advice would have been wrong in hindsight as you would have left money on the table by not claiming your benefit sooner. That doesn’t mean the recommendation to delay was bad. It just means it was the best educated guess that could have been made at that time. The point is, the actual dollar amount of value realized from the initial advice won’t be known until years down the road.

The value of tax planning is similarly impossible to quantify. We know federal tax rates are currently the lowest they’ve been and are very likely to increase over the coming years. As such, doing things like Roth conversions now could help reduce your taxes over the long-term.

However, without fast forwarding decades into the future to see how tax legislation and your annual tax bill actually played out year-by-year, there is no way today to say exactly how much “value” there currently is in doing Roth conversions; it’s all just projections and assumptions and educated guessing.

To be sure, there are definitely some things whose current value is clearly able to be measured. For example, in recently reviewing a client’s tax return, I saw the tax return preparer misclassified municipal bond interest on the client’s state tax return. And that misclassification meant the client paid about $1,000 more in state tax than was necessary. I pointed that out to the client who had the preparer amend the return and the client got that $1,000 back from the state. That was clearly $1,000 of value I provided that year. But most of the value I and other advisors provide isn’t so obvious, definitive or able to be measured.

To sum up, there is definitely a lot of potential value to be had in working with a good retirement planner. As such, you may find it worth it to use professional help in planning your retirement.

But be wary of advisors who make claims or guarantee-like statements that they can provide you at least X dollars of value each year or that the value they provide will consistently exceed their fees. Such claims are disingenuous as there is no way to measure the value actually delivered each year.