The word “retirement” conjures up all manner of restful images — a man napping in a hammock, a woman playing bridge with her friends, a visored couple strolling towards a green on a sun-splashed golf course. But please note: the financial advisor does not figure in any of these peaceful scenes.
That's because a client's retirement announcement initiates a time of great business (pun intended) for the average advisor. It's as if, after years of training for the Olympics and fighting through qualifying events, the moment of truth arrives — an opportunity to make a run at the gold.
Of course, along with this opportunity comes great responsibility and tremendous pressure. A client who flatters his advisor by choosing him to manage the most important financial stage of his life is assuming the advisor will handle the six- or seven-figure portfolio capably, even though retirement finances are anything but peaceful.
Adding to the pressure is the fact that the best advisors are likely to see a significant uptick in the number of retired clients in the coming years. SRI Consulting Business Intelligence estimates that 13.8 million American households contain at least one person who will be retiring this decade, and that these people control $4.4 trillion of investable assets. That works out to an average of one retiree (and around $300,000) per month for each reader of this magazine.
Unfortunately a “slap-‘em-into-a-mutual-fund” approach won't impress this group. Indeed, unsophisticated or underdeveloped post-retirement plans could jeopardize even a long-standing client-advisor relationship. An advisor must offer innovative solutions that show the foresight necessary to ensure the clients' money lasts as long as they do.
Increasing Income
Jacking up retirement cash flow is not all about Caribbean cruises and the condo in Del Boca Vista. The bare necessities of life — medical expenses, taxes, living expenses — consume an outsized portion of the typical retiree's nest egg, and the investment style must acknowledge this reality, while still striving to make some room for greens fees and spoiling the grandchildren.
Don't even think about recommending an aggressive portfolio, hoping to party like it's 1999 all over again. Instead, use some small tweaks to traditional retirement wisdom to make a big difference over the long haul. Some suggestions for clients:
Get a job
Nothing heavy, mind you — the client is, after all, looking to relax. But encouraging the client to pick up some part-time work, presumably doing something he enjoys, can delay the need to tap into retirement accounts. In addition, it may provide health insurance to early retirees who are too young to qualify for Medicare. The additional income isn't just pocket change — it can also be used as the basis for contributions to Roth IRAs for clients and their spouses. If a couple filing jointly makes under $50,000 in adjusted gross income, dropping a few thousand into a retirement plan may qualify them for the Saver's Credit. This gift from the IRS (expiring in 2006) may not only reduce income taxes of up to $1,000 per contributor, but can offset any taxes if they choose to convert IRAs to Roth IRAs.
Delay Social Security
Try to get your clients to delay taking payments as long as they can. A rule-of-thumb is that recipients will fare better by waiting until full retirement age to begin their monthly checks, as long as they survive past their mid-seventies. Postponing payments is an especially good idea if the clients decide to pick up some part-time work. Between age 62 and full retirement age, every $2 earned above $11,640 annually knocks a dollar off the benefit check. Basically, if they can't survive in retirement without taking Social Security in their early 60's, maybe they're not ready to retire just yet.
An interest in dividends
The knee-jerk reaction for most retirees is to mitigate risk to their principal by tossing their assets into bonds, and clipping coupons every month. That may feel good today, but it could cause a great deal of pain tomorrow. Twenty years ago, a retiree needing to generate $13,000 of annual income could have invested $100,000 into ten-year Treasuries. Assuming over the next two decades her expenses rose only at the rate of the CPI, she would now need over $550,000 invested in ten-year notes at today's rates. Try to wean your clients from their bonds, and put as much as they can stand into a diversified portfolio of common stocks that provide a steady (and hopefully increasing) stream of dividend income. If your recommendations yield 2.5 percent in dividends now, and raise their payout 5 percent per year, it will only take 14 years before the yield exceeds what you would get had you originally bought a bond paying 5 percent simple interest. And there should be a commensurate increase in the worth of the stock portfolio, whereas the bond is unlikely to appreciate much beyond face value.
Take the money and run
This coming crop of retirees should be one of the last groups to have a defined-benefit pension payout to consider. Company loyalty aside, your clients will be well-served to take the option that gets them the most money quickly. Why? Because many corporations are already facing insurmountable pension obligations, and unless stocks provide several years of double-digit annual returns, the problem will only get worse. If a company goes belly-up, the Pension Benefit Guarantee Corp. will step in to honor the obligations made to retirees, but only to a maximum of about $3,600 per month. And even the PBGC has been hit by company failures and falling stock prices — last year the agency ran a deficit $11.2 billion. (You can find out more by visiting www.pbgc.gov.) Many times the pension payout option that gives the most upfront money is also one that provides little or no income for a surviving spouse, once the retiree passes away. If this event creates anxiety for your clients, recommend the purchase of a cash-value life insurance policy on the life of the pensioner, with the surviving spouse as the beneficiary.
Writer's BIO: Kevin McKinley is a CFP and vice president of investments at a regional brokerage and author of Make Your Kid a Millionaire — 11 Easy Ways Anyone Can Secure a Child's Financial Future.
kevinmckinley.com