Make sure clients road-test retirement
As baby boomers ap-proach retirement, they’re likely to feel excited or afraid, or perhaps a bit of both.
As baby boomers ap-proach retirement, they’re likely to feel excited or afraid, or perhaps a bit of both. It’s natural to have a range of emotions at such a significant point in life. Having the freedom from alarm clocks and meetings, and more time to pursue personal interests on a daily basis, is exciting.
But the fear of entering a great unknown can easily creep in. Leaving the workforce may mean separating from a career and an energizing daily routine. Retirees also have to fill 40 hours (or more) each week in a new and fulfilling way. Top that off with the ever- present concern about whether they will be financially secure throughout retirement, and the anxiety can become even greater.
There is a way to help clients head off post-workforce problems: As they near retirement, encourage them to set up a trial run and “practice” their retirement, even if it’s for only a week or two.
To the extent that clients have made a financial commitment to a new lifestyle, a change of heart in retirement can pose real problems. If they’ve already devoted a significant amount of savings toward a particular lifestyle (a home in another part of the country or a trip around the world for a year), changing their mind could throw a wrench into their long-term financial plan.
RELOCATORS
A good example of clients who should perform a practice run are those who have based their financial plan for retirement on the idea that they will be living in a far different environment than their current home.
Consider a client who has lived her entire life in New York but, when she retires, moves to Florida, where taxes and the cost of living are lower. Deciding after several years to relocate back to New York can mean that the dollars she’s saved will have to be reallocated and her savings may not go as far as planned.
Other clients who should absolutely practice retirement are those who have determined that they want to spend a large amount of time and resources in retirement doing something they don’t already commit much of their free time to, such as operating a small business.
Managing a small business means a significant investment, financially and emotionally. A week practicing the job might give important perspective as to whether that’s really what your client will choose to spend his savings on during retirement. If he changes his mind before he retires based on his experience, you can adjust his financial plan accordingly — hopefully freeing up some lifestyle funds.
Practicing retirement may also mean easing into it. Some people may want to take a part-time role with their current employer, or work as a consultant to continue experiencing the challenge of work. Of course, this can also offer important financial benefits that help preserve the nest egg. The point is to experience life in this new reality “challenges and all” to make certain it is the right choice for life in retirement
Practice can pay off in another way — simulating how to manage expenses in retirement. The idea that cash flow no longer comes from a reliable paycheck but from other sources, such as Social Security and personal savings, can come as a shock to new retirees, even those who are well-prepared for this change.
Consider asking your clients to run two accounts. Through one account, manage all of the household and lifestyle expenses expected during a normal year of retirement. This includes the costs for necessities such as food, clothing, shelter, car payments, utilities, taxes and insurance. It also requires some estimates about the other lifestyle expenses, which likely will remain the same or rise with many more free hours to fill.
Through the second account, run all of the expenses that are likely to end in retirement: principal and interest on a mortgage payment (if the home will be paid off), current car payments (although car payments can certainly happen again in retirement), college costs for the kids and contributions to retirement plans.
A little practice can go a long way toward easing emotional and financial concerns about retirement. A trial run may not answer all of the questions you or your clients have, but doing it for six months or so can be very beneficial in determining if your clients’ budget and lifestyle expectations for retirement are realistic.
Craig Brimhall is vice president of retirement wealth strategies at Ameriprise Financial Inc.
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