Helping clients plan for retirement is one of the major jobs for advisors. Helping in that task are retirement planning calculators, investing theories and vehicles, and Social Security strategies galore.
Advisors and their clients must live in the real world, however, and all those tools must incorporate what we know and are learning about psychology, the markets, regulation and legislation, and demographic trends. To help advisors provide the best retirement planning advice for their clients, we list here some of the most salient issues that you should be considering in your process. Some you may know, others you may not have considered as burning issues, but taken together these five issues provide a snapshot in 2014 of what near-retiree and in-retirement clients are and will be facing. We humbly suggest that you read on to better prepare your practices and your clients for this new reality of retirement.
Issue 1: The Feds and Retirement
While advisors helping their clients plan for retirement must address many issues, the elephant in the room is always the Federal government, including actions by the executive branch, Congress and regulators like the Department of Labor. Here are three initiatives that may affect how advisors help their clients plan.
First is the DOL’s proposed regulation that would require retirement plan sponsors to project participants’ actual income in retirement. Second is President Barack Obama’s plan unveiled in his State of the Union Address for a “myRA” proposal. Third is legislation introduced in January by Sen. Tom Harkin, D-Iowa, that would create a new type of privately run retirement plan.
While all are steps forward in helping address the retirement savings crisis, advisors and industry officials are giving Obama’s myRA accounts mixed reviews.
Executive Action: myRA
Obama directed the Treasury Department to set up myRA, a savings bond that he said “encourages folks to build a nest egg.”
Workers earning less than $191,000 per year could invest in a myRA with no tax penalty for withdrawals. Initial investments could be as low as $25, while subsequent investments could be as little as $5 and would be automatically deducted from workers’ paychecks.
Once a worker accumulates $15,000, or has the same account for 30 years, they would have to roll it over to an IRA.
The accounts would have the same variable interest rate return as the Thrift Savings Plan Government Securities Investment Fund.
Harold Evensky, president and CEO of Evensky & Katz, said that while myRA “may open up savings opportunities for those with incomes at the low end of the ‘middle class,’” it will be “of little interest for many middle-class investors.” Families with incomes of $50,000 to $100,000, “are likely to be in a position where parsing savings down to $5 a pop is not necessary.”
Bottom line, said Evensky, “If [myRA] encourages even a few extra people to save, I think it’s a valuable concept, but not one to justify changing the tax advantages of a traditional 401(k).”
Obama caught the ire of retirement planning officials when he asked Congress during his State of the Union speech to help him “fix an upside-down tax code that gives big tax breaks to help the wealthy save, but does little to nothing for middle-class Americans.”
Obama’s budget for 2015, which is expected to be released this month, is rumored to propose, once again, to cap higher earners’ retirement contributions.
John Comer, principal with Comer Consulting and an adjunct professor at Minnesota State University Mankato, said that myRA “will allow consumers who cannot find a vehicle for small savings amounts to save,” and the accounts “allow employers to provide a way for their employees to save without the administrative costs and liabilities of a qualified plan.”
But myRA “is not likely to do much for anyone who is already working with an advisor because they are presumably already saving. It does not appear to be a way for people who are already maximizing their savings to save more,” added Comer.
Congressional Legislation: The USA Act
Sen. Harkin’s Universal, Secure and Adaptable (USA) Retirement Funds Act, introduced in early January, is comprehensive legislation that Harkin says “tackles the retirement crisis head-on by ensuring that every working person has the opportunity to earn a safe, portable and secure pension.”
The USA funds would create a new type of privately run retirement plan intended to combine the advantages of traditional pensions—including lifetime income benefits and pooled, professional management—with the portability and ease for employers of a 401(k).
DOL Proposes: Showing the Number
Harkin’s bill also includes a provision that supports the DOL’s upcoming proposal to require sponsors to provide an illustration on participant statements that shows how their account balances translate into a dollar amount that they would receive in retirement. “Converting an account balance into a lifetime income can be a powerful incentive to save,” said Greg Burrows, senior vice president of retirement and investor services at The Principal.
Fred Reish, partner and chairman of the financial services ERISA team at Drinker Biddle & Reath, said DOL’s proposal will be a “game changer” for plans. The proposed regulation “will change the way plans are seen,” Reish said. “Now, 401(k) and 403(b) account balances are seen as wealth; DOL is changing that to have them seen as sources of monthly income,” which will ultimately result in “more guaranteed insurance product discussions.” —Melanie Waddell
Issue 2: Paying for Health Care
Fidelity Investments’ annual retiree health care cost survey found that a 65-year-old couple retiring in 2013 could expect to spend $220,000 on health-related expenses in retirement. Although that’s down 8% from 2012, it’s still a big number for a lot of retirees, many of whom have not factored that expense into their retirement planning.
That doesn’t even include nursing home care, which Genworth’s 2013 Cost of Care study found could run as much as $75,555 a year for a semi-private room and $83,950 for a private room.
“Most of us would aspire to retire early. We know that Social Security can kick in at 62 if you’re willing to take a 25% haircut in your benefits, but what a lot of people don’t think about is that Medicare doesn’t kick in until 65,” Larry Sinsimer, senior vice president of practice management for Fidelity, said in an interview. “In the past you had to worry about a pre-existing condition, but under the Affordable Care Act, if you got the platinum coverage, which would be comparable to what people are getting from their employers today, it’ll cost a married couple, aged 62, $2,000 a month,” or $72,000 until the couple qualifies for Medicare coverage. “That’s $72,000 after tax,” Sinsimer pointed out, “which really equates to about $125,000 pre-tax that you have to put away just to cover that three-year window because you decided to retire prior to 65.”
Coverage can be especially problematic for couples where there is a significant age gap. “Say we have a woman who’s 15 years older than her husband and she’s the major breadwinner,” Sinsimer said. “She retires at normal retirement age, but her spouse is 15 years younger, and he’s been covered by the company health care. Now she’s on Medicare but he’s not, so he has to go get health care.” Continuing with the scenario, Sinsimer said, “Now let’s make that 15-year-younger person not working but they also have a congenital heart defect. Prior to the Affordable Care Act, that person couldn’t get insurance. Where the ACA provides a benefit is not only would it be expensive to get coverage for that heart condition, it would be difficult to get coverage at all.”
High and Getting Higher
Health care is the biggest expense retirees have to account for after food, shelter and clothes, Sinsimer said, and it’s rising at three times the rate of overall inflation. “National health spending projections, even after health care reform, expected that health care for retirees would continue to rise about 6.3% per year.”
Regardless of how difficult it is to engage clients in these conversations, it’s in advisors’ best interest to do so.
“The great benefit to the advisor of having this conversation is that as people come into retirement, they’re going to shrink the number of advisors they’re using. They’re going to consolidate their assets, so the advisor who can really add the value-add, who can point out some of the things they haven’t thought about, that’s the advisor who’s going to end up winning as clients begin to consolidate where their assets are being held.”
Sinsimer noted that it’s common for advisors to have more of a relationship with one part of the couple, and it’s not always the husband. “Very often it’s the wife who manages the money and may be the major breadwinner, but one or the other has the relationship with the advisor,” he said. It’s critical that the advisor have that conversation, perhaps separately at first, then together “so that they get on the same page. If you’re working with only one or the other, then the plan’s never going to work.”
For example, it’s not uncommon for a couple to have different ideas and not realize it. An advisor may find that “the husband thinks he’s going to get a cabin on the Platte River in Idaho, and the wife thinks they’re going to get an apartment next to the grandkids,” Sinsimer said. Instead, Sinsimer argued that it’s important that the husband and wife share their personal “vision of retirement,” including when and where they want to retire.
First, Show Clients’ Pre-Retirement Expenses
The “where” in retirement becomes especially important if clients are considering a move of their primary residence. Many doctors aren’t accepting new Medicare patients, and compounded with a shortage of primary care doctors already, Sinsimer said, clients might have to add the cost of flying back home for a doctor visit when estimating their health care needs.