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Saturday, February 04, 2012
Feature: March 2006
Readying for Retirement
How high earners can make their money last well into the golden years
Story by Sharon Frederick
Social Security is headed toward bankruptcy, there are fewer and fewer secure pensions, the stock market is lackluster, interest rates are low and healthcare costs are rising: What ever happened to the snug and secure retirement — largely planned by someone else — our parents’ generation experienced?
It’s gone the way of rotary phones, punch cards and vacuum-tube radios.
Today, you’re in charge. Like it or not, most working individuals currently must shoulder the responsibility for doing the saving, thinking and planning for a secure retirement. And since the majority of us are expected to live longer than ever before (to an average age of at least 82 for males and 85 for females), we have to make our money last longer than ever before.
Not a problem, you say. After all, you’re a well-compensated professional, an executive or business owner earning six figures, which puts you in the top 5 percent of U.S. wage earners. Not so fast, say financial planners who work with clients just like you. In fact, you may have an unrealistic view of your retirement finances, no matter how savvy you are when it comes to your organization’s balance sheet.
What are the most common gaps in thinking that afflict executives?
Myth 1:
Income equals wealth.
High earners tend to believe that a great income today will translate into a great retirement tomorrow. In an informal survey of 25 senior executives carried out for Comstock’s by Netshare, an executive placement organization in Novato, a majority of the group had exactly that perception. More than 80 percent of those sampled underestimated the total assets required to maintain their lifestyle in retirement.
“The higher earner can be worse off than someone with a more modest income because they’re lulled into a false sense of security by living well,” says Larry Frank, a certified financial planner, teacher and author of “Wealth Odyssey.” “They focus too much on earning more and more rather than making total wealth or net worth the important focal point.”
Numbers always speak louder than words in dispelling this myth, says financial planner Michael Lynch of Lynch Financial Advisors in Roseville. “Initially, I do a very quick analysis with a client. Say, for example, you’re earning $200,000, spending roughly $20,000 in taxes, and saving another $20,000, with the rest going to support your lifestyle. What do you need to continue that lifestyle when you no longer have income?”
The answer is a whopping $3.5 million to $4 million in assets, drawn down by a prudent 4 to 5 percent each year. Assuming you have no other significant source of retirement funds, such as a pension, you would have to save $20,000 a year for 35 years to reach that amount. That means starting at age 30 if you want to retire at 65 and expect to live into your 80s.
The reality is that few of us have $20,000 a year to sock away in our 30s, so it really means saving much more in the following decades. For example, if you begin to save for retirement at age 45, you’re faced with putting away $75,000 a year to be ready to retire at age 65.
Myth 2:
Retirement will cost less than today’s lifestyle.
Books and articles on personal finance sometimes suggest that you can get by on 70 to 80 percent of your pre-retirement income. But real world experience suggests otherwise. “I have yet to meet anyone about to retire who is voluntarily willing to reduce his or her standard of living,” says Frank.
In fact, with more time, many retirees want to engage in all the activities they never had time for before, costly activities like travel, dining out and boating. Add to that unknowns like healthcare costs, which undoubtedly rise as one gets older.
“High-earning individuals are particularly conditioned to having the lifestyle they choose,” says Peter Sander, Granite Bay-based author of several books on personal finance, including one on the best places to live in retirement.
“But they may need to make trade-offs — for example, trading their ideal place to live, maybe a coastal home, for activities such as traveling. You have to balance future location with future spending habits.”
Myth 3:
Retirement planning has to wait until:
a) the kids are gone,
b) the house is paid off,
c) I turn 50, and
d) my work isn’t all-consuming.
If there’s a single piece of advice those already retired are eager to pass on to youngsters, it is this simple directive: Start planning now.
Put yourself and your retirement at the top of your financial priorities, advises Frank. “You can borrow for many other needs, among them your children’s education. But who will lend you money for retirement? No one.”
Many executives simply don’t believe they have the time to deal with anything beyond the very challenging present. “A senior executive will tell me, ‘I’m dancing as fast as I can. What else can I possibly do?’” says Carol Van Bruggen, a partner in the Sacramento financial planning firm of Foord Van Bruggen Ebersole & Pajak.
“These are people working long, demanding hours and incredibly busy dealing with the day to day. The last thing they want to do on Sunday afternoon is review their spending or add up their assets.
“Really successful people tend to believe they can never do enough,” she says. “They feel that way about their work and they feel the same way about retirement. They are actually afraid of analyzing their retirement prospects because they’re afraid of what they’ll see.”
If it’s bad news, these individuals would rather not know about it because they feel they simply can’t do any more. As a result, high achievers may not even monitor the returns they’re getting within company 401k plans to see if they can shift investments and improve results.
If it’s good news they worry as well, says Van Bruggen. “Someone will say, ‘If I find out I’m OK, I’ll get lazy.’ Or they may fear a loss of meaning and status if they’re not working, so they say, ‘I’ll never retire. I wouldn’t know what to do with myself.’”
Van Bruggen works to recast the conversation with her clients, urging them to think of financial independence rather than retirement. “Think of looking through a tunnel, your work life, that has a beautiful view at the end. The sooner you start planning — set your goals and timetable, put a system in place for tracking progress — the more options, the wider the view you’ll have.”
Often, planning can lead to unexpectedly positive results, adds Van Bruggen, citing clients such as the 50-something executive whose rosy analysis will allow her to retire from a stressful senior position in the food industry next year, or the physician who found he could reduce his long work hours even though a recent divorce settlement left him with only half of his savings.
Myth 4:
Retirement planning equals investing.
Too many individuals jump right to an investment solution rather than thinking first and foremost about their goals, says Frank. “Thinking of retirement planning as investing is the product approach promoted by so much of the financial industry. When you think risk, they want you to think insurance. When you think education savings, they want you to think 529 accounts. As ‘manufacturers,’ they want to sell you products.” But, says Frank, investing is how you implement a plan, and as such is one of the final steps in the process.
Van Bruggen agrees. “What’s most important is the thinking that goes into the planning process, the opportunity to consider all of the options available to you when you achieve financial independence.”
If you’re prepared to move beyond the myths, what are the first steps you need to take?
Often, financial planners encourage clients to think in terms of a journey toward wealth and independence. Van Bruggen, for example, suggests you “find out where you are on the map; where’s the red dot that represents you today? Work with a planner or invest your own time to get all your personal finances onto a spreadsheet. This one piece helps accomplish so much.”
Second, decide on your destination. “Think about what’s important to you. What do you want to be doing? What’s your vision of the future?” urges Frank. That could mean soaking up sun in the Caribbean, retiring early to start a new business, or building a philanthropic fund as a legacy — whatever resonates with you.
Third, plan how you can employ assets and debt to get to your final destination while also dealing with hazards along the way — unexpected illness, business failure and the like. Here’s where trade-offs may come in, says Michael Lynch.
Or you may choose to work well beyond traditional retirement age, says Van Bruggen, but perhaps do something totally different, “something that really offers a chance to enjoy the journey. After all, whether during the working years or after achieving financial independence — a term we prefer to “retirement” — money is only a tool to provide the life you want to have.”
The small-business trap
Small-business owners are a unique breed when it comes to retirement planning. “Many don’t even think of investing in a retirement plan,” says Carol Van Bruggen, a partner in the Sacramento financial planning firm of Foord Van Bruggen Ebersole & Pajak.
Van Bruggen specializes in small-business planning and often consults on employee retirement plans. Owners seldom think of formulating their own plans, says Van Bruggen, since “they simply expect the business to ‘retire’ them.”
However, owners often don’t have a solid idea of the value of their business, nor have they set up systems — bookkeeping, for example — in a way that makes it easy to demonstrate or understand the value of the company. Also, says Van Bruggen, owners of very small businesses — those with fewer than 10 employees — need to think about just how saleable the business is.
Financial planner Michael Lynch agrees, asking three key questions of business owners. “First, is the business something that’s purchasable without the owner in place? Second, can someone look at the business and see it’s a profitable venture? Third, who would really want to buy it?” Lynch recalls a client, the head of a construction business subcontracting in a niche of the industry, who discovered that none of his competitors wanted to buy his business.
Larry Frank, a certified financial planner, cites one of his workshop participants who owned an S corporation, selling vitamins through a nationally distributed catalog and netting $200,000 to $300,000 a year. Potential buyers were initially attracted by the cash flow but put off by additional analysis that showed the business depended on baby boomers’ focus on healthy lifestyles, a trend predicted to decline as they aged and turned to prescription drugs.
In addition, adds Frank, “Small-business owners can get caught in the trap of having only one major asset — their business — and forgetting about the importance of diversification. What if the business hits a slowdown? Not only has a concentrated asset position declined in value, but current income is adversely affected; it’s a double whammy.”
