Even in times when the only certainty is uncertainty, financial advisors are still tasked with creating rock-solid plans for a client’s retirement.
Now that another inflation report has shown clients what a lot of financial experts already know—that taming inflation is probably going to take several quarters, not a couple of months, in concert with a bit of a recession—more clients are more concerned about their retirements than they’ve been in a long time, advisors say.
“This is one of the most financially complex phases of someone’s life, and the stakes are so high,” said Larry Pershing, a CFP with Optimum Retirement Planning in Chicago, a firm that specializes in clients age 55 and over.
Preparing clients for retirement, especially in this environment, he said, means advisors should control what they can and have some frank conversations about what they can’t control, like a recession, lower returns, and ongoing volatility that makes it hard to feel like a winner.
“We know that we can’t predict how things are going to turn out 10, 15, 20 years in the future, but we do need to talk about the future with our clients. So it’s important to focus on what clients need,” Pershing continued. “What do you need your portfolio to do? If you need 10% a year, you probably won’t get that from your portfolio. But if you only need to counter inflation, you could get that.”
One trend Pershing says he’s seen among his clients is a certain level of disbelief that quick bounce-backs aren’t the norm.
“I’ve been trying to dial back peoples’ expectations. I’m telling them the stock market won’t be performing in the future like it has been in the past. But they’re not too concerned,” he said, describing his clients as “the millionaire next door,” with anywhere from $500,000 to $3 million in assets. “They say ‘I’ve seen this before.’ Well, not really.”
Be Tax-Smart When Possible
Pershing said he’ll first talk to clients about having an income plan that does not rely on stock market returns in any one year so they’ll never worry a down market will deplete their assets.
He said he likes to pull together the complete income picture, including retirement work if clients are planning on that, rental properties, annuities, pensions, 401(k) and Social Security.
“Gather them up and see how they look together,” he said. “And since most people want to spend the same each year in retirement, I’ll do a long-term projection of level spending through retirement.”
Being tax-smart about where money will come from (or where it will continue to grow throughout the retirement years) is one of Pershing’s primary concerns, he said.
“What tax-smart moves are there to reduce that client’s tax burden that year?” he said. “What’s the withdrawal strategy? Because the order in which you pull money and the type of investment you’re pulling from will have a major impact on the taxes the clients has to pay.”
Pershing looks at the big three account types—IRA, Roth and brokerage—when creating that strategy.
“If you do have two or three of these types of accounts, it’s usually better to withdraw from the taxable first and then from the IRA, which is usually a tax-deferred rollover from employment,” he said. “Similar is a Roth conversion strategy. You’re legally allowed to do it, and for a lot of people when they retire they’re facing the lowest tax rate ever and for the rest of their lives. It’s better to pay 12% now than 28% later.”