The Long, Empty Hours of Retirement

IMGCAP(1)]There are two parts to guiding your clients into and through their retirement years. There is the money or financial part, and the personal part. Most come seeking advice because of the money issues, but the personal part of how a client will spend their new free time is just as important and may ultimately guide how they will utilize their financial assets.

We’ve all heard stories of people who have worked hard their entire life only to retire and then pass away shortly thereafter. I can’t say that there is a connection between inactivity and mortality, but I do believe that retiring without a plan for how you are going to use your 168 hours a week is not wise.

When we look at life after work there is a huge time void that needs to be filled. You may be surprised to learn that many of your clients have never thought freely about their dreams and vision for the future. As these visions begin to formulate, you as the planner must continue to probe and learn what is most important to your clients. For some, this process is so difficult that you may have to ignite the thinking part with a provocative question or two. One of my favorites is to ask a client if they passed away tomorrow, would they have any regrets, or wish they’d done or become something that has not yet materialized for them.

It is questions like that that lead a client to answer with thoughts such as, “I wish that I had visited my elderly mother more frequently,” or “I’d like to take my grandchildren skiing more.” This may sound simple but what is most important on the qualitative side is to help a client discover the most rewarding way to utilize their time. As this issue becomes clear, the planner can use their technical knowledge to assess the feasibility of such and have recommendations in all areas of their financial life to help guide those visions toward reality.

Some clients will have a hard time figuring this out, while others will have their time mapped out. They’ll have dreams, lists and ideas of what they’d like their retirement years to look like in vivid detail. These clients, while they may have figured out the time part, may also need financial guidance. The first part is whether they can afford the desired lifestyle. If not, then your response needs to be direct and helpful, such as letting them know how much they can afford to spend, and how to prioritize their spending. You may need tell them that they’ll need to work and save a few more years, or downsize their home or vision before they put their plan into place.

 

START NOW

Regardless of how early your client starts planning for retirement, the planning for their ideal future can start as soon as they can articulate their vision. Once a vision is established and can be quantified, the advisor can begin work on the analytical side. For clients, or advisors who are not comfortable talking about the softer, deeper side of life planning, you are missing an opportunity to strengthen a relationship and offer help beyond the numbers. However, without this conversation a plan can still be created that includes forecasts to factor in future additional spending.

All retirement guidance must begin with a forecast of cash flow. Your clients should understand their cost of living and desired level of spending, today and in the future. For those early in the process, you’ll be able to help them determine if their level of savings is appropriate for their end destination. Be careful with your assumptions here and make sure that the actual results are compared to the forecast at regular intervals. Not accounting for deviations from forecasts year after year can cause a negative surprise later on.

For example, if a client tells you that they spend $10,000 per month on basic living expenses sans income taxes, you can use that in your forecasting. But if it turns out that they are really spending $12,500 per month and your forecasts don’t react to that difference, you may face future problems.

Just about any assumption made in planning, such as rate of return and inflation, will also need to be reconsidered as conditions dictate. Understating inflation or overstating the forecasted rate of return could have a devastating impact on your clients’ actual ability to draw income in years to come. Consider a few ways to mitigate the possibility of an adverse forecast. The first is to use a range of assumptions, such as 3-6 percent inflation and 2-6 percent for rate of return. Another is to keep the intervals of forecast updating short with a restating of assumptions as needed. Intervals such as annually or every other year are OK for those distant from retirement. For a client whose retirement is closer, I’d update your forecasts at least annually.

Teach your clients how to check up on their Social Security records. Many people don’t realize that they’re not going to get the annual Social Security statement in the mail anymore and have not yet established an account online with the Social Security Administration. While the records shown on most Social Security earnings reports are accurate, there are sometimes mistakes. Help your client to validate their records to ensure that they are lined up to receive their maximum benefit.

In addition to the forecasting side, your clients should undertake a comprehensive risk review to answer questions regarding what can happen to render the forecast completely wrong. Of course, there are issues such as sickness or premature death. But one must also factor in the possibility of extended periods of unemployment, underemployment or a catastrophic loss that creates large uninsured claims against you.

 

WHEN BENEFITS END

As your clients get closer to their actual retirement date, help them think about the loss of benefits from work and what options or needs they have for replacing them. This can be a tougher issue than many think if the client is too young for Medicare coverage, and may materially impact your forecasts due to the high cost of individual health plans. The loss of other benefits such as life and disability insurance should not be an issue in retirement for most clients — but you cannot leave this to chance. Stress-test the plan for long-term-care issues and other long-term health events that could derail the plan.

Find out about all of your client’s retirement savings, including deferred compensation, ESOP plans and anything else that may trigger the need for distributions upon separation from service. To the extent that you have options on payouts, help your client plan so that the tax impact can be minimized. Items that can cause a large chunk of ordinary income upon retirement may be unused sick days, deferred-compensation programs or bonuses. For example, if you have a high-bracket taxpayer with deferred comp or sick days accumulated who wants to retire at the end of the year, ask them to consider January. This way they will have very little base compensation in the year of retirement and leave more room in lower tax brackets for the larger lump sums coming from the deferred compensation or sick day payment.

You can help review their options for taking Social Security. Even clients with a high level of wealth welcome this discussion. The only problem is that it is impossible to be completely accurate with your answer. You can guide them through the generalities of Social Security income using their specific facts such as benefits, age and life expectancy estimates. But they are just that, estimates where the actual outcomes are dependent on other factors such as earnings in retirement and your clients’ actual date of death.

It is also imperative to be sure that your client’s estate plan is current — and not only the documents, such as wills, durable powers of attorney and health care directives, but making sure that their assets are owned properly and that beneficiary elections are current and intentional. For example, it doesn’t help a client who has trusts set up to also have joint ownership of all of their property. Yes, the client can take advantage of portability for death tax purposes, but why make it difficult and time-consuming when merely owning the assets in trusts while they are alive can accomplish the same thing with little fuss? Estate planning documents need to reflect the clients’ primary needs, whether it be post mortem governance of assets or guiding survivors regarding which accounts to draw down.

This is also a good time to have a conversation with your clients about their children and any special situations that you should be aware of. Perhaps your client is concerned about the durability of a marriage, and wants to be sure that the maximum protection is given to their marital assets so that a child can possibly protect herself from a nasty divorce after the passing of both parents. You want the documents to reflect the reality of your client’s situation, with provisions to facilitate their final wishes efficiently and cost-effectively. You should also develop a sense of what their family support network looks like. It will be different for the family whose adult children are scattered around the country than for those who live nearby.

Over the years, I’ve found that many clients are very private about their financial affairs — so private that even their children who have significant roles with their parent’s estate administration or health care powers of attorneys don’t know. I believe that one of the greatest services that a financial planner can provide is guidance on the communication needed to clarify the parent’s plans to the next generation or those who will be tasked with the settling and distribution part. Be pro-active, and help your client with their pre- and post-retirement needs and help them communicate that information to their (hopefully) caring and concerned next generation.

John P. Napolitano CFP, CPA, PFS, MST, RLP, is CEO of U.S. Wealth Management in Braintree, Mass. Reach him at (781) 849-9200 or on LinkedIn at JohnPNapolitano.

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Financial planning Retirement planning
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