How Clients’ Working Affects Their Financial Plans
Financial advisors typically have to rejigger the financial plans of their older clients who keep working for pay. Among other things, Maloney Stifler facilitates goal setting and visioning for her client’s retirement life stage. “We discuss the glide path to or through retirement,” she says. “Whether it’s going to be a hard stop or a gradual transition from full time to part time. We also explore and introduce part time or volunteer opportunities if a client is reluctant to stop cold turkey.”

Advisors also have to readjust their client’s nest egg drawdown strategies. Clients who work for pay typically don’t have to start withdrawing money from their retirement accounts as once planned. “I have counseled many of them on the value of the income to take pressure off their investment portfolios,” says Salmen. “It is amazing how much of a difference even a little earned income can make.”

What’s more, financial advisors will often tell their older clients who continue to work for pay to keep saving for retirement, in a 401(k), a solo 401(k) or a Roth or traditional IRA. “If they are working during these periods, I suggest they contribute to the employer 401(k) if they get a match so they are not leaving free money on the table, use the employer’s Roth 401(k) and give up the tax savings and contribute directly to a Roth IRA if eligible or to a traditional IRA if they make too much,” says St. Onge. “If they use the traditional IRA and can convert the next day to a Roth because of the income limitation, they should do so and I try to keep their 401(k) money in the 401(k) so they can do this two-step IRA to Roth.”

In her practice, Anspach also has to advise her clients against doing Roth IRA conversions. “In many cases, the extra earned income means we are not able to convert as much to Roth IRAs at a lower tax rate,” she says. “Instead we often recommend they fund Roth IRAs or a Roth 401(k)—if that option is offered by the employer.”

For her part, Catherine Seeber, vice president at CAPTRUST, advises her older clients who continue to work against rolling their 401(k)s into IRAs too soon. “For those who choose to keep working, make sure you don’t roll over their retirement account. In some cases, if they still work and [are] contributing beyond age 70, they don’t have to take their RMD,” she says.

Besides building up the asset side of their net worth statement, financial advisors recommend that their clients work on the liability side as well and use earned income to pay down whatever debt they might have, credit cards, a mortgage, a home equity line of credit, auto loans, college loans and the like, before retiring. “Saving and paying down debt is key,” says Gjertsen. “I try to have those thinking of retiring live on their projected retirement budget for a couple of months just as a reality check. If they can reduce spending and reduce debt or add to savings, these years can provide a good boost to their resources.”

Financial advisors also recommend that their clients delay claiming Social Security to at least full retirement age, if not later. Doing so, among other things, increases the amount of their future monthly Social Security benefit and, for some, their spouse’s survivor’s benefit. Plus, doing so “may allow them to take money out of tax-deferred investments at a lower tax bracket without triggering a higher taxable amount on their Social Security,” says Salmen.

Advisors are also fond of highlighting the tax benefits of working longer as well. St. Onge says he encourages people to delay the start of Social Security. That way, there will be some years after they stop working and before they start Social Security to do Roth conversions at the lowest tax bracket, so that their required minimum distributions will not cause their Social Security, when it’s started, to be taxed at a higher rate.

In her practice, Maloney Stifler evaluates the optimal timing of charitable giving strategies for her older working-for-pay clients. She also analyzes the merits of pretax against after-tax savings as well as the tax benefits and other advantages of contributing to a health savings account. And she examines the timing of a client’s retirement to maximize any after-tax deferred compensation plan, which is often paid out six months after one officially retires.

Maloney Stifler helps other clients set up small businesses, LLCs for example, if they are independent contractors, and she reviews employment contracts carefully to maximize all compensation and minimize forfeited awards.

Financial advisors can also help older clients decide whether working is really better for them than volunteering. “You have to be careful,” says Seeber, who says that given the effect extra income has on benefits, volunteering might be a better bet than getting paid.

Besides the money part of the financial plan, financial advisors are also checking in on their older clients’ state of mind no matter whether they are working, semiretired or fully retired. “The life planning piece is always critical,” says Kirchenbauer. “Are our clients leading fulfilling retirement lives? If not, how can we get them back on purpose?”

Good For Business, Too
Financial advisors say this trend has been good for their own businesses. “[The advisor’s] business benefits by having happy clients who are living life on their terms,” says Salmen. “I believe that as more baby boomers reach retirement age that we will see a direct correlation between working longer and longer life spans. People need purpose, and when they sit around doing nothing they get old. The work they are doing in retirement is tapping into their accumulated skills and abilities, which improves their self-image.”

Others share that perspective. “All of this is a huge plus for business,” Galli says, “as the decision process involves knowledge of taxation, retirement accounts, investment strategies, Medicare and Social Security benefits and required minimum distributions.

“Just when someone thinks life is going to get simple … they discover it’s going to be more complicated, at least financially, than it has been and they need help. That’s a large value add for financial planners.”

Gjertsen says this working-longer-for-pay trend presents an opportunity for advisors to create better financial plans. “For us CFPs, there’s more opportunity for engagement in determining realistic retirement goals,” he says.

And clients who work longer for pay are also good for the advisors’ bottom lines, especially advisors who charge clients a fee based on assets under management. For them, there’s the potential to manage a larger pool of their client’s assets for a longer period of time.

“In general,” says Anspach, “I know the industry is concerned about a business model built around retirees because of a net outflow of assets. We do not see this as an issue. Most retirees will not spend down their wealth. Many older clients spend less than planned and often inherit assets, and in the majority of client cases the portfolio values are maintained and even grow in the decumulation phase.”

Plus, there’s the chance that advisors will enjoy a higher valuation on their practice in the event of a merger or acquisition. “While the underlying client demographics certainly matter, we place the most emphasis on the advisor’s actual revenue streams and the transferability of those streams,” says David Grau Sr., president and CEO at FP Transitions. “A meaningful shift in the longevity of client assets could result in a positive impact on practice growth rates, which would, in turn, favorably impact the valuation results and the marketability of the practice in an M&A setting.”

Not All Working Longer
To be sure, not all clients of financial advisors are working longer. In fact, Anspach says the majority of the clients at her firm are still focused on leaving work and a more traditional retirement.

“Overwhelmingly,” she says, “we find that once a client knows their retirement-income plan looks solid without any further work, they look for the first opportunity to retire in a way that fits their current employment situation. Once they know they can retire, most clients plan a retirement date which allows them to complete a current project, choose a year-end retirement date or pick a date structured around some other cyclical aspect of their industry.”

Still, Galli says, “it’s becoming more common for people to continue working, either in the primary occupation they have enjoyed or finding something new.”

And that means advisors will have to continue to find new ways to deal with this trend. “We in the financial planning profession need to start to change the narrative of what ‘retirement’ is,” says Gjertsen.

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