Did your mother ever tell you why you shouldn’t assume? Well, sometimes it goes beyond making you and me look foolish. When your client holds faulty assumptions about financial planning for retirement, the results can be disastrous.
Here are four areas where your clients may need to re-evaluate their perceptions on retirement planning.
1 - Life Expectancy
What assumptions do your clients have about how long they’ll live? Do they think they’ll live forever and yet don’t worry about saving for tomorrow? Or will they fail to enjoy their retirement years by holding on too tight to every penny they earn in fear it will run out?
Barbara Williams of Financial Focus in Carlsbad, California, and partner Gloria Foote often find themselves running after clients who take off in either direction. Sometimes clients hold on too tightly to their finances, missing out on the comfort and enjoyment the assets can provide. But Foote said they have to run around after other clients and yell, “What are you doing? You’re going to run out of money!”
Your client’s assumption about longevity can impact their decision on when to take Social Security benefits and their predictions of how long their retirement (and retirement savings) will last. The average life expectancy continues to increase, according to the Social Security Administration. Your client may need to plan on living much longer than expected – as much as 30 years in retirement.
Foote has a client who is 106 years old. She’s no longer working, of course, and her rest home care is very costly. Williams has a (just) slightly younger client who keeps his hand in the career game by managing some real estate – and staying (very) active physically.
“He’s planning to hang-glide for his upcoming 103rd birthday,” Williams said. “He celebrated his 100th birthday by skydiving.”
“Right now, we generally base our plans on an age projection of 95,” she said. Some clients choose to ignore them when advised they may live longer than they think they will. “They say, ‘Well, I’m not going to live that long.’ We respond by saying, ‘Fine, but we’re going to run projections for ages 85 and 95.’”
“It’s our job to look out for them,” Williams said.
2 - The Role of Social Security in Retirement
While just a third of current workers expect Social Security to play a major role in their retirement, two out of three retirees report Social Security benefits are a major source of income, according the Employee Benefit Research Institute’s 2018 Retirement Confidence Survey (RCS).
Nearly half of the workers surveyed have considered how the age at which they claim Social Security will impact their benefits, but workers still plan to claim them at a median age of 63 – far short of 70, the age providing maximum benefits. Just 23 percent said they chose a planned claiming age to maximize their benefits.
“Looking at the big picture of Social Security, it’s ideal for your client to wait until after the age of 70, if possible, to take Social Security benefits,” Foote said, while acknowledging circumstances may make this too difficult. “Someone who works in manual labor may not be able to wait until they’re 70.”
While some people assume Social Security benefits will cover most basic needs in retirement, others wonder if Social Security will even exist when they reach retirement. The reality is probably somewhere in between the two extremes.
Foote and Williams tell their clients that by 2037, Social Security may reduce to 73 percent the benefits they expect to receive. Indeed, the Social Security Administration projects the system will stay sound through 2036 but anticipates benefits may be reduced as much as 22 percent by 2037. And they may keep declining yearly if no changes are made to the present system.
The bottom line is Social Security may remain a valuable resource for many retirees. But it will only cover a portion of your client’s retirement expenses. They’ll need additional savings to cover the gaps.
3 - Working Past Expected Retirement Age: I’m Not Going to Retire/Stop Working
The Bureau of Labor Statistics reports that in 2016, 32 percent of the U.S. adult population took part in the civilian work force. The figure will rise to 37 percent by 2026 as more older workers remain working. According to the RCS, the top two reasons people worked in retirement were to stay active and involved (64 percent) and for the pure enjoyment of working (48 percent).
“Our clients are a mixed bag of those who work past retirement and those who don’t,” Williams said. “Some hit age 65, qualify for Medicare and call it quits. But others go into a ‘soft retirement’ and work part time.”
Several of her clients are high-level professionals, company presidents and vice-presidents, who decided to work as part-time consultants. Their reasons echo the 2018 study.
“Sometimes they want to keep their hand in the game or they want to make a difference in the world,” Foote said. And often, they just love what they do. She points to herself as an example.
“I’m soon 73 and still working. It’s not about the money. It’s just so rewarding to be making a positive difference in clients’ lives,” she said. The relationships she’s made with Williams and their clients keep her engaged and happily working.
However, clients may not have as much control over when they will retire and may need to draw on their retirement funds sooner than expected. Nearly 70 percent of the RCS respondents expected to retire at age 65, but retirees reported they actually retired at age 62.
The reasons behind retiring earlier than expected could be positive or negative. Twenty-four percent of those surveyed reported they were able to afford early retirement, while 42 percent cited work-related reasons, such as their company downsizing or closing.
4 - Health and Health Care Costs
How well does your client understand the cost of health care in their retirement plans? If they’re like most of the working community, they’re underestimating how much they may need – if they’ve thought about it at all. Only one in five workers say they’ve calculated how much money they’ll need to cover health expenses in retirement.
Health care is expensive even prior to retirement. Many of Financial Focus’s clients work to age 65 to qualify for Medicare. But while standard Medicare Part A is free, it covers only about 50-60 percent of overall retirement health care needs.
To bridge gaps in coverage, your client will need to budget for Medicare Part B premiums, prescription plans, out-of-pocket costs and any supplemental insurance. And they can’t base those figures on current prices. Over time, premiums and out-of-pocket costs will rise.
Clients often underestimate how much they’ll need because they’re used to having as much as 75 percent of their premium picked up by their employer. Your client could assume their current take-home pay will be enough during retirement – forgetting they’ll have to pick up the whole premium, as well as any out-of-pocket expenses.
And they may find they will retire sooner than planned. Forty-one percent of retired workers report having left the workforce earlier than expected due to health problems or disability; 14 percent left the workforce to care for a spouse or family member.
Williams has at least one client where that scenario plays close to home. She’s known him since he was 15, and played sports with her son. “He looks great, but he’s really not doing so well,” she said. “He has diabetes and doesn’t think he’ll live a long time.” The client is planning to retire around age 57, while he’s relatively fit enough to enjoy his time and family.
In some ways, financial planning operates on assumptions. But those assumptions are calculated on historical data based on averages. Clients who hold faulty assumptions run the risk of derailing their retirement plans – and more. Discussing their perceptions of longevity, Social Security, working past the expected age of retirement, their health and the rising costs of health care can help provide a realistic picture of their future financial needs.