The Wealth Management Process – Money

Published On: October 24, 2023

Written by: Ben Atwater and Matt Malick

Most new clients come to us due to a major life event like a job change, imminent retirement, the death of a loved one, a divorce, the sale of a business or a property, etc. These events trigger a desire to plan your financial future.

The planning process is never ending and always changing. A plan is something we are always adapting and updating.

You need to start somewhere though, so here is a primer on our planning process. The first essay we wrote – part of a short series – was about getting to know our clients​ and understanding their goals.

Today’s essay examines the money side of the wealth management process, namely looking at your retirement assets and your retirement income sources.

Let us start with Social Security. Although affluent retirees are not relying solely on their Social Security, it is still an important part of the retirement puzzle for them. The earliest age at which one can take Social Security, at a reduced benefit, is age 62. According to the Social Security Administration (SSA), as of 2022, 22.9% of men and 24.5% of women took Social Security at 62.

The maximum age to which you can defer Social Security is 70. Only 8.4% of men and 9.3% of women wait until 70. This is despite academic findings that waiting until 70, for more than 90% of Americans, would result in a 10.4% increase in a typical worker’s lifetime spending.

Of course, each person’s circumstances are different and your overall resources, your health, the differences in one spouse’s Social Security relative to the other spouse, etc. are all factors that we collaborate on with clients in deciding when to take Social Security.

Again, for many folks Social Security is just one component of retirement income. We also need to look at other sources of income like pension, annuity, rental, trust, part-time work, installment business sales, deferred compensation, alimony, royalties, etc. For those who are reliant exclusively on Social Security, or who have no heirs, then exploring a reverse mortgage offers some potential benefits as well.

Liquid investments are another income source for clients, and, often, their largest income source. In many cases, we invest portfolios to generate a certain total return so that clients can receive a percentage of their portfolios on an annual basis to support their lifestyle.  This percentage of distributable total return is usually in the 3% to 5% range.

These investment assets usually take the form of employer retirement accounts that many clients choose to rollover, other individual retirement accounts (IRAs), fixed and variable annuities, brokerage accounts and health savings accounts.  Other investment assets can include stock options or restricted stock through a client’s current or former employer and cash value and variable life insurance policies.

Although a client’s home can be a major asset, it is unusual for us to include this asset in the financial plan, at least as a spendable income source. Even for clients who “downsize,” we often find that their home equity is comparable to the cost of their new housing, whether that be a well-appointed home in a 55 and over community or an entrance fee to a continuing care retirement community.

Vacation homes normally fit into one of three categories. They are purely an expense, they are an income source as the result of frequent rentals, or they may be a source of cash down the line, as some clients plan to sell their vacation home when traveling there gets difficult and then ultimately adding those funds to their retirement nest egg.

Another money factor is liabilities, or debt. Most mass affluent families prefer to enter retirement debt-free, but that is not a prerequisite for success. Often car loans (or leases) and mortgages are sensible debt to carry into retirement. This kind of debt can help you manage cash flows, particularly if your assets are concentrated in tax-deferred (IRA) accounts. Furthermore, mortgages may provide a tax deduction for retirees who itemize their deductions. And, lastly, a 2% or 3% mortgage in a 7% or 8% rate environment is just smart finance.

The next article in our series will focus on how your goals and your money intersect to create the best likelihood for retirement success.