Mon. Dec 4th, 2023

What You Need to Know

  • Understanding your clients’ assets can help you help them create cash flow in the most tax-efficient way possible.
  • Many people who retire early forget about health care costs.
  • Finances shouldn’t be the only consideration. How will the early retiree fill their time?

The full retirement age in the United States is 67. Most people spend about 45 years in a professional environment, amassing retirement savings. But have your clients ever dreamed about retiring before they’re 60, or even 50?

While there are many advantages to early retirement, it is essential to understand that there are also significant challenges. To help prepare your clients for life beyond work, you need to guide them as they take stock not only of their finances but also their long-term aspirations. 

Invaluable Benefits: Freedom and Flexibility

What’s not to like about early retirement? Clients now have the freedom and flexibility to explore their hobbies and passions without the constraints of full-time work. Have they wanted to make a cross-country trip and see all the national parks, or rent a little villa in Italy for a month and visit the beautiful wineries? Have they longed for the ability to schedule a tee time when it’s quiet or wanted to take up woodworking or cooking, or learn a new language? Well, now they can. 

In addition, retiring early can be beneficial for their health — they no longer have the barrier of too few hours in the day to exercise, for example. They can use the gift of early retirement to get in the best shape of their life. There are many benefits of early retirement, but they must take advantage of the time they’d have to truly enjoy them. 

Getting Started: Building a Financial Plan

While the obvious benefits of early retirement may sound enticing, other factors must be considered. The first and most important is that they will no longer have a reliable income source. This means they will rely solely on the assets saved for retirement during their careers to sustain them for the next 30, 40, even 50 years! Cash flow planning and budgeting will be a crucial step to ensure their money lasts. 

When clients are considering early retirement, the first step is to meet with them to make sure they have thought this decision through and fully understand all the potential challenges. This process will start with constructing a robust financial plan that will look at their situation holistically. You should know as much about your client as possible — not just about their financial life, but also their short- and long-term goals for retirement.

Having a financial plan helps determine, based on their goals, how much risk they need to take with their retirement investments. Unlike when they were accumulating and increasing assets, your clients must now consider the impact that market volatility may have on their income source. They’ll no longer be adding to their assets — potentially, they may even be spending at least some of them. Helping clients understand the shift in thinking toward risk assessment and proper asset allocation is vital to participation in market growth while protecting client holdings in bad times.

Understanding Spending Needs in Retirement

An essential part of the financial planning process is for the advisor to understand the client’s retirement budget. This includes not only day-to-day expenses but also any large purchases or future financial demands, such as a new car, a second home, or their kids’ weddings. You want to make sure that you factor in these significant expenses to their financial plan, because each can significantly affect their future financial success. 

One expense that people tend to forget about is health care costs before they hit 65 and qualify for Medicare. I recently worked through this issue with a client who wanted to retire at 50. She had come up with her own budget and felt that she was ready to retire. She had created a very detailed spreadsheet but neglected to include any health care expenses. We discussed how health care expenses would be a significant burden on her plan, as she would need to pay for private insurance until she qualified for Medicare since her company would no longer cover her. After I ran this exercise with my client, she decided to push her retirement out to age 52 because of these essential costs. Working an extra two years has given her the confidence she needs to retire early — securely.  

Cash Flow and Tax Planning

The next step should be drilling into cash flow planning and how clients will generate a “paycheck” in retirement. How will they get the cash they need in retirement? From which accounts will they pull money? What are the tax consequences of pulling money out of each specific account? Are there penalties for pulling money out of any accounts? These are the questions that we need to help our clients answer before they retire.  

Remember, not all accounts or investments are taxed the same way. It will be critical to understand what types of assets your clients hold and how you can help them create cash flow in the most tax-efficient way possible.

By senior