Switching from accumulation to distribution of assets can be scary.
Charles DiVencenzo Jr., vice president of advanced markets for Allianz Life Financial Services LLC, says clients have to change their mindset once they retire in order to start drawing down benefits.
“Your clients are used to their assets growing and growing for years,” says DiVencenzo. “It can be frightening to them see the assets dwindling in retirement. Clients sometimes miss the big picture that this is what they gathered the assets for. It’s like climbing Mt. Everest: You have to be prepared to come down; that’s harder.”
He notes that financial advisors need to redirect a client’s attention from the decreasing assets to putting together a monthly income for the rest of their lives, which could last 30 to 40 years.
A number of issues must be considered in order to put together that monthly income, including deciding when to take Social Security and when to spend down other assets.
“If a person has other money, he or she will want to consider spending some of those assets while the Social Security benefits grow each year,” DiVencenzo says. “Family history should be taken into account. If your client comes from a family that is short-lived, he or she may want to take Social Security starting at age 62, or if they need the money they may want to take benefits early.
If a client wants to take Social Security early, he must know that Social Security will deduct one dollar from benefits for each two dollars earned until the person reaches full retirement age, which is 66 for most people.
“For clients who think they will live longer and ones who do not need the money immediately, they may want to wait to take Social Security,” he says.
For those who wait, a decision has to be made whether to take money from a tax-deferred account or one that was taxed before the money was put away for retirement. “You don’t want to be pushed into a higher tax bracket because of the withdrawals you are taking," DiVencenzo says. "But at the same time, you don’t want to be pushed into a higher tax bracket when the required minimum distributions from 401(k)s and IRAs start at age 70.”
Additional factors must be considered if a married couple is involved, which DiVencenzo calls a joint-life analysis. “If the two members of a couple are 66 years old now, one of them will probably live beyond 90.”