Professional organizers can’t keep up with demand, judging from news articles about people downsizing their homes, emptying cluttered attics and basements, and discarding what no longer sparks joy.
Your wealthy clients in late middle age—roughly those in their mid-to-late 50s to their mid-60s—have messy financial closets, too. Their accounts are scattered across multiple advisors who won (some of) their business in years past.
Their financial challenges differ from those of their friends who have crossed the retirement threshold or reached an advanced age and are concerned about wealth transfer. But trust me: They will be open to a meeting for a gut check if you say you can explain their opportunities for minimizing taxes and optimizing income and legacies to their children.
A Picture Of A Couple In Late Middle Age
Look at your client list. Do any of these people look familiar?
• They are at the pinnacle of successful and lucrative careers.
• Their 401(k) plans include significant holdings through employee stock option plans (ESOPs).
• They have stock options that make them heavily concentrated in one company.
• They own businesses that they intend to sell in five to 10 years.
While well-off clients earn income and receive bonuses, they’ve had limited ability to minimize taxes. But as they look to the future, managing their holdings in a coordinated way becomes paramount to limit their tax liability.
The finance of retirement income is new terrain. Be their guide.
• Explain how the breaks they got from contributing to tax-qualified retirement plans will come home to roost when required minimum distribution (RMD) rules kick in.
• Disclose what happens to individual retirement accounts (IRAs) they leave to beneficiaries.
• Educate them on strategies for minimizing taxes over the rest of their lives through techniques such as Roth conversions.
Now, To Your Advice
Your financial advice to clients of late middle age will focus on the following:
1. Revisiting (or creating) a financial plan with their goals and anticipated spending needs before and after retirement.
2. Managing transitions of accounts from other firms or advisors to you to limit any taxes owed due to sales or redemptions.
3. Minimizing taxes on investment income, realized capital gains and withdrawals from tax-qualified accounts like 401(k)s and individual retirement accounts (IRAs).
4. Enabling any desire to contribute to charity, possibly through selling appreciated assets to open a donor-advised fund or start a family foundation.
5. Preparation for wealth transfer to heirs.
In the planning process (#1), you’ll want to put together a holistic view of clients’ accounts: traditional and Roth IRAs, brokerage, variable annuities and life insurance.
Some clients in late middle age may not have maximized contributions to retirement savings because they needed to pay tuition bills or support elderly parents. Your advice can help put them back on a savings course to prepare for what actuarial tables say could be retirements lasting 30 years or more.
You may need to update some clients on pending rules for catch-up contributions requiring those to be taxed first and deposited into Roth accounts.
Well-Off Individuals Need You To Captain A Team
You will work with—and help corral—their tax accountants and possibly their attorneys. The latter are involved less frequently, mainly to adjust beneficiaries of a will or set up trusts for children to protect investment income from gift taxes.
Tax accountants are in the picture more regularly, preparing tax filings and providing you with much-needed estimates of clients’ taxes.
Your role in this trio is often the least understood. But you know that successful management of clients’ accounts will diminish their tax exposure and increase what’s available for retirement funding, charity or transfer to children or other relatives and friends.
Your investment software can help you recommend how to locate investments in suitable types of accounts to limit taxes (an under-appreciated practice known as asset location), manage sales of appreciated assets and transition accounts from other advisors if clients choose.
The software can also empower you to evaluate opportunities for clients to contribute undervalued shares of stock to a traditional IRA and convert it to a Roth IRA (i.e., a “back door Roth”).
Wealthy clients have some of the most complicated tax situations until their income stabilizes in retirement. You’ll coordinate with their tax accountants to estimate non-investment taxable income and charitable deductions over calendar years.
That will help you determine, after clients turn 59½, when you should recommend taking voluntary IRA withdrawals to fund Roth conversions and take advantage of moderate tax brackets, especially important in the cases of couples while both are living.
Win Their Business with Your Expertise
In many cases, the work I’ve described will lead clients to pause and consider if a stable of advisors continues to serve them well.
Wealthy clients are most motivated to consolidate accounts with one advisor or firm when their non-investment income is reduced because they retire or semi-retire. It’s no longer “pay as you go,” which isn’t very challenging when they have substantial paychecks. It’s time to look to their savings and investments for income.
You can secure clients’ confidence by presenting a plan for contingent account withdrawals and transfers over multiple years and estimates of tax liabilities and federal and state income taxes. The goal is a plan that provides them with the income they estimate they’ll need and minimizes their income and investment taxes.
For clients with charitable intentions, you can recommend how best to take advantage of philanthropic contributions to a donor-advised fund or family foundation. The “taxable event” happens the year they contribute, but they can disburse the funds over as many years as they like.
Although these clients are comfortable, they aren’t immune to the desire to claim Social Security benefits. Using your available technology again, you will want to talk to them early about claiming strategies and how to evaluate those.
The urge to organize and streamline in late middle age is potent. But many people don’t know where to begin. Your knowledge, concern and confidence can go a long way toward becoming the winning financial advisor in their lives.
Paul R. Samuelson is the chief investment officer and co-founder of LifeYield.