Business leaders sometimes explain their decision to step down by conceding that “I can’t see around corners like I once did.” In fact, a similar aversion to the unexpected is very common among retirees in general.
When clients retire, increased caution of the unforeseen is rooted in good reasons. First, unlike someone still in the workforce, retirees can’t look to wage increases and career advancement to preserve their standard of living. Secondly, historic trends regarding long-term market performance offer less comfort as clients age and their concerns over volatility grow in the face of shorter planning time frames.
Some surprises needn’t be
What’s no surprise is that retirees generally prefer to avoid surprises. Especially for those with carefully made plans in place for a life stage they’ve long anticipated and worked for, they rightly prefer certainty.
Still, some surprises in retirement planning remain just that. No collision avoidance system exists to sound an alarm for every threat that’s around the corner. Just the same, certain forces and events that jeopardize retirement well-being need not come as shocks. The possibility – and in fact, likelihood – of their influence can be anticipated. Moreover, preparations can be put in place to address the potential impact of these risks.
Ideally, retirement is a time for stress-free fulfillment on terms of your client’s choosing. Facilitate an understanding of exactly what that means to your individual client — and what risks may jeopardize such ambitions and expectations. Whether it’s heightened health care costs, accelerated inflation or unsustainable spending, help educate and equip your retiree (and pre-retiree) clients for surprises that may spoil their retirement festivities.
Here are five retirement party crashers that your client may encounter.
Spending on office attire, business lunches and work commuting will end with retirement, but SURPRISE … retirees are much more inclined to spend money on entertainment and social activities. More fun costs more money.
While entertainment, dining out, travel and other perks of retirement are well served, the associated outlays need to be planned for and managed as well. Suggest clients consider modestly priced entertainment alternatives, travel at off peak times and take advantage of senior discounts.
Health care spending
Traditional Medicare is the federal health care program providing coverage for persons who are age 65 or older, but SURPRISE … Medicare households on average devoted nearly 14 percent of their total household spending to health-related expenses in 2012, according to the Kaiser Family Foundation.
In retirement, a 65-year-old couple on average will spend about $400,000 out-of-pocket until age 92, not including long-term-care costs (“5 Costly Retirement Surprises,” Kiplinger).
As health care spending increases with time and age, retirees may find themselves spending more money on health care than on food. Meds versus meals is a choice no retiree cares to confront. That makes it extremely important that your clients understand the potential out-of-pocket costs and use realistic assumptions in planning to address them.
A 3 percent annual inflation rate is a common planning assumption, but SURPRISE … for the period encompassing 1973-1982, the dollar lost a compound average of 8.7 percent each year, according to a DollarTimes inflation calculator.
If it happened once, it can happen again. Not only can prices spike steeply over certain periods, but seemingly small differences in inflation over time can make big differences for a retiree.
For example, over a period of 20 years where prices would rise 81 percent with 3 percent inflation, they would increase 107 percent for 3.7 percent inflation and 128 percent for 4.2 percent inflation.
For those still in the workforce, at least salaries can increase during periods of high inflation. That’s not the case for your retired clients seeking to safeguard their standard of living over a projected 25- to 30-year period without a salary. It’s key that they consider growth opportunities and increasing payout options for their retirement nest eggs.
Retirees may expect their taxes to go down once salary and bonus earnings are a thing of the past, but SURPRISE … their tax bill may not decrease.
If a client is well positioned with ample personal, employer-sponsored and government-provided retirement assets, their income may diminish a little, but meanwhile, deductions such as those for mortgage interest and tuition expenses may disappear, and property taxes may increase. The net result may be more taxes paid.
In addition, money that is pulled from tax-deferred retirement accounts is taxed as ordinary income, which can be a costly revelation if not accounted for in advance, as can the fact that federal income tax may be owed on up to 85 percent of Social Security benefits.
Clients need to plan for income streams sufficient to cover their regular expenses and their taxes. Moreover, diversification among taxable, tax-deferred and tax-free wealth vehicles will help promote efficient allocation among assets needed now, needed later or needed never.
Clients may joke about their days and their dollars running out simultaneously but SURPRISE … Americans are living longer than ever, according to the U.S. Centers for Disease Control and Prevention.
Larger numbers of people living longer is reflected in the ranks of centenarians. There were 55,000 Americans age 100 or above as of last count and, in fact, that number is projected to grow to more than 600,000 by 2050, says an article on Medical News Today: “American centenarians and baby boomers feel ‘younger than their years.’”
As lifespans continue to increase, so too must planning assumptions. Sources for growth potential and income guarantees take on added importance as clients ready themselves for retirement periods of 30 years or more.
Plan for success
How many of your clients set off on a vacation without directions or a roadmap? But how many set off into retirement without an income plan?
The difference may lie in simply not knowing where to begin. For example, in a recent survey, only 29 percent of middle-income Americans reported they had a written retirement plan. As much as retirees may dislike surprises, attempting to navigate retirement without a plan sets them up for nothing but.
A good way to begin addressing the planning deficit is to help clients articulate what they see themselves doing in retirement and how they intend to pay for it. As details emerge, they lay the groundwork for consideration of funding sources and drawdown assumptions.
Enhanced confidence ultimately comes from putting real plans in place. The process includes establishing baselines, identifying priorities and setting short, mid-range and long-term financial goals. Planning should include some allowances for surprises and some thought given to adjustments that may be required.
Financial professionals perform a valuable service for their clients when they initiate discussions of retirement readiness and steer them in directions that define it in real terms. One method for doing so, for example, is by sharing Retirement Picture, an engaging, interactive, app-like resource developed by LIMRA and distributed by W&S Financial Group Distributors. Retirement Picture helps create a personal profile of a client’s ambitions for their post-career lifestyle.
Retirement Picture is just one interactive tool out there to help retirees and pre-retirees envision their financial future. Use them as much as possible.