Rewriting The Rules

    Many older Americans don't plan to retire either because they want, or have, to stay working.
    Satchel Paige, the great Negro League and Major League pitcher, once said he'd pitch forever. His work meant that much to him.
    These days, more Americans seem to be taking a page from the man who, in his forties, was striking out Ted Williams and Joe DiMaggio. Tens of millions of older Americans want to go on pitching in their professions, or maybe go on to new ones.
    "Many won't retire at all, at least not before their health requires it," says Robert C. Carlson, who is the author of The New Rules of Retirement. Strategies for a Secure Future.
    Welcome to the world of the no retirement, or the phased retirement. Some retirement-age people have already decided not to quit working any time soon-and this trend is expected to accelerate as the baby boomers begin retiring. Born between 1946 and 1964, baby boomers will begin hitting 62 in three years. It's expected that many of them will choose to keep working because they want to do so, while another group of them will have to keep working because they won't have saved enough to retire. Not only that, but some proposals to fix Social Security-such as raising the retirement age or changing the formula to calculate benefits-could result in reduced benefits for at least the younger baby boomers, and that would mean more of them would be forced to work longer.
    At any rate, it's expected that many baby boomers are going to need financial planning and advice, but not the kind that their grandparents and parents did.
    The baby boomers are going to retire later than preceding generations, says Carlson, who is a certified public accountant, an attorney and the managing member of Carlson Wealth Advisors LLC in Fairfax, Va. Carlson is also the editor of the Retirement Watch newsletter.
    And the health of the elderly as a group has never been better, according to Ken Dychtwald, a psychologist, gerontologist and author of ten books on aging-related issues. He says that the life expectancy today for a 65-year-old woman is "approaching 90." He adds that this trend forces everyone to reconsider the concept of old age. "If you're going to live to age 90, where does old age begin?" Dychtwald asks.
    So instead of buying a rocking chair and retiring to the porch at age 62 or 65, Carlson suggests, this boomer generation will go on to second and third careers.
    Indeed, a longtime advisor with some 35 years in the business continues to work just as many of his readers are doing the same. "People used to retire at age 62, and now there's no such thing," explains Lewis Altfest, a fee-only planner with his own busy practice in New York.
    "It's becoming a matter of prestige with so many of my elderly clients, especially professionals. No one wants to admit that he or she is even thinking of retiring. All they will admit to is that maybe they will slow down a little." Speaking at a professional conference a few years ago, Altfest quipped that many of his clients hope to be "carried out with their boots on."
    Carlson acknowledges some people keep working because they must. But others keep working because they "have few interests outside of work. Others keep working because they love it. They believe work keeps them young," contends Carlson, who is 47. Some clients who are working in their sixties and seventies look at friends who are retired with a mixture of condescension and sympathy, he adds.
    As a group, a growing number of advisors are likely to help fuel the never-retire trend. A fixture in the advisory business for more than 20 years, the 64-year-old Altfest says, "I love my work and expect to be here for many years."
    Advisors should look at this never-retire group as needing a kind of personal service beyond running numbers, says one advisor with mature and active clients. "It is critical with these people that the advisor turn away from the computer and put down the calculator. One must listen to these people and find out what they're going to do for the rest of their lives," argues Scott Farber, a CFP certificant in Boston. "So often you hear someone is going to retire. Fine. But they haven't the slightest idea what they're going to do now."
    The answers to these questions will not only have a dramatic effect on the well being on the client, they will be critical in arriving at the correct numbers on spending and in providing the best investment advice," Farber says. He notes that his father retired in his late fifties and "went nuts." He has since returned to his job as a mortgage broker, Farber says.
    Other advisors, looking at the numbers, say a growth element in a portfolio can be almost as important as one for a young or middle-aged person. That's because older workers-workers in their 60s or higher-are likely to still have 20 years or more to invest.
    Advisors may be overlooking this growing group-these tens of millions of Americans in their fifties, sixties and seventies who continue to work-or may be making assumptions about their investments that no longer apply.
    Indeed, the trend toward people working to an older age has been on the rise for the last two decades. Planners should also be prepared to offer tax and portfolio advice and discuss lifestyle choices with this growing group of clients, advisors say. But there is no debate about their rising numbers (see sidebar).
    Susan MacMichael John, a solo practitioner with her own fee-only advisory business in Wolfeboro, N.H., is all too familiar with these individuals. Many of these hearty New Englanders are seniors, but still work of their own volition. She has grown accustomed to their needs.
    "I want to know why the client is working," she says. John says most of her clients don't need extra income. If for no other reason, they are working because "they don't want to be bored."
But for others, the ravages of inflation have made their golden years a time they must resume full-time work. Recently, John said, she found an opportunity to help an older person by asking a simple question.
    "Are you working because you need to or because you want to?" she recalls asking the client. The client said she didn't want to work. John, by slightly rearranging the portfolio and suggesting some economizing moves, was able to make retirement possible.
    Again, she says, it is important for the advisor to understand why clients are working. "Maybe they wouldn't need to work if some changes in their portfolio could produce more cash flow," she says.
    John also stresses that advisors should look for untapped assets that might allow the client to retire. "There is cash value life insurance that someone might not need any longer. The cash in these policies could be put into an annuity that could provide the needed income," John explains. She has found several clients have been making premium payments on unneeded life insurance policies.
    "So there is a double benefit there. They don't have to pay the premium and they can turn it into a stream of income," she says.  Sometimes, she adds, a reworking of the portfolio may make retirement possible for those who thought they had to continue to work.
    Bill Bengen, a fee-only planner in El Cajon, Calif., looks at the impact of elderly earned income on Social Security. "Some people are penalized for working. I want to check that and go over that with the client," he says. Bengen also looks for real estate opportunities with those who can't retire. He says some clients have properties that are under used and could be generating income.
    And then there are outstanding debts that it may be time for the client to call in. Some clients, Bengen notes, have children who could help. "Parents can be too generous with their children," he adds.
    Altfest agrees. "Maybe it is also time for clients to ask their children to pay back some of the loans they've extended over the years." 
    Altfest also says that he is reluctant to become more aggressive with a portfolio in order to make retirement work for someone who wants to quit work now. Instead, he suggests economizing. "Sometimes the problem can be solved just by moving across town or to a smaller house or just simply working for another year or two," Altfest says.
    Expenses can also play a significant role in the finances of someone who is considering slowing down.
    "Living here," notes Bengen of southern California, "gas prices are higher than in many parts of the country, and many other costs are also higher. Maybe it makes more sense for the client to move to another place." Indeed, states like Nevada and Oregon have boomed thanks to retirees from California seeking to slash their cost of living.
    When all else fails, there is always the old standby: Try working full time for another few years. "Another two years of work means two fewer years of required savings for retirement. Sometimes people forget that," Altfest says.
    Michael Kitces, a certified financial planner licensee with a practice in Columbia, Md., says clients without the resources to retire usually won't find them just by discovering new assets or reworking a portfolio. "I'm very hesitant to leverage the portfolio with these clients to take even more risk," he says. "If that works out, that might be great. But, if it doesn't, we're going to take a bad situation for the client and make it even worse."
    He adds that, for clients who have undersaved for retirement, "there is not a lot that you can do."  He tries to counsel them to find ways to economize, and encourages them to work a few years longer because of the fear that plagues many without huge nest eggs-that their money could run out and they could face unexpected poverty in their last years.
    Given longer life spans, Kitces is wary of reverse mortgages for clients in their sixties or seventies. "If we're already at crunch time, I'd be very concerned that it won't work over 30 years, that someone could find himself without a home."
    William Mueller, a CFP licensee with The Vanguard Group, recently used a projection to illustrate how four extra years of work could give a client a greater margin of safety against running out of money in old age. Say Dave and Linda, a sales manager and a homemaker in their fifties, have an average annual income of $100,000. They have a 14-year-old son on whom they will spend $100,000 to pay for college in four years. Assuming their portfolio earns 9.2% a year and an annual inflation rate of 4.3%, Dave and Linda retire at age 62 with a portfolio of some $1.2 million.
    Mueller estimates that the couple has a shortfall risk-a risk of running out of money-of 41%. However, say Dave keeps working for another four years. Then, their portfolio is $2 million. Now, his shortfall risk has been significantly reduced, according to Mueller, to 27%.
    But both John and Kitces agree that just about every portfolio should have some stock component. They both stress that, due to the destructive effects of long-term inflation, almost all of their elderly clients have some growth component. 
    Adds Carlson, the Virginia CPA and retirement newsletter editor, "You almost always need growth to make up for inflation." He says that, in theory, some elderly clients with large portfolios can stick to cash and bonds and live off the income streams. "But the number of people in this group is probably very, very small."
    Indeed, John says that, taking into account a client's risk tolerance, she still has many clients in their eighties who have 100% of their portfolio in equities. "That's because stocks are what they know and understand. They have the risk tolerance for it," she notes.
    Her general rule for all her elderly clients is a minimum of 25% in stocks. She argues that for typical clients in their seventies or eighties, growth is still needed because there is a possibility that they may live another 20 or 30 years.
    Kitces agrees, insisting that all his elderly clients must keep at least some of their assets in equities. Advisors working with this unique clientele all agree with Kitces: It is too risky, especially for elderly clients who are healthy, not to hold any equities.
    "Twenty or 25 years is a very long period for inflation to do its damage," Kitces says. "I don't think there is anyone that we recommend being less than 20% in equities." He adds that an "all-bond portfolio and a 40% stock-60% bonds portfolio have fairly similar risk characteristics over a 20-year period."