Some of your clients may have a set retirement date in mind. Others may turn to you for advice on when to resign from the nine-to-five. Regardless, it's seldom a simple decision.
Both you and your client have to answer several questions. Can the client afford to retire? Does the client want to keep working in some capacity? What are the psychological factors surrounding the retirement decision? Or, as one published work in the area described it: “The decision requires the skill of an actuary, the rationality of an economist and the ingenuity of a lawyer.”
Feel intimidated yet? Don't worry. Help is on the way. Kenn Tacchino, professor of Taxation and Financial Planning at Widener University and
co-director of the New York Life Center for Retirement Income at The American College, has come up with a checklist of 25 factors that influence the choice of a client's optimal retirement age. The article, which Tacchino co-wrote with his social worker wife Patricia, will be published in an upcoming issue of Benefits Quarterly. But he gave me a sneak preview.
The choice of retirement age is first and foremost a financial decision. Therefore, you have to go through all the usual calculations of tallying total retirement income available from all sources and assess whether it's likely to provide the desired retirement lifestyle under the proposed withdrawal strategy. You also need to make a best guess at life expectancy and determine health insurance availability if the client retires before he or she is eligible for Medicare. An adviser should also evaluate the client's debt level and examine the impact of various Social Security claiming options as a source of guaranteed retirement income for the client and possibly his or her surviving spouse.
And that's just the beginning. You have to assess the employer's plan type and plan features. Some defined-benefit plans, for example, may provide financial incentives for early retirement while typical 401(k) plans may encourage working longer to stockpile more matching contributions.
Because of the possibility of retiring due to circumstances beyond one's control such as poor health, corporate downsizing or caregiving responsibilities for a disabled spouse or a live-in grandchild, the planner and the client should consider planning for a spectrum of retirement ages, the Tacchinos wrote. Planning for a range of retirement ages rather than a set retirement date could help to mitigate the risk of “retirement by necessity” and increase the chances of “retirement by choice”.
Don't overlook the softer side of the retirement equation. Filling up free time with meaningful activity requires thought and planning, too. In fact, one adviser in New Jersey has created a series of workshops that she dubbed “Retirement University” for current and pre-retirees to help them reconnect with former passions and to discover new ones. The one-time art student-turned planner said it's her attempt to inject some right-brain creative thinking into the left-brain logic of financial planning. The experiment has been a hit so far with her clients who find that how they spend their time in retirement is just as important as how they spend their money.
The 25-point check list could one day lead to software that could assess the optimal retirement age by quantifying the factors in order to arrive at a conclusion. However, the authors note, that could understate the complexity of the issue. “The dialogue between the clients, the spouse and the trusted adviser is a necessary function,” they wrote. “The decision about when to retire may require some printouts to help map it, but here more than ever the essence of the decision requires the personal touch of thoughtful discussion and analysis.”
Assessing a client's ability to retire and recommending the optimal date is a big responsibility. But this paper underscores the important role that financial advisers play. And for that, you should be proud.