More and more financial advisors are grappling with clients who haven’t saved much for their post-career years – and who plan to continue working in retirement, given their need for income.
That creates an interesting – and challenging – dilemma for money management professionals. How does an advisor build an investment strategy around that “working in retirement” model?
First, the data. According to the Employee Benefits Research Institute’s 2017 Retirement Confidence Survey, 30 percent of U.S. career professionals “feel mentally or emotionally stressed about preparing for retirement.”
Additionally, only 41 percent say they’ve “tried to figure out how much money they will need in retirement, EBRI reports. The “no or low savings” issue is so vexing that a whopping 80 percent of survey respondents told EBRI they will work for pay, either full- or part-time, in retirement.
Make no mistake, eight out of 10 workers who expect to work for pay in retirement is an alarming number, and one that advisors should focus on as they help plan retirements for their clients.
Some money managers, though, are already realistic about clients who delay retirement, or who don’t plan on retiring at all.
“It’s no surprise. The single best thing that a client can do to improve his or her retirement plan is to work longer,” said Jamie Hopkins, director of retirement planning at The American College in Bryn Mawr, Pa. “Working longer shortens the retirement period, reduces the impact of inflation, allows assets to grow for another year, and increases income.”
Yet Hopkins also issues a cautionary note on the topic of working in retirement.
“Far more people express the desire to work in retirement than actually end up working in retirement,” he noted. “This is a big misalignment of beliefs and reality, that can cause a client to under save for retirement because they were banking on some income from continued work.”
That said, advisors would do well to start building retirement models that include a job in retirement, for clients who say that’s their goal. But what would such a plan look like?
“When setting up a plan for someone working in retirement it’s important to first look at their employment and ask how secure this income really is,” Hopkins noted. “How long can the person realistically keep working? Will the job be there? Are there health risks?”
Working in retirement also increases an individual's human capital, and wealth managers should know that.
“With higher human capital, the individual is able to take on higher risk investments or at least a higher allocation in equities as employment functions more like a safe income source comparable to bonds from an asset allocation standpoint,” Hopkins added. “By allowing the person to invest more aggressively, this also increases the likelihood the investments will produce higher returns and improve the longevity of the portfolio.”
Lower Withdrawal Rates
There’s another built-in feature of a “working in retirement” portfolio.
“Working in retirement also allows the individual to keep his or her withdrawal rates lower for the first few years of retirement, drastically improving the total amount of money that can be spent throughout retirement,” Hopkins said.
The biggest challenge that advisors will face with dealing with a client working in retirement is gauging how long the person will continue working.
“If the plan is built around five years of additional work, and the client leaves the workplace entirely after a year or two, this could throw the plan off, requiring drastic changes,” Hopkins noted. “In many cases, additional work in retirement is seen as extra income and not fully relied upon in the planning process because of the potential uncertainty of continued work.”
Wealth mangers need to build in flexibility to the plan and cannot overly rely upon continued work as the data shows that most people do not continue to work throughout retirement even if they express a desire to, he said.
For advisors, there are myriad challenges in planning for working retirees – challenges that go beyond simply creating an investment portfolio.
“The trick is to take a look at their entire situation, including work-life balance, and build a portfolio that matches the client’s goals,” said Mark Painter, a financial planner with Everguide Financial Group in Berkeley Heights, N.J.
By looking at current income needs and current savings needs, investment advisors can develop a plan that allows a person to reduce the number of hours worked over time and create a longer transition to retirement, Painter explained. It’s a lot like threading the needle, though.
“By being too aggressive on the savings and appreciation, you could take unwarranted risks, and by being too conservative you could miss out on the potential to grow the asset base,” he stated.
One harsh reality is that many advisors refuse to work with career professionals who need to work in retirement to eat and pay the bills – mainly because they don’t have enough money.
“Financial planners don’t deal with this segment of the population because they have no savings or investments to retire on and thus no assets from which the planner can collect a fee,” said David Poole, a financial planner at Brightworks Financial Planning in Columbia, S.C.
Ideally, money managers should put others needs above their own, and help people discover and reach their goals. Helping clients overcome their obstacles requires a never- ending skill set in financial services, Poole said.
“You want to work with these struggling clients and help them map out a course that will get them through their golden years,” he said.
“I can’t say it will look or sound like normal retirement, but it will allow them the dignity and peace of having a plan while they continue to work as long as they can.”
Brian O'Connell is a former Wall Street bond trader, and author of the best-selling books, The 401k Millionaire and CNBC's Guide to Creating Wealth. He's a regular contributor to major media business platforms, including CBS News, The Street.com, and Bloomberg. Brian may be contacted at email@example.com.
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