Like many advisory shops, White Oaks Wealth Advisors in Minneapolis attracts prospects a few years shy of retirement. “A lot of them have never put together a plan, but they’ve committed in their heads to a retirement date,” says Laura Bereiter, the firm’s director of tax and financial planning.

Some clients are in good shape and can retire when they want. Others, she says, require a harder conversation. To them the firm is likely to say, “‘Actually, based on your savings right now and what you want to spend in retirement, we think you need to work for three to five more years.’”

Pre-retirees are likely suffering from many misconceptions and are prone to missteps. One of their most routine failures is underestimating how much longer they are going to live.

“We have a client who recently turned 103,” says Matthew Saneholtz, president of Tobias Financial Advisors in Plantation, Fla. “A big concern that people often don’t think about is if you want to retire at 60 and you live to 100, that’s 40 years of non-work. That’s a lot of time to cover without any wage income.”

Compounding the problem is that many folks contemplating life after work don’t know their ideal retirement’s cost. “That’s the biggest number going into it—what it’s going to take to retire the way they want to retire,” Saneholtz says. “Maybe they want to travel but they don’t know what it’s going to cost. Maybe they don’t have all their retirement goals fleshed out. We help paint the picture for them, and then we figure out what might be the best strategy to meet that spending goal, how we’re going to help them get there.”

One of the things they must watch out for is healthcare, he says, adding that it’s “a big expense most people don’t think about.” Health insurance can be particularly costly for an early retiree. But even Medicare-eligible people age 65 or older get sticker shock.

“They don’t realize that, on average, Medicare is going to cost at least $400 to $600 a month, all in, per person,” says Christopher Fundora, director of retirement planning at Traphagen CPAs & Wealth Advisors in Oradell, N.J.

And that’s without Medicare’s income-related monthly adjustment amount (also known as IRMAA). This can add hundreds of dollars to monthly premiums for Medicare Parts B and D, a nasty startle for the approximately 8% of enrollees cursed to pay it. In 2024, it hits single taxpayers whose 2022 modified adjusted gross income exceeded $103,000 ($206,000 for joint filers).

How To Add Value
When a client’s income falls in retirement, however, they can thwart the higher premiums with the Social Security Administration’s Form SSA-44. This document can be used to request that a client’s IRMAA calculation be based on their lower, in-retirement income if the client has left the workforce. “They may avoid IRMAA entirely,” Fundora says.

People counting on a pension, including teachers, firefighters and police officers, usually don’t understand the complex payout options they face. Nor do they account for income tax. And they end up overestimating what their retirement cash flow will be.

According to Fundora, the documents that pension plans periodically send workers tend to highlight the amount they’ll receive if they take the pension over their lifetimes, with no survivor benefit. The survivor option pays less, he explains to surprised pensioners. “They say, ‘I didn’t realize that’s how it worked.’”

Furthermore, they mistakenly believe the pension can always be left to children, when a spouse is typically the only permitted survivor. Determining the best pension option—and there could be a good half dozen of them—demands professional analysis of the worker’s total financial picture.

Misadventures In Investing
Plenty of near-retirees think, “I’ll make my investments more conservative when I retire,” says Jeremy Keil of Keil Financial Partners in New Berlin, Wis. But by then it could be too late. “I met a lot of people in 2020 with this mindset who were six to 12 months away from retirement. They freaked out when their stocks dropped by 30%, then sold to cash. They should have had some of their portfolio in cash ahead of time.”

Bereiter recommends holding 12 to 18 months of living expenses in cash at retirement to minimize having to sell equities during a market downdraft. Her early retirees typically hold their reserve in a taxable account. “But if someone is planning to retire at 67 and start collecting Social Security and taking distributions from pretax accounts right away, then we may have them continue to contribute to their pretax retirement account while they’re still working and use those contributions to build up the cash reserve in it,” she says.

Indeed, asset location plagues many pre-retirees. Most workers’ assets reside largely in tax-deferred retirement accounts “because that’s what they were told to do,” Fundora says. The problem is that their primary income source in retirement will be fully taxable withdrawals from those accounts.

“When I’m meeting with an individual a few years away from retirement, I refer to planning from a tax standpoint as having your three pillars—tax-deferred, tax-free and non-retirement,” Fundora says. “We help clients develop the pillars. Having a tax-diversified portfolio allows for planning in retirement to keep brackets at optimal levels, and it opens opportunities for Roth conversions and reducing or avoiding IRMAA.”

A small oversight: Employees retiring midyear frequently miss out on maximizing employer-plan contributions that last work year. “They should increase payroll contributions prior to their retirement date,” Fundora says.

Tough Love
The biggest challenge in advising pre-retirees, Bereiter says, is the need for difficult talks that shake up those clients who can’t leave their work life as planned. They’re particularly stunned if they believe they’ve done everything right, like maxing out retirement-plan contributions and whittling down the mortgage.

But advisors can win over would-be clients by displaying “a good amount of expertise,” she recommends to other advisors, who can “hit on different ways you can be helpful by explaining how you would address their situation.”