The retirement landscape is undergoing a transformation. More than half of Americans plan to work at least part time in retirement, according to Transamerica Center for Retirement Studies’ 16th annual retirement study. These older workers may be extending their careers, slowly transitioning out of the working world or taking up a new part-time job post-retirement. Whatever the case, old assumptions about retirement no longer apply – and advisors who work with clients living out these new retirement realities may have to adjust their strategies and recommendations accordingly.
“No one retires and sits in a rocking chair anymore,” says advisor Michael Garcia, who manages $100 million at Merrill Lynch’s Dallas, Texas, office. His clients choose many different paths for their post-65 careers, including part-time consulting, investing and working for a start-up, or starting up a new business of their own.
“These clients aren’t retiring, they’re rewiring,” he says.
But that rewiring can come with costs.
“If equity or seed money is needed for a new business venture, we discuss what the risks are and how it will impact their nest egg,” Garcia explains.
Clients who transition from a corporate job to becoming a consultant in their working retirement might not be aware of the financial implications, which can include costs for error & omissions insurance as well as planning for quarterly tax payments. Finally, Garcia also reminds clients about the toll that frequent travel demands may take on their older bodies.
Sometimes late-in-life work can turn out to be more lucrative than earlier careers. When this happens, advisor Edward Kohlhepp, owner and president of Kohlhepp Investment Advisors in Doylestown, Pa., works with clients to revise their investment strategies.
“I have a couple where the husband is 76 and the wife is 66. They left the corporate world and have built up a consulting business that makes more money than they ever did before,” says Kohlhepp, who manages $150 million.
With additional income, clients can revise their “bucket” strategy and put more money in aggressive investments, even though that runs counter to traditional retirement planning strategy.
“I run projections to age 100,” says Kohlhepp. With this kind of long-term thinking, clients can see how increasing risk for their untouched “buckets,” i.e. funds that are not allotted for spending, will ultimately benefit them.
“I have a 72-year-old client who has so much crazy vitality. After a career in special education, she’s now traveling all over the world, consulting and collecting a paycheck,” says Eric Freckman, advisor and owner of Palatine, Ill.-based Guillaume and Freckman, which manages $170 million.
While the additional income is never a negative, clients who continue earning income after 65 may find themselves juggling a number of financial decisions related to retirement.
“Should they keep contributing to a 401(k) or Roth? They may have required distributions as well, which we often redistribute to other income accounts, since they don’t need them,” explains Freckman.
For those clients who need to work to continue building up income, Freckman advises postponing taking Social Security benefits until at least 70, even though it can be tempting to file for benefits earlier.
“For every year past 65 that you don’t take benefits, your total benefit amount increases by eight percent,” he explains.
Financial benefits aside, Freckman says his older clients with careers just have better lives: “They stay younger so much longer.”