I was recently talking to a financial advisor and he excitedly said retirement is big business. This industry serves mostly Baby Boomers (born between 1946-1964), which are about 76 million people, almost 25% of our population. They will be retiring over the next 19 years, which means an astonishing 11,000 people a day retiring.
You couple this with the estimated $46 trillion in wealth and financial advisors see green (that is greenback) when they stare at a potential retiree. Just have a conversation with anyone over the age of 50 and ask how many “free” lunches, webinars, and seminars they have received to help them with retirement. For most, the sea of advisors all offering an invite on their ship of retirement planning to sail you to “retirement happyland” seems overwhelming.
This leads to the question I get asked most often by retirees: How do I know I am getting someone that can help me in retirement? There are 5 things you can ask to test your advisor’s ability to help you retire:
When should I claim Social Security?
Despite the debates about Social Security, the fact remains that it represents about 38% of the income of the elderly. It is important for your advisor to be knowledgeable enough about Social Security to provide guidance on the impact of claiming benefits at 62 vs. full retirement age. They should at least be able to give you a way to calculate potential Social Security benefits based on different Social Security claiming strategies.
I was casually talking to a woman who was shopping around for a financial planner to come up with income strategies. She mentioned how little her Social Security was going to be. I asked her if she was married or single. She was single.
I then asked if she had ever been married. It turns out that she was divorced after a 20 year marriage and her ex, who earned a substantial amount of money, recently died. She was already at Social Security survivor full retirement age.
I told her to immediately contact Social Security because she was eligible for a survivor benefit as an ex-spouse. That benefit wound up being over two times more than her own Social Security, giving her the additional income she needed to retire. She said that not one advisor discussed Social Security with her. Their lack of knowledge about Social Security almost cost an additional $18,000 in annual income and for her, at least 10 more years of working instead of visiting her grandkids and traveling more.
When can I claim Medicare and how does it work?
One of the biggest concerns of retirees is the cost of healthcare. Advisors who say their focus is on retirement planning should have a basic understanding of Medicare. They should understand that you have a 7 month window that begins 3 months before the month you turn 65, includes the month you turn 65, and ends 3 months after the month you turn 65., to enroll or you may pay a higher premium.They should understand that Medicare Part A covers the cost of medically necessary care at hospitals while receiving inpatient care, Medicare Part B covers doctor visits, outpatient procedures and lab tests, Medicare Part C is optional private insurance and Medicare Part D covers prescription drugs. Understanding all of this will help the advisor let you know that there is a possible penalty for not signing up on time or how income increases or decreases can affect your Medicare premiums. This can mean more money per month in or out of your pocket, depending on your financial advisor’s ability to guide you.
What is long-term care insurance and should I get it?
It is estimated that about 70% of people turning 65 can expect to use some form of long-term care. If the advisor is knowledgeable about Medicare, then they should be able to tell you that Medicare only provides limited long-term care benefits. The advisor should also mention that the average cost of care is about $3,300 per month for assisted living and the mid 50s is the best age to apply.
A general rule is that if your net worth is between $300,000 and $3,000,000 you should consider long-term care insurance. If your net worth is higher, you can probably pay for your care out of pocket, and if your net worth is lower, it may be more cost effective to simply spend down your assets and qualify for Medicaid. Your advisor should also know the benefits of partnership plans in providing additional protection. Finally, they should have a working knowledge of the possible tax breaks of owning long-term care insurance. This knowledge can save you hundreds of dollars in overall cost.
What are the rules regarding taking money out of my retirement plan?
An advisor’s understanding of this can cost or save you thousands of dollars. I recently spoke to a man who was very excited about a rule called NUA, or net unrealized appreciation, that allows him to treat the gains of the stock he had been purchasing for almost 40 years in his 401k plan as capital gains, taxed at a much lower rate than ordinary income taxes. He mentioned that he was going to talk about it with his advisor, who he had just rolled over the entire 401(k) balance to.
I must have visibly cringed when he said that because he asked why I seemed upset. I then had the unpleasant experience of telling him the rule does not work if the stock is moved to an IRA. The advisor’s knowledge of this could have saved him thousands of dollars in taxes.
I spoke to another woman who was unaware that had she withdrawn the money she needed from her 401(k) plan when she retired at age 55 she would not have paid the 10% penalty that cost her about $6,000. She was advised to move the entire amount to an advisor and from what she told me, she told him that her plan was to immediately take a portion out of the IRA. Yet the advisor had neglected to warn her about the tax penalty.
How much of my income can I replace in retirement?
They should have a tool to help gauge how much of your income can be replaced in retirement without you running out of money. The tool should also adjust for inflation. Once you have an idea of how much you can replace then there should also be a plan as to how this income is generated.
As a rule of thumb, annuity income is sometimes used to cover non-discretionary expenses like food and shelter, but for a lot of people, a balanced portfolio may work just as well. There should be a certain percentage they should give you that you can pull out without running out of money, the most popular being 4%. Unfortunately I have met plenty of people who were told they could withdraw 10% of their income annually, without at least an annual check to see how long their money would last, and whose funds eventually ran out.
These questions should help you quickly determine if you are working with someone knowledgeable enough to help you have a comfortable retirement. If you are still uncertain, you can look for an advisor with specialized training in retirement planning such as a Retirement Income Certified Professional (RICP), Retirement Management Analyst (RMA), Certified Retirement Counselor (CRC), or a Chartered Retirement Planning Counselor (CPRC). In any case, be sure to ask prospective advisors these questions as well.
