Wednesday, July 28, 2021

Go-Go? Slow-Go? No-Go? Prepare Clients From the Get-Go!

Advisor educates clients on the phases of retirement before they begin their journey.

It’s impossible to know how long clients will end up spending in the each of the three stages of retirement — the “go-go” years, the “slow-go” years and the “no-go” years — especially if they end up living the 100-year life. Part of it is based on genes and how well they take care of themselves, and a lot of it is just shear luck.

Individuals farther from retirement age may underestimate how much they’ll want to spend during their early, active (go-go) years of retirement, but may already be terrified of blowing through all their money on medical bills should they live to be very elderly.

It’s not enough to help clients plan for retirement without drawing them a map to help them navigate their 20-, 30- or even 40-year retirement journey. So how do you prepare them when there are so many unknowns? Beth Walker, a wealth advisor with Carson Wealth Management and founder of Center for College Solutions, based in Colorado Springs, Colo., recently spoke with Rethinking65 about how she approaches this.

Jerilyn Klein: How and when do you initially talk to clients about the three stages of retirement?

Beth Walker: Because I meet clients at various stages of their “retirement planning” (e.g. they’ve hired me because their junior is going to college; they hired me because they are about to sell a business and their CPA referred them to me; or they hired me because they just had a baby), the subject of retirement is largely driven by their proximity to that life phase and where it sits in the pecking order of their financial priorities.

That said, I use a forecasting tool that projects probable outcomes through life expectancy so I am always weaving the concept of “retirement” into the conversation. I also address the four critical questions everyone needs to answer regarding their retirement:

1. Do you know what rate of return your savings and investments need to earn so your money lasts as long as you do?

2. Do you know how much you need to be saving and investing so your money lasts as long as you do?

3. Do you know how long you need to work so you can set aside enough money to support yourself through life expectancy?

4. If you continue doing what you’re doing, do you know how much less you’ll have to live on in retirement?

Once they see where they’re headed, I then talk about the risks they face during retirement — that’s where the “go-go, slow-go, no-go” concept emerges.

Klein: How do you plan for these separate stages?

Walker: Because none of the stages comes with specific starting and ending dates, it’s our best guesstimate and it revolves around cash flow. During the “go-go” stages, they are likely to spend as much or more money on an annual basis than they did while working — because they have time and energy and want to get out and do things (most often travel and experiences they didn’t have time to enjoy while working). So we run scenarios that incorporate more spending in the first 10 to 15 years of retirement, then back off to today’s inflation-adjusted lifestyle for the “slow-go” years.

The discussion about the “no-go” years is focused on the need for assisted living and healthcare costs at the end of life. Oftentimes that discussion revolves around how we should “hedge” that risk — it might be a long-term care policy or hybrid annuity product specifically designed for that situation; or earmarking certain assets for liquidation in that event (e.g. a second home); or choosing that moment in time to implement a reverse mortgage strategy. I have a lot of men/husbands tell me they will “pull the trigger” or “take the pill” if it comes to that. But the women — who know they are likely to care for their companions and outlive them — really pay attention to this part of the conversation. Visit any facility with elderly residents and it’s eight-to-one female to male.

Klein: What do you put in the individual buckets, how do you budget for them, and how do you have clients fund them?

Walker: While I do use a “bucket” investment strategy, we don’t usually segregate the assets for these phases of retirement.

The buckets segregate the investments based on volatility and ability to meet cash flow needs. Bucket one contains one to three years of cash equivalents or annuities or pension money so we don’t need to sell in a down market and lock in losses. Bucket two won’t be tapped for four to seven years and is seeking a 4% to 6% rate of return. Bucket three is eight-plus years out and is aggressive, seeking a rate of return of 8% or more because we want to grow the money and have time to endure the ups and downs of the markets.

The only dedicated asset regarding these phases of retirement would likely be the one earmarked for a potential long-term care scenario.

This is really an easy-to-understand construct for discussing the realities of cash-flow needs in retirement.

Klein: What other factors — other than a client’s age — do you take into consideration?

Walker: This is a client-driven process so the other factors that come into play are legacy goals (e.g. funding education for grandchildren), risk tolerance (Can they stomach a 30% decline in account values at 70? 80? 90?), and health and family history (Are they likely to live into their 90s?). More often than not, the biggest challenge is spending more during the “go-go” years and having enough to support the latter phases. I think this is why moving forward we will see people working into their early 70s and warming up to the reverse mortgage strategies.

Klein: Do you suggest that clients keep their RMDs consistent throughout the stages?

Walker: More often than not, we recommend accelerating the draw down of “tax postponed” accounts early in retirement — in advance of age 72 — in an effort to manage the tax liability more efficiently and reduce the future RMDs.

The No. 1 planning issue we face is helping clients create a tax-free bucket of money they can use during their retirement years to offset the fully-taxed distributions coming out of their 401(k)s and IRAs. Those accounts are ticking time bombs from a tax perspective and many, many seniors are shocked to discover the tax bite is much higher than they expected in retirement — negatively impacting taxes on Social Security and Medicare premiums.

When these accounts were introduced in the 1980s, there were 27 tax brackets; now there are seven. So the assumption that you’ll be in a lower tax bracket in retirement isn’t necessarily true. And many of your tax deductions — kids, mortgage interest, 401(k) contributions — are no longer applicable.

Klein: How do you tackle unforeseen circumstances?

Walker: We discuss “risk management” as part of our planning process all the time. The question I pose over and over is, “Would you like to make sure what you want to have happen actually happens — whether you’re there to enjoy it or not?”

Creating more certain outcomes involves products with guarantees — which means insurance. The older I get, the longer I practice, and the more estates I settle, the more convinced I am about the necessity of these products.

Jerilyn Klein is editorial director of Rethinking65.  How are you helping your clients plan for the different phases of retirement? Please email jklein@rethinking65.com.

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