It’s never too late to start building wealth. While many people envision amassing fortunes in their younger years, the reality is that life can take unexpected turns, and financial success doesn’t always come early. When clients find themselves positioned to accumulate wealth later in life, financial advisors must adopt a strategic approach and tailor planning strategies to account for a condensed timeline.
Scenarios like a late career promotion, a small business owner whose business takes off, or a parent re-entering the work force after raising their children are all real-life scenarios that may require a shorter duration of time to plan for a full retirement.
Balancing lifestyle and savings
Increased success and income often brings an elevated lifestyle. As an advisor, we need to help clients who suddenly find themselves in a vastly more favorable financial situation strike a balance between savings habits vs. immediate gratification.
The initial step in this journey involves meticulously assessing your clients’ current financial landscape and lifestyle goals. Will their new norm of income effectively translate into a similar or better retirement lifestyle than they had planned for during their earlier years?
Even if your clients’ desired retirement closely mirrors their expectations prior to their significant income increase, it is still imperative to immediately implement prudent savings habits and strategies to ward off lifestyle creep. This phenomenon, where individuals gradually expand their spending and upgrade their standard of living, can erode wealth building efforts if not addressed proactively.
Lifestyle creep could become a problem if clients fail to properly manage their stock options and equity grants. It’s common for clients to exercise grants annually and utilize this additional cash flow for annual one-time purchases such as vacations, home improvements, etc. As clients are promoted, these grants become more significant. However, as grants become larger and company stock appreciates, we encourage clients to shift these proceeds from lifestyle into savings.
Wealth-building strategies
A client who starts building income later in life may also need to be reminded that retirement may be closer than they anticipate. So, it’s essential for them to allocate a more substantial portion of earnings toward retirement savings. A prudent starting point is to maximize contributions to employer-sponsored retirement plans, while also taking advantage of age-based catch-up provisions.
Clients should also explore programs that may now be accessible to them within their employee benefits package, such as deferred compensation and equity-based rewards.
Deferred compensation
Deferred compensation tends to align with this type of planning in that participants can defer higher compensation during these earning years to future retirement years. Deferred-compensation programs typically become accessible once traditional defined contribution plans have been fully utilized, particularly for executives and key employees. These plans are often less flexible and should be carefully correlated with the overall retirement plan, as annual elections must be made to define the payout date of this income.
Equity-based rewards
Equity compensation can be invaluable for accumulating wealth over time. It typically involves granting of company shares, which we touched on earlier when discussing lifestyle creep.
Grants comes with specific terms and conditions, primarily centered on vesting and future payouts. The growth in the value of grants provides employees with a powerful incentive to contribute to the company’s growth, while offering them an opportunity to build substantial wealth beyond regular savings. Understanding the nuances of equity compensation, including vesting schedules and tax implications, is essential for clients to leverage this form of compensation.
After-tax accounts
Clients should also consider saving in after-tax accounts once they’ve maxed out other savings strategies. While after-tax accounts may lack the same tax advantages as retirement plans or deferred compensation arrangements, they provide flexibility, they can serve as a liquidity backup, and they lack contribution limits. Managing after-tax savings in a tax-efficient manner can help mitigate the negative tax impact of growth during the asset accumulation phase.
Retirement age
The definition of retirement age can vary from person to person. Some individuals view retirement as a complete cessation of work; others envision a transition involving part-time employment or reduced hours. Clients who start late on their savings journey can significantly grow their accumulated wealth by delaying their retirement or by saving at a higher income rate for at least a couple of additional years.
Part-time earners who gradually transition to retirement may be able to delay withdrawing from liquid savings in the early years of retirement. They may also be able to postpone accessing fixed-income sources such as pensions and Social Security. Deferring these income sources and taking them later at a higher benefit amount can significantly impact the later years of a retirement plan.
The benefit formula of pension plans usually includes an average salary component. Higher income later in a client’s career can boost this figure in the defined benefit formula and result in increased monthly retirement payments. Social Security benefits are based on lifetime earnings using a 35-year average. Adding a few years of higher income could also increase Social Security benefits assuming some of those previous 35 years fell under the income threshold used to calculate benefits.
Conclusion
Embarking on retirement planning later in life may present challenges, but it is not an unsurmountable obstacle. Helping clients assess their current situation, set well defined retirement goals and steadfastly following a plan can enable them to achieve considerable progress. Accumulating wealth later in life can help clients secure a more comfortable retirement, no matter how much their earning power increases. The most important advice: Act promptly and encourage clients to remain committed to the journey.
Mike Leverty is founder and CEO of Leverty Financial Group, an advisory firm registered with the SEC and a member of Dynasty Financial Partners. This article is for informational purposes only. Leverty Financial Group does not provide tax, legal, real estate or accounting advice.
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