THINKADVISOR: How do advisors keep clients from retiring too soon?
STEVE VERNON: I often show examples of “here's what retirement income would be if you retired at age 62 … 65 … 70.” These are the kind of calculations that most people cannot do on their own, so advisors can add tremendous value by just saying, “You can really increase retirement income if you just wait a few years because the increase from Social Security and from just delaying drawing down your savings are significant.” … At least the advisor can point out the financial consequences.
2. How can an advisor persuade a client not to focus on a “magic number” for retirement?
Again, an advisor should say, “if you want to retire at 65 [or another age] let's first decide how much income you're going to get.” He then should add together Social Security, drawdown from savings, IRAs, pensions, 401(k). Once all these pieces are added up, can the client cover living expenses? Some clients might say, “Whoa, you mean I'll have only $50,000 a year in retirement income when I make $100,000 when working? I can't live on that.” The advisor should say, “This is what's realistic to expect from income,” then walk them through this tough decision: either reduce their standard of living or work longer. The numbers can help drive the client to a different decision — or not.
3. How does an advisor prevent a client from taking Social Security too early, especially if they’ve lost their job?
Yes [a client] might not be able to replace a current job, but is there any kind of work they can get just [long] enough to delay Social Security? Advisors need to push back when their clients might be making this mistake.
But suppose [a client] truly can't work, then a Social Security bridge payment is one of the best ways to use savings [cash in bank, IRAs, pension, 401(k)]. People think that when they retire, they have to start Social Security. We want to decouple that decision. I've done all kinds of analysis on retirement income strategies and the amount of extra retirement income [a client gets] by delaying Social Security [is significant]. Bridge payments are the best income they’ll get from that savings.
4. Why is the thought of working “indefinitely” a mistake?
I've seen [clients say they’ll] stop full-time work at age 62 and [then] work part time and start Social Security. They say they can live on part-time work together with Social Security. They do that for a while and then they get to mid-70s or older and they can't work anymore and that income drops off. Now all they've got is the minimum Social Security [payment] because they started too soon. That's the mistake. That’s just looking at how you live now without looking down the road. Again, this is where an advisor can add tremendous value by saying, “OK, let's just run some numbers when you're no longer able to work, what would your income look like and could you live on that?”
5. What about Medicare? How can an advisor help with that?
I'm guessing most advisors don't feel comfortable making recommendations, but they can tell their clients this is an important decision and refer them to someone who the advisor respects. A lot of people think that Medicare is all they need and then they get hit their first big medical condition and they are shocked to find out they have huge out-of-pocket costs. An advisor can build trust by saying, “I can't help you with it but here's a person who can” — that helps build trust with your clients. And by the way, if they do refer them, there are consulting services that will help in an unbiased way to decide what kind of Medicare Supplement works best for the client.
6. What about moving a home after retirement?
For most retirees, the largest living expense is still their house — when they add up mortgage, homeowner's insurance, property taxes and maintenance. If they have a big gap between income in retirement and living expenses, then look for the biggest target. There is an option to move to someplace that might better meet a client’s needs and reduces living expenses. Also, the time to do this is when they have the energy to do it, which is in their 50s or 60s. But once they get to their 70s or 80s it's just harder to make that kind of a move.
Also, finances and the taxes are just one element of where to live in retirement. What's more important is what are you going to do with your life and do you want to be close to your grandkids, your friends and family?
7. What about preparing clients for retirement “non-vacation?”
A more personal aspect of advising [is asking] people what they want to do in retirement. Many say: “I want to travel,” “I'm going to play a musical instrument,” “I’m going to see my grandkids.” And then an advisor should say, “Well that’s about three or four weeks of the year; what else do you want to do?” A lot of people haven’t thought it through. An advisor needs to make them think about that and maybe say, “Eventually you're going get bored — do you want to volunteer or do part time work or something?” These are the more holistic aspects of retirement. By pointing this out, an advisor can build trust.
The transition from work to retirement is one of the most complex times in a person’s life, says Steve Vernon, a retirement author and researcher, even moreso than saving for retirement. In his new book, “Retirement Game Changers: Strategies for a Healthy, Financially Secure and Fulfilling Long Life,” the Stanford Center on Longevity research scholar focuses on mistakes baby boomers especially can make in retirement. Although he worked for 35 years as an actuary helping large companies design and manage their retirement plans, in the last decade he has been focused on education and retirement income strategies though his company, Rest-of-Life Communications.
We asked him to outline some of the key mistakes retirees make and how advisors can help clients avoid them. Check out the gallery above to see what he said.
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