When working with clients on retirement planning, I often ask them to shift their focus. Instead of thinking about the end goal as retirement, think about the real objective: obtaining financial independence. These two concepts are similar yet very different. Clients should feel confident that when they want to stop working, they can do so without being dependent on a steady paycheck.
The truth is, as baby boomers begin to turn 65, many of them are opting to work beyond the traditional retirement age. In some cases this may be out of financial necessity. Other times, boomers have reached financial independence but chose to keep working for reasons other than income. Common reasons that older adults continue to work include having the same sense of purpose and fulfillment they experienced during the course of a successful career, or the desire to leave a legacy.
No matter the reason, advisors often overlook the emotional and social components of retirement planning that tie directly into a client’s financial goals.
Advisors should be prepared to speak with clients about their goals for retirement, as well as financial independence. Part of retirement planning involves talking about goals and aspirations and then working backward to ensure that clients have the assets they need to reach these objectives.
When we look at retirement income needs, we consider three components:
- Core expenses: food and housing
- Joy expenses: recreation, vacations and gifts
- Legacy planning expenses
It is important to push clients to consider not only their core expenses, but also their joy and their legacy planning expenses, which they often highly underestimate.
I have run into pre-retirees who underestimate the money they will need to achieve true financial independence. Some spend the first few years of their retirement accomplishing all the things they have been putting off and waiting to do, like home remodels, travel or a new hobby. Occasionally, this leads to retirees reluctantly rejoining the workforce a few years later in need of a new income stream. Taking a look at clients’ post-retirement goals, particularly those joy expenses, is key to helping them achieve lasting financial independence throughout their retirement.
In other cases, clients’ retirement goals highlight the desire to continue working in some capacity. We often see this goal when a client has reached financial independence but finds fulfillment in his or her work and chooses to continue either full time or part time.
More and more Americans ease out of full-time work little by little, a transition period economists call “bridge employment.” For many folks, retirement is a slow and lengthy process, rather than a one-time event. According to the University of Michigan’s Health and Retirement Study, part-time employment forms the biggest share of total employment for people age 70 and older of both genders. Many people are taking these types of bridge jobs voluntarily as a way to ease into the major life transition of retirement.
About 30 years ago, I met a retired attorney while on a mission trip in South Africa. More than a decade later, I ran into the man again, back at work in his late 80s. At the time, I did not yet realize this man was reflective of a trend among retirees. His job added value to his day-to-day life and he chose to continue working even though his financial situation did not require it. Now, through my work with clients at all stages of retirement planning, I see this trend come up again and again. Retirement does not necessarily need to mean the end of work, but rather the financial freedom to stop working if and when a person desires.
With continually increasing longevity comes the need to look further out when planning for retirement.
As people begin to live longer, it is crucial that they — and their financial advisors — think long term as they start to plan. Longer life spans and costs of potential long-term care are increasing the possibility of outliving savings. Encourage clients to take a look at their goals from a financial perspective, as well as from an emotional and a social perspective. Most financial advisors get caught up in the management of investments and overlook the impact of critical areas of risk management such as life insurance and long-term care insurance, which can be an emotional conversation. Urge clients to consider what a fulfilling retirement means to them and then help them budget and plan to make these activities financially possible.
Leaving a legacy the right way
For many boomers, an important piece of a fulfilling retirement is legacy planning. Many people in the field of financial planning refer to baby boomers as the “sandwich generation,” and aptly so. Boomers are concerned about both their parents’ and their children’s financial wellbeing. In the case of the next generation, legacy planning becomes a key element of many boomers’ retirement plans.
Preparing the next generation to inherit wealth is not always easy. Advisors must work with their clients to instill financial responsibility, as well as good saving and spending habits with clients’ children. After all, if retirement means financial independence, a client cannot retire confidently without feeling assured their children are equipped with the financial tools to care for themselves.
Within my own family, I encouraged my children to develop healthy saving habits from a young age in the form of a “Daddy 401(k) plan.” My children knew from as young as seven or eight years old that they could invest their money by giving it to dad, who would return their money plus a little more at a later date. I frequently work with my clients to help them work out similar systems in their own households so they have the tools to prepare their children and grandchildren to inherit their hard-earned wealth. Sometimes I end up working with three generations at once.
Generally speaking, boomers are not saving as much as they should. Perhaps the most common misconception is that they have enough saved up to retire the way they want. I often have clients who, as they near age 65, simply assume they will retire without putting much thought into whether or not they have enough money to live the lifestyle they want in retirement. Some fail to even consider if they even want to retire at this age. Advisors must help their clients consider how they plan to spend their newly acquired free time and factor in unexpected risks to their financial wellness, like long-term care or a downturn in the market. Additionally, advisors must help clients put the tools in place to ensure they can reach financial independence on their own terms and in their own time frame.
Retirement advisors must challenge clients to question their retirement readiness from every vantage point. Simply turning 65 is not a reason to retire, and a truly comprehensive retirement plan requires thoughtfulness about what day-to-day life would ideally look like in retirement and what it will take from a financial perspective to achieve those goals.
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