You've worked for decades and hopefully amassed a six- or seven-figure retirement fund, and finally you’re nearing retirement.
But there’s one more task some near-retirees don’t fulfill until late in the game, and then they miss a few key steps, resulting in a less-than-stellar outcome. I’m talking about finding an advisor to help you transition into and successfully navigate retirement.
If you’re like most retirement-minded seniors or near-seniors, you’re just now beginning to think about hiring an advisor. And sure, your advisor should be a fiduciary and ideally paid on a fee-only basis, but how about those retirement-specific hurdles?
Here are seven questions to ask to ensure the investment advisor you hire understands the issues unique to your situation in the next decades.
1. Tell me how you handle sequence-of-returns risk. Run if your advisor looks blankly when you ask about this.
What’s the risk? If markets plunge as you begin retirement and start taking withdrawals from your portfolio, those withdrawals—which you’re making to cover your retirement living expenses—will further deplete your already-depressed portfolio and end up exhausting your savings decades earlier than expected. You certainly don’t want to run out of money in your mid-80s. So what should your prospective advisor do to address sequence-of-returns risk?
A good advisor should manage your return expectations. If your retirement spending plan relies on high single-digit or low double-digit annual returns, you’re setting yourself up for financial trouble. Your advisor should be using more conservative return expectations so that if a few bad years drag down your actual average return, this doesn’t derail your plan.
Yes, this may mean retiring a few years later and even curtailing your desired monthly spending, but both of these options are much safer than depending on elevated market returns.
A good advisor should also adopt a flexible spending strategy. These reduce your monthly withdrawals, usually by a certain percentage or dollar amount, if your portfolio falls below a specified threshold. This prevents you from overburdening already-depressed investment accounts.
The idea here is to allow enough of the portfolio to remain so that you meaningfully benefit from an eventual market recovery. If unchecked withdrawals drop your portfolio to a fraction of its prior size, even substantial positive performance won’t be able to remedy your situation.
2. Tell me how you’ll handle our health care costs. Make sure your prospective advisor realistically addresses health care spending. Overlooking this can be disastrous because this is a big one—$275,000 per couple big.
Fidelity Benefits Consulting released a study in September 2017 estimating that a couple retiring at age 65 in 2017 would need an average of $275,000 to cover medical expenses throughout retirement. A later Fidelity study reported that the number is rising. The 2017 figure was 5.7 percent larger than the 2016 number.
Maybe you hope to spend less than $275,000 per couple, or perhaps you expect to spend far more. Regardless, medical expenses will constitute a major portion of your retirement spending.
Your prospective advisor should understand the rules, timelines, and cost ranges for Medicare parts A (hospital insurance), B (medical insurance), C (Medicare Advantage plans), and D (prescription drug coverage). The advisor should be able to speak fluently about when and how you should sign up for Medicare coverage.
Beyond original Medicare and private coverage offered through Medicare Advantage plans, your advisor should incorporate into your retirement plan regular out-of-pocket medical expenses that won’t otherwise be covered. These expenses, along with Medicare premiums, must be layered on top of your regular living expenses to arrive at a “fully burdened” retirement expense figure.
3. What checks and balances will you implement to deal with any later diminished capacity? Be sure your advisor has a structured process for working with you as you age, when you may no longer be able to independently manage your financial affairs.
When interviewing advisors (or reassessing your current one), ask how the person handles clients who exhibit traits of diminished financial capacity. You advisor and that person’s team should be aware of some of the warning signs, which according to the AARP and Fidelity, include:
- The inability to understand the consequences of investments or broader financial decisions
- The failure to grasp simple or formerly understood concepts
- A substantial deviation from previously stated goals, objectives, and financial priorities
- A new trend toward mistakes in basic math or calculation
- Short-term memory lapses
- Disorientation of time and place
An advisor should be able to describe the policies in place to safeguard senior clients. Many of these are good financial practices in general and become especially important with senior clients. Up-to-date estate planning documents, beneficiaries, emergency contacts, and client-asset location maps are all key.
An important, and often overlooked, challenge is eventually involving other family members, typically younger generations, in seniors’ finances. At some point, your advisor may need to include your children (or perhaps a younger family member or friend) in managing your financial affairs. While that may be unnerving, you need to be confident your advisor is willing to, and capable of, having the difficult conversations to bring in others when necessary.
Be sure to read What You Need to Know About Trusted Contact Persons on p. 18, which covers new FINRA rules that may help you address this issue.
4. How do you suggest we maximize Social Security payouts? With traditional employer-sponsored pensions in rapid decline, Social Security will likely be the only “regular” check you receive in retirement. Tens of thousands of dollars ride on your decision about when to start collecting benefits: At age 62, which is typically the earliest age; waiting until age 70; or sometime in between.
If you retire and then wait a few years to claim Social Security, your investments and other sources of income must cover your expenses until your Social Security benefits start. While this seems obvious, your advisor needs to run various projections to ensure that you won’t overburden your portfolio during this period.
Claiming Social Security at the “correct” age is half the battle. Coordinating your decision with your investments, other assets, and other sources of income is the important, and often ignored, other half.
5. How should we approach long-term care insurance? This is another potentially uncomfortable topic that a good advisor will certainly discuss. Some percentage of Americans—and you’re part of this possible group—will eventually have a long-term care stay that’s not covered by Medicare. Statistics vary, but 35-70 percent of those over 65 will require long-term care services averaging between two to three years.
What could this cost? Fees for a private nursing home room vary widely by metro area and state, but a recent Genworth Financial study showed Atlanta costing an estimated $6,965 per month and one facility in San Francisco coming in at an eye-popping $14,265 per month. The 2017 national median was $8,121 per month, which totals more than $97,000 per year.
Any way you look at it, long-term care stays are expensive and have the potential to drain investment accounts since Medicare covers only a limited portion of long-term supportive services.
An advisor should stress-test your financial plan for its ability to withstand a long-term care need and be comfortable discussing the pros and cons of differing long-term care insurance policies and integrating them into your overall plan.
6. Can we take advantage of employer-sponsored health care coverage? While rare, a thorough retirement advisor should at least ask whether your firm offers any type of partially subsidized coverage to retirees.
The answer is likely a resounding no. But if your firm does offer coverage, it could be an expense game-changer in retirement. You may not be sure (which is normal) if your employer offers coverage, so your advisor should be willing to call your HR department with you to ask.
7. How do you suggest we deal with the soft side of retirement? By this I mean replacing the challenge and fulfillment of work, which I’m sure just made some of you roll your eyes.
I get it. But I’ve lost count of how many retirees I’ve heard say that either they’re really enjoying their second career, part-time job, contract position, or volunteering activities in retirement or they’re frustrated and bored because they’re tired of sitting at home and can golf and travel only so much.
After practicing law for decades, you probably derive a sense of fulfillment and identity from your career. Simply stopping working is perfect for a vacation but not so perfect for the multiple decades that’ll be your retirement.
Before you retire, an advisor should encourage you to set aside time to think about what you’ll “do” once you’ve stopped practicing. This isn’t a one-time activity. Ponder this alone and then involve your spouse or partner.
There’s nothing wrong with a detox from the deadlines and stressors of your career. However, going through retirement without any daily or weekly structure will eventually cause problems for most people.