The Advised Advantage: Talking about retirement transition

How do you help clients prepare for retirement transition?

When working with clients who are in the accumulation phase, we discuss both financial and emotional needs.

On the financial side, it’s about reducing your portfolio’s risk as we gradually prepare you for retirement. We look at how much money you’ve saved across your retirement accounts and whether it'll be enough to support your goals. We also discuss setting up a cash reserve or emergency fund for:

• Unexpected expenses like medical bills or a new car or roof.
• Daily living expenses should you lose your job. I encourage my clients to set aside three to six months of living expenses for a two-income household and six months of expenses for a one-income household. As you get closer to retirement, increase your savings to cover 12 months of expenses.

On the emotional side, it's about picturing what your ideal retirement will look like. Saving and being financially prepared are always topics of discussion. But it's also important to prepare yourself for the extra time you’ll have on your hands once your retirement honeymoon period is over.

During the first year, you might take that big trip you’ve always dreamed of, get your house and yard in order, and make plans to see friends. But in the second year, the new normal sinks in. And it’s not uncommon for my clients—especially those that were very career-focused—to lose sight of their sense of purpose.

Having structure in your life is essential whether you’re preparing for retirement or transitioning to it. It’s about identifying your next calling and the things that will get you out of bed in the morning. It could be spending time with family, focusing on new or old hobbies, going back to work, or doing something entirely different.

If you haven’t already, take some time to identify what your new sense of purpose will be in retirement.

How do you help retirees shift from a saving to a spending mindset?

The majority of my clients got to where they are today because they lived within their means. They saved, invested, and are now in a comfortable position to enjoy the next phase of life. Even though they’re financially prepared, it’s not always easy for them to shift to a spending mindset.

For some, the saving mindset was passed down from parents who grew up during tough economic times. For others, it came from life experiences and setbacks—or it’s just engrained in their DNA. It’s a tough habit to break and doesn’t just happen with a flip of the switch. One way I help my clients overcome their spending concerns is by using our dynamic spending tool.

Dynamic spending puts numbers around something we tend to do naturally. In lean times, when your portfolio is down, you tighten your spending. And when markets are performing well, you spend a little more.

With dynamic spending, I’m able to help my clients gradually become comfortable with the idea of spending. I help them determine a baseline budget for lean times and how much extra money they’ll have to play with during good times.

For example, I had a client who'd always wanted to go on a transatlantic trip with his family, but was concerned about whether he could afford it without jeopardizing his long-term goals. I showed him that not only could he afford the trip, he could consider flying first class for some added comfort during the long flight. At first, he thought first class was a waste of money, but after thinking about it, he decided to splurge. That’s what I love about dynamic spending—it helps strike the balance between having some fun with your money without jeopardizing your future needs.

How do you help clients overcome their reluctance to spend in retirement?

It can be hard to watch your savings go down over time and not be replenished by that paycheck you were accustomed to. Once we’ve established that you’re in a good position to spend, our conversation shifts to revisiting why you invested in the first place. Are there things you always wanted to do or buy, places you wanted to go, or charities you wanted to donate to?

When my clients don’t have any top-of-mind ideas, I ask them to create a bucket list of the things they want to accomplish with their retirement funds and bring it to our next meeting. We then work together to prioritize and check items off their list.

It’s important to live the retirement you’ve worked so hard to secure. This includes spending any money that you’re not planning to pass down to your loved ones. Otherwise, the IRS may end up with a portion of money that could’ve been gifted to your family in a much more tax-efficient way.

At the end of the day, I’m here to help make my clients' retirement spending decisions easier and to help ensure they don’t run out of money during their lifetime.

How do you help clients maximize their retirement income strategy?

When I’m working with my clients, we discuss tax-efficient strategies that'll help them make the most of their retirement income. Before they retire, I help them grow well-balanced portfolios, manage risk, and ensure they have diverse account types (traditional and Roth IRAs and taxable accounts) that afford flexibility when it comes to making withdrawals in retirement.

One of the most common withdrawal methods is to start taking your required minimum distribution (RMD) when you’re 72 and have a traditional IRA or employer plan. Then, supplement your income by withdrawing from your taxable accounts. When deciding which assets to withdrawal from next, we discuss whether you expect your tax rate to be lower now or in the future.

• If you expect your future tax rate to be lower, consider withdrawing from your tax-free Roth accounts before your tax-deferred accounts.
• If you expect your future tax rate to be higher, consider withdrawing from your tax-deferred accounts next, followed by your tax-free Roth accounts.

But it’s not always that simple. We also consider:

• The tax impact of your decisions on your heirs, including how to pass your assets along in the most tax-efficient way.
• Concentrated stock positions or other workplace benefits (like stock options or deferred compensation) that may help provide some additional retirement income and/or be passed down to future generations.

Depending on your circumstances, we'll determine the best way to help maximize your income, while meeting your legacy planning goals.

How do you help clients decide if they're ready to retire?

To help my clients decide if they're ready to retire, I use their investor profile (how much they're spending, what their income will look like, etc.) along with other helpful tools like Medicare Match or the health care estimator to help them understand if they're financially ready to retire and how health care costs could affect their transition.

I was recently working with a client who was preparing to retire in three to five years and was in a good financial position to do so. During a meeting, he shared that he wanted to retire sooner (within the next year) because of some unexpected events that caused his priorities to shift. He wanted to start spending more time with his loved ones. But he was also concerned about the impact to his overall retirement plan and health care costs since he was under 65 and not eligible for Medicare.

To help him understand his financial outlook, we updated his investor profile with his new timeline and received a 99% success rate. Of the 10,000 market scenarios our forecasting model uses, 9,900 showed he would have money left over at age 100. We also factored in his need for private health insurance until he became Medicare eligible.