Helping clients plan for a successful retirement is a critical service you provide. Many clients don't take the time to envision just what their future will look like, and, as a result, they are often unprepared for the time when they no longer receive a steady paycheck. As your clients' trusted adviser, you can get them on the right track by facilitating retirement conversations and serving as a sounding board for all of the questions they may have.
With that in mind, here's a look at six retirement questions your clients are likely to ask. Are you ready to answer?
1) What Will My Retirement Look Like?
Most pre-retirees walk in your door and ask, "Do I have enough savings to retire?" or "How should I invest my money in retirement?" You can't answer those questions unless you understand your clients' retirement vision. Unfortunately, many clients don't give much thought to what their next stage of life will look like.
A retirement vision is a detailed description of one's most fulfilling retired years. Encourage clients to realize—and articulate—their vision by brainstorming their goals and dreams. (Use our complimentary worksheet as a starting point.) Ask them to write down the qualitative, intangible benefits they get from work—camaraderie, creative stimulation, or a sense of purpose, for example. How will they replace these benefits in retirement? How do they plan to stay engaged and energized? These desires are vital for planning.
2) How Much Do I Need to Save?
Depending on the source you consult, retirees will need anywhere from 70 percent to even 100 percent of their pre-retirement income to maintain the same standard of living when they stop working. Although this basic formula might be useful for someone decades away from retirement, a replacement percentage is no substitute for your detailed analysis of the client's current spending and retirement goals. Be sure to consider items like travel, hobbies, and health care.
3) How Much and What Type of Health Insurance Will I Need?
Many clients underestimate how much they'll need to set aside for health care expenses. According to a 2013 Fidelity Benefits Consulting estimate, a 65-year-old couple retiring in 2013 will need approximately $220,001 to cover medical expenses throughout retirement.
It's a common misconception that health care is free for those over 65, but only Medicare Part A (hospital insurance) is free for most people. Part B (doctor services), Part C (Medicare Advantage coverage), Part D (prescription drugs), and Medicare supplement insurance (Medigap) come with a premium. Even if they have insurance coverage, clients should expect some out-of-pocket costs.
Health insurance for early retirees usually takes the form of COBRA or the spouse's employer-provided plan. Private insurance may be another option for the healthiest retirees. Alternatively, the client may qualify for HIPAA-eligible plans and high-risk pools, depending on the program the state offers.
Don't overlook long-term care! Medicare doesn't cover most long-term care needs. According to Genworth's 2013 Cost of Care Survey, the average cost of long-term care in 2013 was $207 per day for a semiprivate room and $230 per day for a private room. Long-term care planning is a difficult topic—but talking about the benefits of long-term care insurance is among the most critical conversations financial advisers should have with their clients.
4) Should I Pay Off My Mortgage?
From a purely mathematical point of view, clients shouldn't pay off a mortgage if the after-tax return on their investments is greater than the after-tax cost of maintaining the mortgage. Other factors that may favor retaining a mortgage include the period of time clients plan to live in the home, their financial cushion, and how easily they could obtain a home equity loan in an emergency. For some, however, the peace of mind of not having a mortgage may outweigh these financial considerations.
5) When Should I Begin Social Security and Pension Payouts?
Retirees can start taking social security between ages 62 and 70. If clients begin taking benefits prior to full retirement age (66 for most), the monthly benefit will be permanently reduced. If they delay taking benefits beyond age 66, however, benefits increase about 8 percent per year.
Similarly, when evaluating pension payout options, your clients face an array of choices: annuity, joint and survivor, and pension maximization options. Ask about important factors, including the retiree's health, family history of longevity, cash flow, and marital status. Be sure that you don't rely solely on a breakeven calculation when helping clients decide on the best option—this is only part of the story.
6) In What Order Should I Take the Withdrawals?
For those over age 70½, the simple answer is to take required minimum distributions first and make up the difference from taxable accounts. For younger retirees, the most tax-efficient method is generally to take withdrawals from taxable accounts first. But which taxable accounts? Here are some rules of thumb:
• Look for accounts with the potential to generate taxable losses. Investment losses can offset both long- and short-term capital gains, and then up to $3,000 in ordinary income.
• Look for assets with no opportunity for further tax deferral, such as maturing CDs, bonds, and other cash equivalents.
• Accounts with the smallest gains might come next. Under today's law, liquidating accounts with long-term capital gains is more tax-efficient than liquidating ones with short-term gains.
• Hold off as long as possible on investments with potential for tax deferral (e.g., variable annuities, traditional IRAs, and qualified retirement plans).
Granted, there are always exceptions to the general rules. For instance, it may make sense to take RMDs before 70½. For clients with significant funds in qualified accounts, it may be wise to convert to a Roth IRA early in retirement.
Remember, no withdrawal decision should be made on tax considerations alone. Clients wishing to maximize their estates may want to preserve assets that have tax advantages for beneficiaries, such as capital assets that receive a step-up in basis or Roth IRAs. The amount of withdrawals is also critical. Clients need to understand how much they can withdraw without outliving their savings.
Consider these six questions a launch point for retirement planning discussions. By working together and asking thoughtful, probing questions, you and your clients will be better positioned to make smart decisions that will go a long way toward helping them build their dream retirement.
Justin Duft is an advanced planning consultant at Commonwealth Financial Network®, member FINRA/SIPC, an independent broker/dealer–RIA.
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