If you read financial planning textbooks, you might be left with the impression that people report to the financial planner’s office to begin the planning process as soon as they land their first job. However, that’s not how it usually happens. Instead, people need a sense of urgency to get started. This often comes after an unexpected change such as a career transition, a divorce, or when someone has a burning financial question such as:
Should I buy this house?
What should I do with stock options?
How should I pay for my child’s college education?
When can I stop working for money?
Creating a financial plan requires the coordinated work of a team. At our firm, that team consists of an investment advisor, a relationship manager, and a paraplanner. Initially, the investment advisor will design and monitor an investment strategy that supports the goals of the financial plan; the relationship manager will open and transfer accounts; and a paraplanner will gather information to build and test the financial plan. But that’s only the beginning. There’s still much more for the team to do to keep the plan on track.
Later, as a client nears retirement, the financial plan becomes more action-oriented. People need help deciding what they should do with their money. Should savings be invested in a retirement account or a 529 plan or real estate, or should it be used to build an emergency cash reserve? When the person needs cash, which account should it come from? When should the client sell an investment? At this stage, it’s the logistics of cash-flow management that become important, and the burning questions for financial planning change to:
How much money do I need each month, and how should I get it?
When should I start taking my Social Security benefit?
How should I plan for a long-term care event?
Should my investment strategy change?
When should I rebalance and tax-loss harvest?
What is the best way to take my required minimum distributions (RMDs) from my retirement account each year?
(For those interested in a deeper exploration of these questions, please refer to the webinar on our website “Retirement Spending: A Blueprint for Smart and Strategic Distributions.”)
But the most underappreciated time for hiring a financial team is middle retirement, which we usually consider to begin around age 70. In middle retirement, all our clients (even those without formal financial planning) receive the same investment and cash-flow management as before – but a new and often difficult factor comes into play: the possibility of unexpected death or disability. An actuary might say there is a 50% chance that each person will live beyond the age of 82. But that also means there is a 50% chance that each person will not. When one spouse passes away, a financial team will help with the transition. This involves more than just retitling accounts in the surviving spouse’s name and making sure that he or she has enough money to live on. It also involves remapping the cash-flow plan. After a spouse’s death, living expenses usually decline by about 15%. At the same time, the decedent’s social security benefit may disappear. The same goes for that person’s special pension or medical benefits.
In a lot of couples, one member is more passionate about financial matters. She or he enthusiastically does the work of keeping the family’s finances organized. For such a household in middle retirement, a financial team can be key. Even if the spouse who enjoys dealing with financial matters ends up living an exceptionally long life, a good team will become a contingency plan for a time when that person may no longer want to, or be able to, fulfill that role. The forward-looking couples that recognize this can search for this professional support together. That way, both partners will feel comfortable with the investment advisor and relationship manager who will help them navigate the changes further down the road.
In the final stage of financial planning, the focus expands from taking care of financial matters to supporting estate planning. A client’s team here at Bell serves as a record-keeper that understands why certain decisions were made, and how they help fulfill both the financial plan and the estate plan. Estate planning is not just creating a trust and a will – after a spouse passes away, there’s a lot of work to do.
At that time, the team works with the estate-planning attorney and the tax professional who wrote the trust and prepared the taxes. While these professionals have the most in-depth understanding of the directions in the trust and the current state of tax filings, they don’t often communicate with each other. A dedicated financial team will step in here to translate their advice and to help coordinate the activities of the estate-planning attorney, tax professional, executor, and beneficiaries.
Current law allows that all the assets owned by the deceased receive a step-up in basis. That is, the cost basis of an asset (be it the home, investment account, or other type of asset) is raised to its value on the date of death. A client’s Bell team takes direction from the estate-planning attorney as to the date of death, and then researches and documents the valuation of assets as of that date to accurately step-up the basis. When an alternate valuation date is chosen by the estate-planning attorney, we support that work again with the valuation research and documentation needed to settle the estate.
Upon the death of a spouse, the titles of all relevant accounts need to be updated. We do this work on behalf of the beneficiaries and distribute assets to them according to the mandates of the trust and beneficiary designations. Often, this requires establishing new accounts so beneficiaries can receive what was intended for them. After the initial distributions to beneficiaries are complete, we also take care of the second layer of distributions. Inherited retirement accounts, for example, are subject to required minimum distributions. We calculate the RMDs and ensure their timely processing for our clients, which is especially important as the penalty for untaken RMDs is a frightening 50%.
If you have entered middle retirement and have not yet chosen your team, it makes sense to start that search. Waiting until the need is imminent makes the work harder, and introduces concern and anxiety during an already difficult time. Also, attempting to handle these tasks oneself is daunting and error-prone, to say the least.
If you know a couple in middle retirement without a complete financial team, encourage them to change that. Retirees, and even those just approaching retirement, should think about the kind of professionals they want to work with and begin the search as soon as possible for someone with whom each spouse can have a confident and trusting relationship.