What financial planners need to know to really help their clients
by Tania Slade, CFP, CFAMs. Slade is head of Wealth Planning, BMO Wealth Management (U.S.). Visit www.bmo.com.
We are living longer today… and that’s good news. We are fortunate to be living longer, too. However, there is an implied challenge inherent to longevity, and we have to now consider the emotional and financial costs, as well as the societal impacts of aging.
Increased life expectancy among Americans – which currently stands at 76 years for men and 81 for women – has extended the average retirement period to 18 years. As a result, many boomers are remaining in the workforce longer in order to grow their retirement nest egg, meet retirement and estate planning goals, and stay active. And, they’re thinking more than ever before about how to ensure they will live a comfortable life now and in the future.
Financial industry professionals have been promoting how crucial it is for people approaching retirement (and even earlier) to work closely with their financial advisors/planners, spouses and family members to come up with a viable, long-term strategy that supports them throughout their elder years. The increase in life expectancy has been on our radar for years along with the quality of life, the associated cost, and how to best prepare our clients.
BMO Wealth Management wanted to know how Americans are thinking about this increased longevity, so we conducted a survey of more than 500 Americans aged 55 and older to explore their views on aging and their top concerns tied to family and wealth. Click here to read the full report.
The study shows that Americans’ top concerns about living a long life include health problems and costs, becoming a burden on family, and maintaining financial security. And more importantly, far more aging Americans would most like to be remembered for the values they lived by and the life lessons they imparted along the way than for the wealth they accumulated.
How Americans Want To Be Remembered
Key survey findings include:
- Boomers’ top concern about a lengthy retirement is future health-care costs and whether health problems will affect their quality of life (46 percent). Being a burden on family members (45 percent) and running out of money during retirement (44 percent) also ranked high on the list. One in five respondents indicated concern about having nothing left for heirs, being lonely later in life, and becoming a victim of abuse, neglect or fraud.
- Spouses and partners often have different opinions when it comes to long-term financial goals. The discrepancy cited most frequently among couples was when and how much to save for the future (28 percent), followed by retirement goals (27 percent), and how personal assets and possessions should be distributed to heirs (25 percent).
- Respondents identified their most significant investment and retirement issues as a desire to maximize retirement income (22 percent), fear of outliving their savings in retirement (21 percent), and the impact of long-term care costs on personal finances (19 percent).
Top Concerns About Living A Long Life
Living longer does not necessarily mean Americans will be unable to afford to retire. However, it does mean that thoughtful and effective decisions have to be made about financial, retirement and estate planning goals, savings strategies, and tax planning in order to have the long and fulfilling retirement most people want.
We would also suggest scenario planning – considering various “what if” scenarios that would incur major expenses during retirement. How would these “what if” events impact financial resources, and what social and medical support systems would be available in the short and long run?
Many Americans address their concerns by staying in the workforce or by earning self-employment income rather than relying on accumulated retirement savings. Over 20 percent of working seniors are self-employed.1 From a financial planning perspective, earning additional employment income beyond a “normal” retirement age has a positive impact on making retirement funds last longer and achieving retirement and estate planning goals.
Considerations beyond the numbers also must be made. Importantly, how will time in retirement be spent? We’ve all seen research showing that living an active lifestyle in retirement is enjoyable and can promote better health as we age. This is not limited to physical activities, but also includes engaging in rewarding social interactions. For many, volunteering can provide purpose and camaraderie, and most importantly, it can slow the cognitive decline that often comes with aging.2
So, what can we do and how do we help more clients? Americans benefit from having a financial coach with an understanding not just of markets, products and solutions but the ability to help them plan for cash flow needs at different life stages. As well, we can increase engagement and commitment to planning by weaving in the impact of behavior finance, psychology of money and adjusting our approach based on individual and couple personality dynamics.
While these are not easy discussions to have with clients – it takes time, courage, and commitment to help work clients through this process – they are necessary if we are to help clients adequately prepare. We know the value of financial planning and we need to be a bit more forthcoming in regularly and effectively educating and communicating with our clients on the merits of this process.
Below is a list of areas to cover with clients, however, I suggest starting with a general awareness discussion on longevity. You can utilize the report (link) findings as talking points to help understand your client’s specific concerns, encourage them to start thinking about this sooner, and make your clients aware of these issues so you can help them thoughtfully and proactively address the areas that are important to them.
Tips for clients to help alleviate common concerns during retirement:
- Make sure your financial plan is up to date: Living longer means planning to 100. If your financial plan is based on average life expectancy rates, you may be underestimating your needs. The older you get, the more likely it is that you will outlive the average.
- Make sure your written estate documents are up to date: They should match your current objectives, provide for unforeseen contingencies, and be flexible enough to withstand potential tax and law changes. If this is not true, an update is warranted.
- Consider your working years’ “after-life”: You may need to work longer to provide for living longer and to meet the needs of your anticipated lifestyle. Even if you would just like to keep active, having a strategy can help you prepare for a smooth transition.
- What activities will you engage in during retirement: engagement and activities can promote better health as you age, keeping in mind this is not limited to physical activities, but also includes engaging in rewarding social interactions.
- Know your personal and family medical history and the effects it could have on retirement spending: Medical costs are some of the biggest expenses people encounter after retirement. Be sure you fully understand what the transition from a privately funded, employer-sponsored health plan to something else (i.e., Medicare) is likely to entail, including additional out-of-pocket expenses. When healthcare concerns become an issue, having the resources and ability to find the care required can be difficult, especially for loved ones and family members
- Keep your investment policy statement up to date: As your reliance on your invested assets increases with age, your risk tolerance will likely change as well. Ensure that your investments are managed in line with your changed investment risk and that your wealth manager understands and acts accordingly.
- Have end-of-life discussions with your spouse, family and/or support network: Spouses need to reach consensus regarding lifestyle, finances and estate planning. Meanwhile, informing family members and supporters of your wishes now (and changes going forward) will ensure that your desires are followed and they won’t need to guess in trying time
- Consult professionals: Just as you consult with doctors and dentists to care for your physical health, you should engage with attorneys, accountants and wealth advisors to ensure your financial health and help you navigate the legal, tax, and investment complications of living longer. ◊
Differences in opinion over financial goals between spouses or partners9
1. “The Ascent of the Senior Entrepreneur.” Wilmoth, D. U.S. Small Business Administration Office of Advocacy, August 18, 2016. https://www.sba.gov/sites/default/files/advocacy/Ascent-Senior-Entrepreneur.pdf
2. “Research Finds Volunteering Can Be Good for Your Health.” Gallegos, D. Wall Street Journal, April 22, 2018. https://www.wsj.com/articles/research-finds-volunteering-can-be-good-for-your-health-1524449280
3. “Median age at first marriage: 1890 to present.” U. S. Census Bureau, 2018. https://www.census.gov/content/dam/Census/library/visualizations/time-series/demo/families-and-households/ms-2.pdf
4. BMO Financial Group survey conducted by ValidateIt Technologies Inc. for the BMO Wealth Institute between June 28 and July 5, 2018, with an online sample size of 502 Americans aged 55 and over. The overall probability results for a sample of this size would be accurate to within +/- 3.01% at the 95% confidence level.
5. Respondents in the survey may have selected more than one response, so the percentages in the table do not total 100%.