When working with clients on retirement planning, I often ask them to shift their focus. Instead of thinking about the end goal as retirement, think about the real objective: obtaining financial independence. These two concepts are similar yet very different. Clients should feel confident that when they want to stop working, they can do so without being dependent on a steady paycheck.
The truth is, as baby boomers begin to turn 65, many of them are opting to work beyond the traditional retirement age. In some cases this may be out of financial necessity. Other times, boomers have reached financial independence but chose to keep working for reasons other than income. Common reasons that older adults continue to work include having the same sense of purpose and fulfillment they experienced during the course of a successful career, or the desire to leave a legacy.
No matter the reason, advisors often overlook the emotional and social components of retirement planning that tie directly into a client's financial goals.
Advisors should be prepared to speak with clients about their goals for retirement, as well as financial independence. Part of retirement planning involves talking about goals and aspirations and then working backward to ensure that clients have the assets they need to reach these objectives.
When we look at retirement income needs, we consider three components:
- Core expenses: food and housing
- Joy expenses: recreation, vacations and gifts
- Legacy planning expenses
It is important to push clients to consider not only their core expenses, but also their joy and their legacy planning expenses, which they often highly underestimate.
I have run into pre-retirees who underestimate the money they will need to achieve true financial independence. Some spend the first few years of their retirement accomplishing all the things they have been putting off and waiting to do, like home remodels, travel or a new hobby. Occasionally, this leads to retirees reluctantly rejoining the workforce a few years later in need of a new income stream. Taking a look at clients' post-retirement goals, particularly those joy expenses, is key to helping them achieve lasting financial independence throughout their retirement.
Bridge employment
In other cases, clients' retirement goals highlight the desire to continue working in some capacity. We often see this goal when a client has reached financial independence but finds fulfillment in his or her work and chooses to continue either full time or part time.
More and more Americans ease out of full-time work little by little, a transition period economists call "bridge employment." For many folks, retirement is a slow and lengthy process, rather than a one-time event. According to the University of Michigan's Health and Retirement Study, part-time employment forms the biggest share of total employment for people age 70 and older of both genders. Many people are taking these types of bridge jobs voluntarily as a way to ease into the major life transition of retirement.
About 30 years ago, I met a retired attorney while on a mission trip in South Africa. More than a decade later, I ran into the man again, back at work in his late 80s. At the time, I did not yet realize this man was reflective of a trend among retirees. His job added value to his day-to-day life and he chose to continue working even though his financial situation did not require it. Now, through my work with clients at all stages of retirement planning, I see this trend come up again and again. Retirement does not necessarily need to mean the end of work, but rather the financial freedom to stop working if and when a person desires.
Long-term view
With continually increasing longevity comes the need to look further out when planning for retirement.
