As the baby boom generation continues to retire, more and more financial planners will be dealing with the distribution phase of their client’s financial lives. Last month I shared some of the most common investment issues that are not understood by those in or approaching retirement. Today I’ll highlight some non-investment issues.
I’ll Be Able To Relax And Not Worry About Saving
After a lifetime of squirreling away money and delaying gratification, many retirees still fret about their spending. In some cases, they worry more as retirees than they did when they were in the work force.
When one is working, if they show up on time and do a decent job, they get a paycheck. Usually, that feels like a dynamic they can control. Many of the vagaries of financial markets don’t bother workers much because they believe they can probably keep the paychecks coming.
In retirement, economic, political and financial market gyrations can cause a lot of anxiety. One of the important tasks of a good advisor to retirees is helping them manage or change their perspective about these things so they won’t worry themselves into making bad decisions.
Other unknowns can be just as puzzling and distressing. Which accounts do I pull from first? How long will I live? Will my pension stay solvent? Will Social Security be altered? Will I need significant health care or long-term care? Will a family member need some financial help?
Retirement can be low stress, but it takes planning, perspective and a different skill set from what is required leading up to retirement.
My Kids Will Be Off ‘The Payroll’
Maybe, maybe not. Ideally, our children blossom into adulthood and can sustain themselves without our financial support. Unfortunately, they have the same problem that the rest of us do. We are all human.
The kids can be downsized at work. They can get sick or injured. They can battle addictions. They can get ripped off or embroiled in a legal dispute. Or, just struggle to make enough to stay independent. The list is endless.
No matter how sure a client is that they are not paying for things for children once the nest empties, there are events that simply cannot be ignored. Will a client really say no when one of their kids needs money for a beloved grandchild’s medical care? Or refuse to help pay for a lawyer to get a daughter out of an abusive relationship? Probably not, so we need to be prepared to help them assess the long-term ramifications of helping out.
I Don’t Need Life Insurance, So I Will Drop Mine
Because a primary reason to have life insurance is to replace lost wages in the event of an early demise, when people retire, they are less inclined to keep life policies. Often, they simply drop and surrender for any cash value in the policies. They view the policy as an expense, not an asset. That could be a mistake.
Even though the need to replace lost wages can cease at retirement, many widows find their lifestyle is hampered when their retired spouse dies. The total Social Security payable to the household decreases when either spouse dies and there may be a reduction in a pension payout. Plus, the survivor’s tax brackets compress when they start filing as a single taxpayer creating more stress on the portfolio.
Nonetheless, many retirees will not “need” life insurance but they still shouldn’t be in a rush to drop the policies. There is an adage that no beneficiary ever thought the insured had too much life insurance. Add to that the fact that dying is a “when” not an “if” event and there is a potential for great regret. None of us knows if the proverbial bus is around the next corner.
First, and foremost a thorough physical exam should be conducted before they make a decision about a policy. Heaven forbid, they have cancer or another condition that could substantially reduce their life expectancy and not know it.
Beyond that, there are many things that can be done with existing policies to make the expense less burdensome or otherwise make better use of the asset that an in-force, uncontestable policy represents.
I Need To Convert To A Roth Account Because RMDs Will Put Me In A Higher Tax Bracket
For some clients, all they know about required minimum distributions is they are forced to take them at age 70½ and pay taxes. While not liking to be forced to do something is understandable, few ever seem to do the math. With recharacterization of conversions no longer permitted, doing some math is even more important today.
The first year RMD is roughly 3.7 percent of the IRA. It rises only to about 5 percent by age 80. Clients with smaller or conservatively positioned retirement accounts often don’t experience the jump in taxes they fear.
The obsession with the onset of RMD is also a bit short-sighted. The more compelling reason to convert would be that the client was confident that their current tax bracket will be lower than any future tax bracket that will apply to these monies.
I met with a 75-year-old prospective client last year that got annoyed when RMDs started on his $250,000 IRA. He was proud that he converted the whole thing that next year and now “pays no taxes” on his IRA. That may be true, but he doesn’t pay now because he has already paid, and paid more than he would have if he’d just taken RMDs. To make matters worse, he’s single with no kids and was leaving everything to charity so the charity gets less also.
I Shouldn’t Take Money From Retirement Accounts Before 70½ Unless I Need It
This is ignoring the effect of RMD rather than fearing it. The common scenario is an early retiree who loves paying little in the way of taxes through his sixties and reaches 70½ with a large balance. The resulting RMD kicks him in a higher bracket. When he passes, it will be even worse on his surviving spouse due to the compressed tax brackets single filers face. Ouch.
If So And So Wins The Election, We’ll Go Broke
I cannot remember a national or even state-wide election in which I wasn’t told that the election of a candidate was going to be the end of us all. And just when I thought it couldn’t get worse, 2016 came and the rhetoric and the blame reached new levels. By simply adding this comment about politics to this column, it is almost a sure thing I will get at least one email from someone accusing me of being politically motivated. That’s how polarized we seem to be.
This year’s mid-term election is no different than every other election I’ve witnessed. Turn on the TV and all the candidates are accused of being evil people with bad agendas. Now, bashing the competition goes back much farther than my recollection. Check out some of the flowery but vicious rhetoric between Thomas Jefferson and John Adams. We venerate them as founding fathers and patriots, but they called each other many nasty things including traitors.
I am not suggesting that you dismiss a client’s concern. They have every right to their viewpoints and feelings. But extrapolating those feelings into political or economic problems that we cannot recover from simply does not jibe with our history.
We have had plenty of tough times yet keep making progress. It isn’t fun, but we do it. To abandon sound long-term financial plans designed to overcome short-term issues out of a fear over short-term events is not a good strategy.
It takes some time and a lot of empathy, but I have found that working through a good financial planning process shifts the focus on how to be more resilient and away from requiring good guesses about what will happen next.
Dan Moisand, CFP, has been featured as one of America’s top independent financial advisors by Financial Planning, Financial Advisor, Investment Advisor, Investment News, Journal of Financial Planning, Accounting Today, Research, Wealth Manager, and Worth magazines. He practices in Melbourne, Fla. You can reach him at www.moisandfitzgerald.com.