Liz Kesselman: Hello, I’m Liz Kesselman with another “Adviser You Can Talk To” podcast. I work with a select group of the firm’s clients in a relationship capacity and I’m joined today by two colleagues I have the pleasure of collaborating with a lot. Victor and Andrew, of our financial planning team, are here to talk about the interactive financial planning that they’re doing with our clients, and specifically today, we’re going to talk about planning for retirement. You two devote much of your time to creating financial plans. We have some awesome technology. These “living, breathing” documents, they’re very, very interesting, but how do you know, from the work that you’re doing, if a client is ready for retirement? I’m speaking from a financial standpoint. How do they know if they have the money for the rest of their lives?
Andrew Busa: There’s no magic number for what your net worth should be. There’s no one-size-fits-all plan for every person. You need your own financial plan figure out if you’re ready for retirement and that plan, like you just said, Liz, it’s going to be a living, breathing document that’s going to change with you throughout your life. And for our clients, we start this planning process years before retirement. And in order to know if you’re ready for retirement you need to answer four questions. Number one, how much do you have? Number two, how much do you spend? Number three, what are your income sources outside of your investments? And, finally, number four, how are these three things going to change throughout your life? So we’re going to dive into each of these four questions together today and thinking about that first one how much do you have, at the heart of this one is, you need to understand your complete asset picture.
Victor Colella: That’s right, Andrew, so no matter how much you have, that’s a very important question, but it’s also about what you have and where you have it. What I’m really talking about here are what are the types of assets that you have and where do you have them? Where’s the location of the assets? Is it cash, is it investible assets or is it mutual funds, for example? Is it real estate? Are most of your assets tied up in a business that you own and manage? Or even, do you have a big rug collection that you’ve been investing in for years and years? I can’t say we see that one a lot, but what we’re getting—
Liz Kesselman: We’ve seen it, though.
Victor Colella: What I’m getting at there is, based upon these different asset types you may or may not be able to spend them to buy a steak dinner or pay your utility bills. So liquidity’s important and also they all grow at a different, in a different way. So real estate grows different from investments. Second, I said location, so location is really getting to what’s the taxable nature of those assets. So it could be cash, it could be money that you have in a brokerage account that’s taxed on gains, or maybe it’s in a 401(k), an IRA, or a Roth IRA that have certain tax advantages both as it grows and when you take the money out, potentially in retirement. Both of these are important, and depending on the type and location it really can change the answer of how much is enough.
Andrew Busa: And an example typical question that we get form a lot of our clients regarding their assets is how should they be invested as I move closer to retirement, should they be more conservatively invested, the answer to that most of the time is no your investments need to continue to work for you over the next 25 to 30 years. That’s a really important point that I think Liz, I’ve heard you say many times.
Liz Kesselman: I think we have this sort of idea in our heads that we’re sort of closing one chapter of the income earning years, so the portfolio needs to sort of react to that, but actually we’re, in many cases, embarking on a whole other chapter and the portfolio has to really work for you. Alright so that makes sense, so once we get a handle on organizing, what are your assets? I know we generally look at expenses next. And I think this part is really interesting because, as Dan Wiener likes to say, you can’t take a shingle to the supermarket to pay for groceries. We find a lot of our clients have significant assets in their current home but they haven’t really thought through: How does that impact their spending? Or how are they going to make that support them in their next chapter? So you guys talk a little bit about expenses and how you sort of gain a handle on them when you do a plan.
Victor Colella: Liz so I’m sure you’ll recognize when I say this, when we do financial plans with our clients, oftentimes I’ll say, “Your expenses are the single biggest level you have to pull to either improve your retirement situation or hurt it.” So to get a handle on expenses, which is the second big question Andrew talked about earlier, we take a look at it from two approaches. One, what are your expenses today? And I’ll explain why these are important. And two is what your goals are for the future? Both in retirement and between now and retirement if you’re a little younger and you have more time to go.
Liz Kesselman: It’s interesting a lot of clients I work with they’re working towards the day when they can stop working but then when they retire they discover after a couple months that actually they’re kind of bored, and they go and they do part-time work and often times it’s totally unrelated to what they did when they were working all those years. But they want the structure and the purpose, and the socialization so yeah it’s interesting when you talk about expenses changing.
Victor Colella: One of our advisers that we work with always says now that you’ve cleaned out the garage, what next?
Liz Kesselman: Right, right.
Victor Colella: I’ll back up, so expenses today like I mentioned before, the reason expenses today are important is twofold, really. One, we want to determine your savings, so if you’re not yet retired, savings is critical because it’ll help us get to the amount of assets that you’ll have to fund your retirement on day one. So savings is income minus expenses, expenses is half of that equation.
The other reason, which varies depending on how old you are, is to help us approximate your retirement lifestyle. So if you’re 30 years old, your lifestyle today probably isn’t going to resemble much what your lifestyle is going to be when you’re 60 or 65. But if you’re 55 and you’re more in that retirement red zone, so you’re a little closer to retirement, you probably can make a couple of tweaks to your lifestyle and pretty quickly get a feel for what you’re going to be spending in retirement. So, that’s expenses today.
The next step is what your expenses are tomorrow. So this is goal planning, and a big part of this is defining what your vision is fore retirement and for the years between now and retirement. So we talk about short-, medium- and long-term goals. So short- and medium-term goals oftentimes have nothing to do with retirement. So this is, I’ve got to send my kids through college. I have to put a new roof on our house. I may expect to have to buy two or three cars between now and day one of retirement. Those affect your savings, again which impacts the assets that you have available. The second part of that is: What your goals are for retirement, how do you envision the day after your retirement party? Sometimes that means I’m going to play a lot of golf. Sometimes you want to travel the world because you never had time to. It can look very different depending on the client.
Andrew Busa: Some of the goals that you mentioned, they’re fun to think about. It’s exciting to think about what you want your retirement to look like, what you want that vision to be. Other goals, unfortunately, aren’t as exciting to think about but they’re equally as important. And one of those is planning for health care. So if you’re retiring at 65, most of the time this is going to be a Medicare situation and this has a lot of complexity. We’re going to help you break down those individual components of what Medicare is going to cost for you Medicare Part B is going to vary based on your income. You think about prescription coverage, out-of-pocket costs as well. And we’re going to help you think about this. Now, if you aren’t retiring at 65, let’s say you’re retiring early, this can actually have more complexity and it can be more costly. I know you guys, we’ve done a plan recently for someone who wanted to retire at 55.
Liz Kesselman: Right Victor, remember he was a high-wage earner and really felt that he should be able to retire at 55, he was currently in his early 40s, but when we went through the plan I think all of us were shocked at what his out-of-pocket health insurance costs were going to be from 55 to 65 to bridge the gap. It was just something that back of the envelope calculation, he hadn’t thought about and I think we all thought it was very eye-opening.
Victor Colella: Health care looks very different person to person. I really think that we see it materialize in a few different ways, so the first one is folks thought that they could retire because they had assets, they were good earners, but then it ended up they couldn’t retire early as they had hoped because they had to figure out how to fund that healthcare pre-65.I guess another scenario that we see (which we like little better of course) is that you think that you can retire, or you think that you can’t retire early, you think that you can’t retire, but maybe you work for this, this is a classic, you work for this, your state and their health care plan is particularly generous and it means that your health care continues for the rest of your life, you never have to go on to Medicare. And all the sudden you can retire a couple years earlier and you never thought it would be possible.
Liz Kesselman: We’ve seen a couple of those right, yeah it’s like a pleasant surprise right.
Victor Colella: I like those. And then finally, even simple scenarios can be more complex than our clients expect. You may find this with your own situation. For example, maybe it’s a single income household. The primary wage earner expects to work until 65 and then switch right over to Medicare. Sounds straight forward until you start to think about their spouse who’s five years younger. That spouse has to figure out where to get health care for those five gap years, and it might cost them 10 to 20 thousand dollars a year to find that healthcare coverage. That changes the retirement picture. So it can really catch folks off guard. It’s important.
Liz Kesselman: So it’s definitely very individualized is what I’m picking up from the two of you. Not just on the health care front but just planning in general, that being said do you ever see any patterns that emerge with the plans that you do.
Victor Colella: We do. We see a lot of patterns, but one that we talk about with retirement spending a lot is the go-go, slow-go and no-go pattern for retirement spending. I’ll explain, so the go-go years are your early years of retirement, you’re young, you’re healthy, and you’ve got all this free time on your hands. Maybe you say, “I’m going to go out and see the world.”
Prime example, Liz, this is a client we did a couple weeks ago, the client wanted to buy an RV. They wanted to see the country, maybe they wanted to see national parks, I don’t remember exactly, but they say, We’re going to buy this RV for the next five years and we’re just going to spend freely. Because we’re young and we’re able to do it.” But they know that after those five years, they’re going to get it out of their system and they’re going to slow down. That takes us to the slow-go years. So this is the lowest expense period in their retirement. Typical pattern, so the attitude here I that we’ve seen the world, now we want to see our grandkids.
We don’t need to go anywhere and spend a whole bunch of money in order to do that. They’ve been there, done that, and now they want to just relax, they’re still healthy and they want to just relax. And then the no-go years, so this is, those expenses start to come up again in the no-go years. The expensive period early in retirement that’s characterized by traveling and maybe going out to eat more, it can depend person to person, but that’s replaced by health care. You’re less healthy than you used to be and the big one that we talk about a lot with our clients is long-term-care planning. If you need help either in home, or you need to go to facility to get that help, it can be quite expensive. So it almost forms a smile. High expenses early, low expenses in the middle, and then high expenses again later in retirement.
Liz Kesselman: That’s an interesting pattern and I can attest to sort of the work I’ve done over the years with clients that we do sort of see that, especially in the early years. The go-go years, it’s fun and that free time is great. Okay so with, that’s really helpful, so I think we all have a pretty good understanding here of how you’ll look at expenses. How do you pair up expenses with income? So you retire, your paycheck goes away. That regular income stream stops, what happens next?
Andrew Busa: I’ll expand on that a bit. And similar to how we approach expenses, we usually look at this as two different incomes right? Income you’re making today, and income you’re expecting to receive in retirement, and this is going to tie directly back with this original question with are you ready for retirement? First to hit on income you’re making today, you need to understand that of course we’re going to help you understand it, you remember that equation that we mentioned earlier, income minus expenses equals savings, this is the second half of it. And we need those savings so we can project what your assets are going to be in retirement.
So income today, we’re talking about your current salary, company benefits, your career prospects, what does your trajectory look like in the field that you’re in, and then income in the future. A big one that we talk about with nearly every single client is Social Security. Of course there’s some uncertainty here, we deal with that by inflating it slower, and we try to be conservative where we can be. But the discussion we most often have around Social Security is timing. When should you file? Should you delay until age 70, should you take it earlier?
Things that often play in to this decision is, what’s longevity look like in your family? Do you have any idea of what your lifespan might look like? Do you have other income? Are you working part-time, and also do you have any assets that you can draw on between full retirement age and age 70? And then also just what are your general feelings on the matter? Sometimes thinking about Social Security is more art than science. There’s no exact right answer of when you should take it and we’re going to help you think about all those things.
Victor Colella: Social Security isn’t the only income source we see from retirees either. Often times we’ll see clients may have rental properties, so they get some income from those rental properties, maybe to Liz’s point earlier, they wake up the day after their retirement party and decide, and say, “I kind of want to go back to work. I’ve always wanted to work at the golf course.” So they get some part-time income. Which can actually help your situation quite a lot, but also this could be pensions. A variety of other income sources, it does vary quite a bit but I think those are the big ones.
Liz Kesselman: Yeah we did this plan recently, remember the client actually had a number of income sources that we’re going to continue in to retirement related to ownership of a family business, dividends, and they both had pensions as well and when we ran the plan I think they were surprised to see actually that these investment accounts they were so focused on, they don’t really even “need” them to support the retirement lifestyle they want, so to say that the mood in the room was elation would be probably an understatement, but I do think it’s kind of interesting, a lot of times I think clients have a very good understanding of generally whether or not they’re in good shape, but when they go through the financial planning exercise, it’s so interesting to see all the different pieces coming together and I think that’s what the two of you really, with your skill set and your expertise, you bring it all together.
Victor Colella: Yeah we had that client yesterday who said, “I’ve always wanted to save $4 million.”
Liz Kesselman: Right, right, their magic number, yeah. Victor Colella: And he had a great looking financial plan, he was just fine for what he went with, he wanted to retire, and we basically had to reinforce to him a few times, $4 million doesn’t matter, what matters is that your goals are being accomplished with what you have in terms of income and assets.
Andrew Busa: Absolutely. So, we’ve covered three out of the four big questions that we set out to answer today. There’s one more question that you need to answer, and it’s a big one. How are all of these going to change throughout your life? This is where uncertainty comes in, no one can predict the future, but this is something we need to consider.
Victor Colella: If you haven’t picked up on my corny sense of humor yet, you will now. What I always say to our clients is that crystal ball really would help in this. We’re in the business of predicting the future and we don’t have one, so uncertainty is where we live. So we explain how we deal with uncertainty for our clients, and we’ll explain it to you that way now. It can really be crippling.
We’ve seen clients procrastinate a financial plan for 20- plus years because they just don’t know what’s going to happen. We have three types of uncertainty we talk about, one is market uncertainty, and we deal with market uncertainty, Liz mentioned our software earlier, we run a Monte Carlo analysis that varies what the markets might do, both in pre-retirement and during your retirements that we can get a feel for the impact of what if 2008 happens in the year that you want to retire. So we’ve got that one covered. Life uncertainty is a little bit tougher. So this is uncertainty around you. So a big part of this is what is your spending going to be, are we guessing well or are we way off. It could be your health: Are you going to have to care for someone in your family who maybe isn’t healthy in their retirement? There are a lot of different ways that this can materialize. But we have some rules of thumb that help us get at this, based upon some research that we’ve done. Andrew talked about some of the rules of thumb that we use for health care, this could also be some risk analysis thinking what insurance products can help us cover this uncertainty. We talked about the retirement slow-go, go-go, no-go years. Sometimes they say you 70% to 80% of your pre-retirement expenses in retirement, lots of rules of thumb that we can apply, but this one’s tough to get at. But perhaps even tougher is the third category which is unknown unknowns, which we have no idea what they’re going to be and neither do you. So what we do here is that we’re conservative, and you just said this.
We buffer, any chance we get to overstate your expenses and understate your income in retirement, and even your investment returns, we do. The reason is that we don’t want to get caught off-guard and tell you that you’re ready to retire when you’re not just because we didn’t think of something that we had no way of predicting.
Andrew Busa: Right, and our youngest clients certainly have a lot of uncertainty because they have a long-time frame.
Liz Kesselman: Sure, sure.
Andrew Busa: But they still need a plan, and what we try to remind those clients is that your ultimate destination is still retirement, but there are a lot of other things along the way that you need to plan for. So your retirement plan is going to help you with that, and it’s thinking about not only what happens in retirement, it’s also what happens between now and retirement and that’s lot of where the goal-planning piece comes in.
Liz Kesselman: Yeah I mean you two have given me on a personal level some great advice for our family when we did the financial plan. I’m mid-40s here, I still have to pay for college, et cetera before the retirement, but here’s some of the best advice you’ve given me that I think applies to a lot of folks that are listening today and a lot of our clients is be aware of lifestyle creep, expenses do matter, so if you’re living responsibly and within your means, taking advantage of compounding, that’s a really powerful one, saving for college that way.
And I think what’s, I hadn’t thought about before we did the plan was some of the insurances that are often overlooked, I know with every plan we’ve done you two talked about the importance of an umbrella policy, and most clients have really given it no thought or they’re woefully underinsured in that aspect, but also things like disability, life insurance, long-term care, some of which for folks like me are available from work and other folks are doing it outside of work, but just again, like I was saying before it’s that big picture part of the exercise that for me and my husband was invaluable.
Andrew Busa: And Liz you mentioned compound interest, you know rumor has it that Einstein once said the eighth wonder of the world is compound interest.
Liz Kesselman: Free money!
Andrew Busa: So the takeaway there: Start investing early. Victor Colella: Well I certainly can’t follow an Einstein quote. But I guess I’ll sum it up though since I can’t follow it. Alright so we’ve covered a lot, and I hope we’ve impressed to you at least that this process isn’t exactly simple. It’s a complicated process and it takes time, but I certainly wish it was as simple as filling out a form online, but it isn’t. So here are our suggestions for you. Number one, sit down and get organized around these four things that we just talked about. Knowing what you have is the first step to figuring out what it’s going to look like in your retirement. And then I’m going to keep it simple.
Sit down and talk to a financial planner, we do this, and the reason why we do this is because it’s complicated and we see, Liz, I think you will say this but our clients retire once, we retire hundreds and hundreds and hundreds of times, so we can leverage that for you. But you know this is a big step and the most important part is that you just get started no matter what age you are. And I know for me personally, we can’t question the mental burden that this is for our clients, because the looks on folks’ faces after we’ve gone through this process is usually one of tremendous relief, and it’s rewarding for us, but it can be a big mental burden, it’s one that you don’t have to have.
Liz Kesselman: Absolutely. Well this is excellent, I certainly appreciate the two of you taking the time to sort of de-mystify retirement planning.
Victor Colella: Our pleasure.
Liz Kesselman: And encourage everybody to just get started. Again I’m Liz Kesselman, thank you all for listening to another of our “Adviser You Can Talk To” podcasts. I’ve had the pleasure of speaking with Victor Colella and Andrew Busa today. We hope you enjoyed the conversation. Please subscribe or check us out at AdviserYouCanTalkToPodcast.com. Your feedback is always welcome as well, and if there are any questions or topics that you’d like us to explore, please email us at firstname.lastname@example.org. Thank you for joining us today.
Victor Colella: Thanks.
Andrew Busa: Thank you.