Sep 01 2023 / Annual Meeting
Are you ready for your clients to retire?
By Clay Gillespie, CFP, CLU
Many clients have been accumulating assets for many years in the hope of retiring and living comfortably in retirement. But what does this actually mean to the client? When individuals are working, it is their intellectual and physical capabilities that allow them to maintain their standard of living. In retirement their personal skills are no longer required to generate their retirement income. This can be a difficult transition.
Retirement can be one of the biggest stressors in their lives. For many individuals their self-worth is tied directly to what they do for a living. You need to tell them this and guide them through the process as they think everyone is happy and excited about retirement. In building and maintaining a portfolio while working, normal diversification strategies are all that are required because your client is getting an income from another source (getting paid). In retirement it is their savings and pension entitlements that are generating their desired income.
In retirement clients need to be prepared for a stock market correction every day. I like to use phrases that set expectations and help set up the discussion: “Over a typical 10-year period based on investment returns, you’re going to love us twice, hate us twice and be indifferent to us six times. What this actually means is that over a 10-year period, the market typically goes up dramatically twice (the years you love us), goes down dramatically twice (the years you hate us), and six of the 10 times you get an average return, and that’s when you think we are doing an OK job. Thus, you need to have a strategy to deal with typically widely varying investment results. You need to answer the question on how they are going to generate their income in any of these expected stock market conditions. Your clients will be less interested in rate of return and diversification. As they approach retirement, they will start to be more concerned about how much income they can generate in retirement.
Phases of retirement
The first two years of retirement are usually the two most expensive years. It is not until year three that we start having a better idea of what their retirement lifestyle will be. These first two years of retirement are usually used for pent-up demands that will be satisfied during this two-year period, but eventually they will settle into a retirement lifestyle. This is the example I use to stress this point: “This is what will happen in your first two years of retirement. There are many items that you’ll do that don’t need to be done again, like renovating your house, redoing your garden or going on some worldwide trip that you will probably not repeat. It will take two years for you to start developing a retirement lifestyle where, for example, you travel in May, in September and are home in the summer, etc.” I am not sure what their retirement lifestyle will be, but if retirement goes well, your clients will settle into a pattern. They will develop a retirement lifestyle. We are spending a lot of time helping them develop what life will look like rather than just their financial affairs.
- The go-go years: These are their most active years.
- The slow-go years: Clients are still happy, but they are starting to slow down.
- The no-go years: These are the years of extensive medical issues and limited mobility.
It is important to have this discussion to make sure your clients understand that retirement is a journey and not a destination. When we were young, many of the fairy tales ended with the phrase “They got married and lived happily ever after.” This is how clients might be looking at retirement. But anyone who is married realizes that the hard work really starts after you get married. What is important about this discussion is that a clients’ income needs can and will change dramatically throughout their retirement years.
The industry is doing a disservice to new retirees as we (the industry) are assuming that clients need a stable income adjusted for inflation through their retirement years. If we run the analysis, assuming a steady net spendable income (after tax and after inflation) through their retirement years, we are not allowing them to spend more money in their early go-go years when they are healthier and have more energy. Or we are making them work longer than they need to. In our practice we find that clients only need to increase their income every three or four years — not every year. And when they hit their slow-go years, then they might never increase it again until health care costs start to increase. I have seen this discussed as a crooked smile when you think of net after-tax income requirements in retirement. We need to give them guideposts on how much income they can generate in each stage of retirement. It is our job to give them that answer.
The phrase I use with prospective clients is “You retire once, and I help people retire every day, so I’ve seen the good and the bad both emotionally and financially about retirement.” As you take your clients through the retirement process, you want to start educating them on the risks of retirement that may be different than they were during their accumulation years. Here are the major financial risks that your clients will face in retirement:
- Longevity risk
- Inflation risk
- Market volatility
- Withdrawal rate risk
- Mental capacity and estate planning risks
- Health risks
You also need to spend time during the first meeting learning about the soft issues that concern them about retirement. It is important to stress that the concerns and confusion they have about retirement are quite normal and should be expected. We explore with our clients some of the emotional risks of retirement:
- Loss of identity
- No longer feeling of value
- A developing trend is “gray divorce.” There is now a spike in divorce around retirement.
Retiring early seems like a lot of fun, but when you retire and you haven’t developed a retirement lifestyle, all your friends might still be working or have developed their own retirement lifestyle and are not around, or they are doing other things. There’s not much to do.
In helping your clients prepare for retirement, it requires much more than running an illustration on how much income they can generate in retirement.