From the September 2007 issue of Investment Advisor • Subscribe!

The Affluent and Retirement

They have more assets than the average client, but the same concerns

In addition to the details of a comprehensive advanced planning strategy, clients may wrestle with such personal challenges as the best way to transfer assets to children and their preparation to manage them, which we examined last month. Another primary concern is retirement--how to live it and what it means to retire with significant assets.

The way that some affluent clients think about retirement is surprising. Advisors have observed how many clients with a high net worth still harbor some anxiety about their retirement income and expenses--although their standards of living would certainly be secure by most measures. A Northern Trust Survey of high-net-worth individuals averaging more than $5 million in investable assets discovered that 92% of pre-retirees were very or somewhat worried that the steep rise in healthcare costs would affect their ability to enjoy their retirement. Even though they have the assets to purchase substantial amounts of health and long-term care insurance protection, they're concerned about the uncertainty in their future.

Retirement planning for affluent clients "is like solving a puzzle. We need all the different pieces sitting on a desk," says Peter Carnathan, a planner with Fiduciary Trust Company International in Washington. The puzzle pieces include more than just assets and goals, however. In terms of client attitudes, he finds that more and more of them just think of retirement and age as states of mind unbound by biology and social convention. Those attitudes need to become part of the planning mix to create the strategies that will work for these clients.

Emotional ROI

Another high-net-worth advisor, Greg Kyde of Kyde Capital Strategies LLC, in Boulder, Colorado, sees a major issue arising as pre-retirees' transition from focusing on career and wealth accumulation to the post-retirement phase, which requires them to redefine themselves professionally and financially. "These folks typically spent their adult lives assessing and evaluating opportunities, calculating risks, comparing potential returns, all with an eye on creating wealth. Retirement sort of flips the switch. They begin to consider more heavily what I call the softer side of return, the emotional side."

Often, it's the first time that they've really delved into the emotional return on their assets and it becomes a challenge. Like many retirees, they question what they should do with the rest of their lives, although their accumulated wealth allows them a greater menu of possible answers than the average American.

Fears regarding dips in their retirement income stream can also affect how advisors plan for them. Before they retired, many affluent clients had regular salaries. Often, they want something to replace that paycheck--and they expect their investment portfolio to provide that safety net and income for them. They may have a $10 million net worth, but they still want to receive a "retirement salary."

Philanthropy and Retirement

Those with substantial assets often think about philanthropy and retirement together. In a survey of affluent individuals with an average of $11.78 million in investable assets, 21% cited retirement as the reason they would increase their charitable donations (Source: U.S. Trust Survey of Affluent Americans, April 2007).

For such a client, retirement and charitable planning could include helping them decide whether to make contributions to a community foundation or creating a family foundation of their own where loved ones participate in running the organization. As much as the financial aspects, the client may want to weigh the emotional return of each charitable avenue to see which best suits her retirement lifestyle. "It's a challenge at times to get someone actually to spend the time, slow down, and be introspective," notes Kyde.

Philanthropic interests often come to the fore in retirement, especially when driven by a client's genuine interest in a particular organization or cause. A client of Kyde's in his early 60s, for example, has a net worth of about $20 million and was considering retirement. He needed to decide what to do with assets in a way that would be meaningful to him. He found his goal: sending as many people to college as he could, starting with his nieces and nephews. The scope of his retirement and the source of his happiness during these years went far beyond personal comfort and leisure activities.

"With good planning, reporting, and risk management, retirees begin to think beyond one more cruise to Alaska," says E. W. "Woody" Young, a planner with Raymond James in Dallas. These clients ask the broader questions--How much is enough? What's really important? Can I make a difference? How do I want to be remembered? These issues start surfacing when they have a comfort level that their lifestyle is secure, observes Young. The more secure they feel, the earlier they address these questions.

Getting Spending right

Client spending habits can dramatically affect even the most thorough investment plan. Spending too much, especially in the earlier years of retirement, can diminish the asset base to such an extent that it can't generate the expected income in the later years. If an affluent client suddenly adopts the spending habits of a 20 year-old pop star, it may be time to help them evaluate their monthly expenditures.

On the other hand, liquidity and very significant net worth don't necessarily give clients the emotional freedom to spend money on themselves, notes Carnathan. "They just will not splurge at all on themselves. It's really a mindset that they've had throughout their entire life. And while it's admirable, at the same time, we have to remind them that every once in a while, it's okay to take a trip or buy a new car."

Bedda D'Angelo, of Fiduciary Solutions in Durham, North Carolina, is one of those seasoned advisors who have observed how many very wealthy people still maintain the middle-class values of their less affluent early years or exhibit the same traits if they've had wealth their entire lives. One of her clients, a business owner, lives in the same small comfortable home on the middle-class street he always has and drives an old Mercedes. Little do his neighbors realize that his net worth is over $40 million. She also has clients with significant old money who have little concept of the cost of living today and remain terrifically frugal about all expenditures.

You may have to convince them that they can retire early, if they wish. Young had a client who never quite understood how much wealth he had accumulated until the advisor laid out his portfolio, stock options, retirement plan, and other assets. Once he understood he was financially very secure, he agreed to a plan with trusts for his children and a philanthropy program. Even after gifting, his net worth was over $12 million. He retired 10 years ago.

In the last six months, his wife has been diagnosed with a treatable but not curable cancer. The future quality of her life is uncertain at this point, but, because they retired earlier, they managed to have ten years of retirement the way they wanted it.

The Evolving Model

Retirement for advanced planning clients has evolved over the years. Having been in the industry for twenty-five years, D'Angelo has observed a shift in retirement planning over the years. Even the sources of retirement income have changed. Early in her career, she rarely had a client with an executive comp package. Now, several clients get annual stock options worth about a million dollars that she invests, which later form non-qualified portfolios that will contribute to the retirement income stream.

Similarly, Young has seen his own attitudes and those of the profession change over time. His practice, in its 20th year, now has 17 CFPs on salary and is on retainer with about 300 families in 30 states and four countries. Their retention rates run about 95%. In 1987, when the firm started to do financial planning, the profession was just starting to mature. "Fee-based advisory relationships were more a dream. They weren't reality yet," he notes.

The expectation was that the clients would accumulate sufficient assets to become financially independent. Once they had enough, the advisory relationship diminished. Fifteen years ago, Young altered the practice to become more active in working with the goals and lifestyle questions of client's retirement. "Over the years, we learned that we can start asking those questions earlier in the relationship. And so, if we have someone who is affluent, we're able to go with our experience and pretty much demonstrate how they can be financially secure in retirement."

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