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Top Ten Issues Related To Retirement Planning and Aging

The AICPA Personal Financial Planning Section recently held a webcast to take a closer look at the issues that CPA Financial Planners’ clients are facing in the retirement planning area. Our goal has been to focus on Thought Leadership in all areas that impact the CPA Financial Planner and their clients.  Retirement is a key focus for our clients and their advisors. The number of baby boomers who are retiring each day is increasing at an amazing rate.  At the same time, there is a growing trend of multi-generational households and blended families are on the rise.  Clients approaching retirement are often still supporting young adult children as well as aging parents, making the planning for their own retirement that much more complicated. Many areas of personal financial planning need to be integrated to help clients in these areas.

Here are some of the issues that were identified by a group of the leading CPA Financial Planners across the country:

  1. Higher Health Costs - The population of the United States is aging; an estimated 10,000 baby boomers turn 65 every day.  Higher income individuals are often in better health at retirement and will face higher lifetime health costs as they live longer.  Typically the clients you are working with fall into this category.  While planning for these higher costs will be challenging it is a very important element in the planning that you do. 
  2. Longer Life Expectancy - New research on asset sufficiency is challenging some of the standard retirement planning rules of thumb, such as the 4% safe withdrawal rate. A 65 year old married couple retiring today will likely see at least one spouse live longer than the 30 years commonly used as the "typical" retirement period.  Current research on topics, such as the impact of a “rising equity glide path” in retirement, is something you should review with respect to how it will impact your retirement planning services. New research such as this will help us better guide our clients through retirement. 
  3. Balancing Risk/Return - Developing a proper asset allocation in a retirement portfolio requires balancing many factors including risk tolerance, cash flow needs, time horizon and return requirements. We generally want to reduce risk as much as possible in the portfolio while still earning a sufficient return to achieve our clients’ financial goals.  This is even more challenging in light of the current low interest rate environment for cash and bonds and the fact that we have seen a strong five year run in most equity markets. How you communicate the risk/return tradeoff with clients becomes very important in their long term success and ability to stick to their plan over various market cycles. 
  4. Enjoying Retirement - While it is important to come up with a retirement withdrawal rate that is sustainable, it should also allow clients to enjoy their retirement. We often focus on not running out of money but we also don't want our clients to die with too much money left over because they didn’t live life to its fullest. There is a delicate balance between spending too much and spending too little.  Much of the current “life planning” movement helps clients to focus on living their life to the fullest, hopefully taking the emphasis away from success being solely defined as always having more financial resources.  A true understanding of your clients’ goals, dreams and desires is always an important part of a good retirement plan. 
  5. Withdrawal Strategy - It can be very difficult to move from a lifetime of accumulating assets to drawing down on a portfolio. Determining an appropriate amount to keep in cash reserves and maintaining that level is critical.  Some people find that a “bucket strategy” helps them compartmentalize what they are spending in order to not stress about market fluctuations. (Setting aside different pieces of the portfolio for different needs.)  While rules of thumb (like the 4% safe withdrawal rate) are a good starting point, the only way to really understand what a client can safely spend each year is to look at your clients’ individual situation.Managing the tax impact of withdrawals and understanding how each item of income is taxed is also very important, even more so now with the passage of the ATRA in late 2012. With higher tax rates on investment income for those in higher tax brackets, you need to focus on things like asset location and managing their tax liability much more than in the past. 
  6. Monitoring Expenses - Expenses are often much different in retirement than they are during the working years, but they are still incredibly important to the overall plan. Often, clients will spend more in the early years of retirement, see expenses dip in the middle, then rise as they near the end of their lives and medical expenses climb. This has been documented recently in the so called “Smile Research.”  Also, not all expense categories grow at the same rate of inflation and this needs to be considered when forecasting long-term expenses. This is often the hardest part of data gathering that your clients will do in the retirement planning area, but possibly also the most important. Starting with current actual expenses is typically the best approach, then you can modify for what might change in retirement. Modeling different expense levels is a good way to understand the impact of various budgeting decisions. 
  7. Social Security Uncertainty - The role of Social Security in the retirement planning process is changing as concerns grow over the availability of benefits for future generations. According to the Annual Report of the Board of Trustees, the reserves for Social Security will be fully depleted in 2033, which is not too far away. After that there is only enough coming in to pay 77% of the benefits.  While it's impossible to predict what will happen to the social security system, we need to consider the impact of potential reductions to payments. For higher income clients, this could come in the form of “means testing” or some other methods of determining who receives what benefits and how they are taxed in the future. 
  8. When to File for Social Security - There are various Social Security claiming strategies that help to maximize the benefits for an individual or couple. The breakeven age where you would be better off delaying benefits beyond Full Retirement Age typically occurs in your late 70's/early 80's, depending on how long you wait and some other factors. The 8% per year increase from Full Retirement Age to age 70 is powerful and once you cross that breakeven age the benefit grows exponentially. Strategies such as file and suspend can be used to fully maximize Social Security benefits, especially for married couples.  This is an area where clients often want to take the easy way out and start benefits long before they should if they are trying to maximize them. Understanding their overall financial situation, cash flow needs, and sources of income is needed in order to properly advise your clients. 
  9. Estate Planning - The increase in the exemption amounts to over $5 million per person has made estate planning less important from a federal estate tax perspective for many individuals, however the non-financial aspects of estate planning are still critical.  Making sure you have your Power of Attorney updated and in place, and addressing the need for health care documents like a Health Care Power of Attorney and Advance Directive are very important. Trustee designations and naming the proper beneficiaries are often missed or not changed when life’s circumstances change.  As clients look at their retirement planning situation this is often a great time to make sure their estate planning is up to date. 
  10. Long Term Care Needs - Long term care costs are increasing as is the percentage of the population that will need this kind of care at some point in their lives.  Looking broadly at how to fund these costs is important, whether that means self-insuring if you have enough assets or buying some form of LTC insurance.  As the population ages, the cost of this coverage is also increasing while many carriers have decided to get out of the business altogether.  None of us looks forward to having to give up the freedom of living in our homes but considering that possibility is an important part of planning as we age.

These are just some of the issues that should be addressed when working with clients on their retirement planning. While the challenges are formidable, there is also an incredible opportunity to really make an impact on your clients’ lives as you help them with these issues. Advisors who are willing to address the wide range of issues that come into play here, and work with their clients other specialists to serve their clients’ needs, will be in a great position to be a key resource for their clients.  Start talking to them about their retirement planning now!

The views expressed represent the opinions of L.K. Benson & Company and are subject to change. These views are not intended as a forecast, a guarantee of future results, investment recommendation, or an offer to buy or sell any securities. The information provided is of a general nature and should not be construed as investment advice or to provide any investment, tax, financial or legal advice or service to any person. Please see Additional Disclosures more information.