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6 lessons for a successful retirement

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Planning for retirement is a challenge that changes with each client, and there is certainly no one-size-fits-all solution. That said, you may — or may not — be surprised to hear how many truly core retirement principles your clients have never even thought about. Here are six time-tested rules that it’s worth repeating over and over and over again.

Lesson 1: It’s your responsibility to plan for retirement. 

Unless your client plans to work until the end of life, someday he or she is going to retire — and it may not be by choice. No longer can any of us depend on our employers to save for our retirements. With the exception of the federal and state governments, few employers have a pension plan and now several states are cutting back on retirement benefits. Most corporations have changed to a 401(k) plan where the employee can contribute up to $17,000 and an additional $5500 (called catch up) once they reach the age of 50. The reason for the catch, quite obviously, is that most employees have not saved enough in their younger years. The catch-up gives them an opportunity to save more in the peak earning years.

While retirees today depend on Social Security, its future is in jeopardy. Most experts believe it will continue, but the amount paid may be less if it is determined by need. Therefore, in addition to funding a company retirement plan, your clients also should be saving in other tax deferred and taxable accounts. 

You’ve heard it a 100 times: Most people don’t plan to fail, they just fail to plan. I see it every day and it is true. I often hear employees say, “My employer doesn’t match any of my contributions, so I’m not going to contribute either” or “I don’t trust my employer with my money” and the classic “I can’t afford to right now.” Successful retirees don’t make excuses; they take action. They enroll in their employer’s retirement plan as soon as they are eligible, even if the employer doesn’t match. Saving for retirement is a habit; therefore, they continue putting money away in other investments like a Roth IRA. Retirement is their No. 1 goal.

With the creation of Target Date Funds, investment selection has become simple. All your client needs to do is choose the date that they plan to retire, and fund managers will allocate their money according to the time remaining until retirement. For younger clients, the allocation has more risk; if you’re ten years away, it will be more moderate allocation.


Lesson 2: Develop a budget and live by it.

Successful retirees understand the difference between a need and a want early in life and on into retirement. They simply live below their means. While this has become more difficult with the temptation of credit, you just have to say NO! As a financial advisor, it may very well fall in your job description to emphasize this with your clients. Remind them that it’s not how much you earn each year that’s important; what matters is what percentage of those earnings you are saving. I’ve seen couples in their 50s who are making over $250K and have less than $50K in their 401(k), and nothing in savings. I see college graduates get a job, and the first thing they do is go buy an expensive car. Hey, I’m a car buff. I love cars. However, even I eventually realized that a car is a means of transportation rather than a status symbol.

The earlier you get started saving for retirement, the less you’ll have to save because time is on your side. So, don’t suffer from “excusitus” by creating a lifestyle that you’ll be paying for the rest of your life. Fund your retirement instead. Encourage every client to start out by saving at least 15% of their income for retirement until they reach the annual maximum contribution. 


Lesson 3: Don’t have unrealistic expectations.

In the 1990s, the stock market was averaging returns of over 10% annually. Investors thought this would continue, and by the end of 1999 a large percentage of investors had moved all their money into aggressive tech investments that had made 70% the year before. Then the dot com bubble occurred.  After seeing their 401(k) now equal to half the value it once was, they started calling their 401(k) a 201(k).

For fear of losing everything, employees began shifting their money into guaranteed investments. In this case, because you are making monthly contributions, you are taking advantage of buying when the markets are low. Encourage your clients to focus on share accumulation — buying more shares when the price is down — rather than how much the stock market has dropped. 

One excuse I often hear is, “But I could lose everything.” That’s true if you put all your money in your company stock and it goes bankrupt, which does happen from time to time. However, if you diversify into different asset classes (which Target Date Funds do for you automatically), chances are you won’t lose everything.  Our great country is based on capitalism and therefore every publicly traded company either produces a good or a service. While all companies go through good times and bad, as long as every working American gets up each and every morning to go into work, capitalism will prevail.

Another lesson that every client needs to hear: Do not borrow from your 401(k). Chances are they won’t pay it back. If they do pay it back, chances are they’ll borrow from it again. A retirement plan is to be used for retirement, which one day will happen. It is not an account to tap for a trip to Disney, your daughters’ wedding, a new car, a bigger house or a college education. These are all goals which should be planned for separately. Encourage your clients to establish an emergency fund of three to six months of living expenses that they can draw from if needed.

Successful retirees do not invade their retirement. When it comes to assisting their children financially, they set limits based on what they can afford rather than what everyone else is doing. If you end up going into debt or possibly bankruptcy because of supporting your children (who are capable of supporting themselves) what have you achieved? The truth of the matter is this: Children believe their parents have more money than they really do, and parents often don’t want to tell their children they can’t afford to help them. 


Lesson 4: Take advantage of the tax savings your retirement plan offers and gain a basic understanding of our tax code. 

In lesson two, I noted that the amount you save is more important than the amount you earn. There I was referring to saving vs. spending.  In this lesson I am referring to the amount you get to keep vs. the amount you pay in federal and state taxes. Retirement plan contributions are tax deductible, which means you are saving both federal and state taxes on your contributions.

For example, suppose your client’s income is $50K, and he is saving 10% ($5000) annually. If he is in the 15% federal tax bracket and 6% state tax bracket, he will save $750 in federal and $300 in states taxes, for a total savings of $1050, all based solely on his decision to contribute to his company retirement plan.  I remember a client who increased his contribution and his next paycheck was higher. He thought surely someone in payroll had made a mistake. After further review, we determined that by raising his contribution amount it reduced his taxable income, moving him from the 25% tax bracket to the 15%. 

The difference between a long-term capital gain and a short-term capital gain can equal thousands of dollars. Suppose you are in the 25% federal tax bracket and the 7% state tax bracket, and you sell 500 shares of Apple stock that you paid $150k for, which is now worth $300k. If you make this move prior to holding the stock for one year, you will owe ordinary income tax on the $150k gain, so 25% ($37,500). If you sell the shares after owning them for more than one year, you will pay only the long-term capital gains rate, which is set at 15%, so $22,500. This is, of course, assuming that the stock is at the same value after one year. (Note that the state tax rate doesn’t change depending on long- or short-term capital gains.)

There are several tax surprises retirees soon learn about. While some rush to start taking Social Security benefits at 62, they often find themselves going back to work. If they did this in 2012, they soon learned that their benefits are reduced by $1 for each $2 that you earn above $14,640 until they reach the full Social Security age, which is currently 66.

Next, they learn that their Social Security income is taxable. That’s right, up to 50% of your benefits will be included in your taxable income.  If your income plus half your Social Security benefit is more than $25,000 Modified Adjusted Gross Income for a single taxpayer, or more than $32,000 MAGI for married filing jointly, your benefit will be taxed at 50%. That 50% rate jumps to 85% when the base amounts are $34,000 MAGI for single and $44,000 MAGI for married filing jointly.  After explaining this, I often hear, “Wasn’t that income already taxed?”

The next tax that I am seeing on more tax returns is the Alternative Minimum Tax or AMT. This is a tax that was enacted in 1970 to tax 155 high-income families that were able to reduce their taxable income to zero because of their itemized deductions. After 40 years and several modifications, AMT now affects millions of families each year. Unfortunately, like most laws there are unintended consequences. Millions of middle class families are affected by the AMT, and that number is growing each year.

Determine if the state you live in is retiree-friendly.  Look for a state where Social Security benefits are exempt from state income taxes. Many states exclude government and military pensions from income taxes or offer a blanket exclusion amount for retirement income. Also, consider sales tax, property tax and estate tax. 


Lesson 5: Take advantage of all your employee benefits and protect your assets. 

While most employees can’t wait to enroll in their employer’s healthcare benefits, they tend to pass on the other benefits. Take disability insurance for example. According to the National Association of Insurance Commissioners, 25 percent of 35-year-olds will experience at least one period of disability during their careers, which will make it impossible for them to work and earn a living for 90 days or longer. The risk only increases as we age. Long-term disability can quickly deplete your assets quickly if you are not insured for this risk.

While employers typically limit the amount of life insurance benefits, these group polices are reasonably priced, so encourage your clients to take advantage of them. Today more than ever, families are underinsured. Some of the excuses I commonly hear are, “I don’t believe in life insurance” or “My wife doesn’t work so therefore she doesn’t need life insurance.” Spell things out for your clients. Ask them, “How much would it cost to hire a full-time nanny to care for your children until they are old enough to care for themselves?” As a rule of thumb you should have ten times your annual income, and while your needs are usually the greatest when raising a family, a need may still exist after retirement. 

Successful retirees not only take advantage of all the employee benefits available to them, they also protect their other assets. They purchase homeowners, auto, life, and umbrella insurance while they are working, and replace their disability with long-term care insurance when they retire.    

estate plan

Lesson 6: Establish and maintain your estate plan.  

Of all the lessons, this is probably the one that is most overlooked. “I’m not planning on dying anytime soon,” a friend once told me. A week later he died of a heart attack, leaving a wife and two young children. Estate planning creates a master plan for the management of your property during life and the distribution of that property at death. An estate plan can be made quite simply.

Every client you work with should at least take advantage of will substitutes. A will substitute is a technique that allows you to transfer property at your death to a beneficiary outside the probate process. This will not only expedite the distribution process, but also avoid any costs associated with probate. Joint tenancy with right of survivorship (JTWROS) and tenancy by the entirety (TBE) transfer assets to the surviving tenant at the death of the other. While JTWROS can be used by non-spouses, tenancy by entirety can only be used by legally married husband and wife, and is not recognized in all states.

Naming a beneficiary is also a will substitute. While most people name their spouse as the primary beneficiary on their retirement plan, life insurance, or annuity, they fail to name a contingent beneficiary, such as their children who are age of majority. This would ensure that your children not only receive your IRA should you and your spouse pass away together but also stretch the annual distributions out over their life time. 

 In addition to will substitutes, successful retirees also have a will, durable power of attorney, health care power of attorney and a living will. 

Make these six simple retirement rules part of every interaction you have with a new client. Your role as an advisor is to educate and mark out the path to financial success. It’s an important job, and these rules are a good starting point.

See also:

2013: The year of the RMD tax bubble

Altering of 401(k) tax incentives alarms retirement industry

Estate planning in a post-fiscal cliff world