Three Do’s and Don’ts of Retirement Planning
Half of modern workers have less than $25,000 in savings. It can be a harsh reality to deal with, for both advisors and individuals. According to the most recent statistics from the United States Census Bureau, the median income in the US is $54,000. That doesn’t go far by modern economic standards, making it very difficult for anyone earning less than that to save or plan their retirement. They are too busy trying to pay for today to worry about tomorrow, next year or three decades from now.
One of the best ways to combat this savings deficiency is to automate the process as much as possible, preventing clients from reaching into their wallets in order to save. However, most financial advisors realize this is often impossible to do on a permanent basis, so here are 3 Do’s and 3 Don’ts that advisors can pass along to clients to ease the burden of saving for retirement:
Do #1: Plan for a long life
The Social Security Act was passed in 1935. This was at a time when life expectancy was much lower, 62 years. Retirement was at 65 and the beneficiaries of Social Security received payouts for 12-15 years, on average. With the advances in healthcare, however, a married couple has a 70% chance that one of them will live to at least age 85, bringing payouts to 20 years or more on Social Security for at least one partner.
Do #2: Put tax refunds into savings
Not all clients work for companies that provide their own 401(k) and this can make life more difficult. This scenario can be easily averted by having clients start an IRA & funding it on a regular basis. Even with a 401(k) plan, an IRA can give your clients an added boost for retirement. Bonuses, tax refunds or inheritances can, and likely should, be used to pad this account whenever possible.
Do #3: Learn Social Security benefits and options
As clients prepare to enter retirement there are some serious Social Security decisions and deadlines that need to be taken into consideration. Due to the Bipartisan Budget Act of 2016, there have been significant changes made to Social Security and the payout strategies that can be used. Clients turning 62 in 2016 can no longer to elect to collect spousal payment based on the higher earners benefits and then choose to switch to payments based on their earnings at a later date.
Until this year, clients could delay payouts from their own Social Security benefits this way and enjoy a higher payout as a result of delaying their claim. If clients weren’t 62 by the end of 2015 they can no longer do this type of restricted application anymore. Now clients can only elect to claim a spousal payment or one based on their work record, typically whichever one is higher.
Don’t #1: Overlook health care increases
Medical advances have extended life expectancies at an ever-quickening rate. Clients are living longer, and their medical costs increase as a result. The longer people live, the more likely they are to experience chronic health conditions like diabetes, arthritis, heart disease, cancer or stroke. It’s important to remind clients to be mindful of increasing medical costs post-retirement while looking at items like long-term care insurance that can mitigate these costs.
Don’t #2: Avoid talking about post-retirement lifestyle changes
Advisors would love if every client could get to that ever-elusive “million dollar retirement,” but it’s just not realistic for most people in today’s economy. Advisors are missing an opportunity to add value if they do not ask retiring clients two questions:
1) How much of their income do they spend now?
2) How will their lifestyle change when they are retired and how might this impact spending?
Many Americans spend more than they earn, making these questions extremely important. Clients always have the intent of spending less during retirement. However, if they haven’t followed through on financial goals before retirement, is it safe to assume they will so when retired?
Don’t #3: Discourage meaningful dialogue
It’s important for advisors to encourage client participation in all aspects of retirement planning. In conventional direct contribution plans offered by employers, providers ask clients in the beginning how much risk they are willing to take on, thus putting constraints on the types of investments used. More often than not, clients feel inadequately prepared to decide on risk, so providers make representative assumptions and then offer mutual funds with a risk level considered appropriate for the client’s age.
When clients try to become engaged on their own, they are often facing precise technical, financial decisions such as “How much exposure to emerging markets do you want?” or “What debt-versus-equity ratio do you want?” Most people, even those with a desire to learn, lack sufficient financial expertise to make significant headway in these decisions. Education is an area where advisors can add the most value, helping clients navigate these tumultuous waters to achieve as many of their pension goals as possible. Setting achievable goals is another value-add area for financial advisors.
Many people are just not able to save for retirement as much as they need, or would like, to be able. Living paycheck to paycheck has become so commonplace, the saying is just not used that often anymore. People are often frightened when thinking about retirement and often just don’t know where to even start to invest any savings they might have. A prudent financial advisor can encourage a worthwhile conversation, and hopefully continuing action, around retirement savings and investing by looking at the above Do’s and Don’ts as a good place to begin.