The work-life struggles that arose during the COVID-19 pandemic, including burnout from juggling child care while working from home, stressful working conditions, insufficient pay and even the desire for greater work flexibility or more fulfilling jobs contributed to what is now known as the Great Resignation.
It began at the onset of the pandemic when millions of workers quit their jobs. Furthermore, solid portfolio returns and a booming real estate market helped increase individuals’ net worth, liquidity and the confidence to make such a decision. While not everyone who resigned from their job immediately retired, a meaningful percentage did.
Goldman Sachs reported that most of the 5 million individuals who left the labor force since the start of the pandemic were over 55. These were individuals who retired early or as planned. With the pandemic almost in the rear-view mirror and many employees being asked to return to offices, we could see another wave of early retirements ahead. What can advisors do to help clients make this very important decision? Start by having detailed discussions with clients about these key variables to ensure they fully understand how each one can impact their long-term plan.
Our clients are giving greater thought to their exit strategies to better understand the available options. As that target retirement date approaches, those conversations are occurring more frequently.
Financial Strength
This begins with an in-depth review of a client’s balance sheet to determine their asset level, allocation between pre-tax-and after-tax assets and available liquidity. In addition, it is important to identify any overly concentrated stock positions or overweighting in a specific asset class such as real estate or private equity. These items would need to be closely managed as clients should be reducing risk within their balance sheet.
Be sure to review the amount and type of debt as well as its terms since they will need to continue making payments in retirement. It is important to communicate how these liabilities will impact their future cash flow. For example, paying off a mortgage pre-retirement may be beneficial depending on certain factors such as their income tax bracket, available liquidity and monthly cash flow.
Income Sources
Retirement means different things to everyone. For some it means not working at all anymore and for others it means consulting or part-time work. Regardless of their wishes and expectations of earning any kind of income, it is necessary to discuss their anticipated budget for retirement and if it is sustainable. If retirement means no more earnings, what sources of income will they rely on? Social Security, pensions, rental income and portfolio income as well as any other sources need to be considered to develop a strategy. This would include determining their ideal time to claim retirement benefits from Social Security and deciding on pension payout options.
Healthcare Costs
While advisors can guide clients to live within their means, and clients can make a conscious decision to spend less, they don’t have full control over the medical expenses they will incur in their retirement years. After leaving an employer-sponsored plan at retirement they will either convert to Cobra, convert to an individual policy or transition directly to Medicare.
In each scenario this could result in additional out of pocket expenses and higher monthly premiums that will compound since medical issues and costs increase with age. Health insurance coverage requires close attention and analysis based on their current health and family history. Review and consider long-term care options to help manage this risk.
Portfolio Allocation
During the accumulation years, clients may tolerate more investment risk knowing that they are not withdrawing from the portfolio but contributing to it. Once their priorities change, risk tolerance is also likely to change. Managing the risk level of the portfolio is crucial in preparation for scheduled withdrawals from the portfolio in retirement.
Encourage a full review of the portfolio risk level and recommend any necessary changes. This can include paying off any outstanding margin and reducing concentrated stock positions. While we cannot control market returns, we can manage the overall risk level via the portfolio allocation. Even if retirement is a few years away, this should be adjusted accordingly.
Inflation and Expenses
Upon retirement, client spending will adjust accordingly, depending on what kind of lifestyle they have planned. Be sure to review their projected spend rate and discuss how inflation will impact those plans as well as their daily cash flow. Social Security’s cost of living adjustment does not always keep up with inflation and only some pensions provide an adjustment for inflation. This shifts the burden to clients to fund any shortfall with savings unless other adjustments are made.
Taxes
Retirees are often surprised to see the size of their annual tax bill since previously the bulk of their taxes were attributable to their wages and compensation. They forget that Social Security can be partially taxable (depending on their income level) as well as pensions and withdrawals from retirement accounts. In addition, any taxable accounts may generate additional taxable income.
When all this is combined, there lies an annual tax expense that needs to be managed closely and factored into the overall cash flow. Optimizing asset location within a portfolio can help reduce taxes, which helps their overall budget.
In summary, each one of these variables can have a meaningful impact in the long term. Combine all the different possible scenarios and clients could end up feeling paralyzed with insecurity.
As advisors, we play a meaningful part in helping our clients evaluate their own financial positions. Including these variables as part of a comprehensive review in conjunction with modeling potential scenarios can bring light to any discussion. Advisors have the benefit of seeing other successes and issues that our clients have experienced. Sharing this insight is always a benefit to clients.
As we work with clients to determine their ideal time to retire, some will not be ready yet. Nonetheless, having this discussion will help them prepare for when it is their time. Until then, they can begin to plan their next chapter keeping retirement close on the horizon.
Mariella Foley is a partner and wealth advisor with Round Table Wealth Management. She heads the Women of Clarity program and focuses her practice on working with women to build their financial confidence. She can be contacted at mariella@roundtablewealth.com or 908-374-2570.
