Investors nearing the age of retirement warrant special attention. And those in retirement require even greater attention. That is because both types of individuals have investment and liquidity needs that are often far different from those of younger investors.
Tutorial: Investing For Safety And Income
Unfortunately, many advisors seem ill-prepared to service their older clients. But this doesn't have to be the case. In this article, we'll provide several thoughts and tips that can make you, as an advisor, more able to meet the needs of your aging clients.
Identification of Liquidity Needs
Older individuals often live on fixed incomes. Even if they are more financially secure than most, they still have cash needs that the majority of the population does not. For example, older individuals often have to pay a sizable portion of their income in physician fees and pharmacy costs. For others, long-term nurse or hospice care is a major burden. In fact, these amounts can easily total in the hundreds or thousands of dollars each month. This means that these investors may not be able to tie themselves up in either equities or bonds.
This may come as a surprise to some advisors. After all, for years, bonds (particularly those issued by the government) have been considered a cure-all for the elderly because of the relatively secure stream of income they are able to create. But some older individuals may not even be able to tie up their money in any vehicle with a maturity that exceeds six months. Therefore, it is up to the advisor to realize these limitations and, if necessary, forgo commissions (or cut commissions) in order to do the right thing for the client. (For more insight, see Advantages Of Bonds.)
Investing for Future Generations
While many seniors will struggle to pay their expenses, others have sufficient means on which to live, as well as additional assets invested elsewhere that will likely outlast them. For seniors with a higher net worth, it makes sense to consider taking a portion of those excess funds and investing them in equities. The logic is to grow these assets for the next generation, and to do so at a rate that outpaces inflation. (For related reading, see Curbing The Effects Of Inflation.)
Another often-overlooked benefit of investing in stocks is that if a stock position is inherited, the recipient may qualify for a step-up in cost basis. In other words, the heir will likely receive the market price as of the individual's date of death as the new cost basis, as opposed to owing tax using the original cost basis (when the shares are sold). (For more on the step-up in cost basis, see Get Ready For The Estate Tax Phase-Out.)
Older people don't usually consider life insurance to be a necessity. That is because the majority of their big needs have already been met. In other words, their house and car(s) are probably paid for, and what they really need is money for day-to-day living - not to mention that many are ineligible due to their age or health.
However, life insurance proceeds are generally received tax-free, so in many cases, even a small policy may be helpful in providing for cash needs such as pharmaceuticals or nursing care for the surviving spouse. Also remember that there are few other vehicles that allow you to leverage your money so well. In other words, where else can you plunk down $500 or $1,000 a year in premiums and qualify for a benefit that could be worth 50 or 100 times that amount? It is up to you, as an advisor, to explain the potential benefits and pitfalls of insurance to your clients, in order to help them optimize the value of their estate. (For more on this topic, check out Life Insurance Distribution And Benefits and Problematic Beneficiary Designations - Part 1.)
One bit of advice for advisors is to obtain an insurance license. After all, life insurance is one of the most valuable tools in financial planning. Selling life insurance can also provide sizable commissions for an advisor - an added bonus.
Addressing Estate Planning Concerns
As an advisor, it is your duty to make sure that your client's financial house is in order in every respect. This means that you must be able to identify and suggest courses of action to plan for the transfer of assets from one generation to the next through estate planning. It also means planning so that assets are transferred upon death with a minimal amount of tax liability owed by the recipient. (For more estate planning articles, see Getting Started On Your Estate Plan, Skipping Out On Probate Costs and The Importance Of Estate And Contingency Planning.)
You may need to interact with attorneys, insurance agents and, possibly, real estate agents. It may also mean reviewing wills and trusts to make sure that your clients' investments are consistent with his or her final wishes.
If your client does not have a will or a trust, or has not made his or her final wishes clear in some legal document, offer to help link them up with an attorney. Your willingness to do so will show your sincerity and loyalty to the client. It may also allow you to get involved in planning for, and investing other funds that are currently not under your management.
Contributing to Retirement/Taking Distributions
Retirement funds, whether they are in an IRA or a 401(k), accumulate on a tax-deferred basis.
Although it is wise to start investing for retirement at an early age, even the elders can take advantage of tax-deferred accumulation by socking away money in the years immediately prior to retirement. To that end, advisors should be on the lookout not only for their clients' ultimate retirement needs, but also to make certain that younger clients are properly funding their tax-deferred accounts. This involves reviewing investments made through a work sponsored program, and making suggestions to alter saving/spending habits accordingly. (For more insight, read Retirement Savings Tips For 55- To 64-Year-Olds, Tips For 45- To 54-Year-Olds and Life Planning - More Than Just Money.)
As far as distributions are concerned, advisors should have their clients (if possible) live off of non-retirement funds, and only tap retirement plans when needed. The logic behind this is to let tax-deferred growth compound as long as possible.
Incidentally, if at all possible, it may also be a good idea to pay account management fees out of non-retirement funds. Again, this allows the clients' nest eggs to accumulate more efficiently and compound over time; therefore, suggesting this strategy to clients also makes sense.
Give special attention to your elderly clients. Try to focus more on their needs, and less on generating commissions. Over the long run, your loyalty and thoughtfulness as an advisor will be rewarded, if not through a larger paycheck, then through the satisfaction of a job well done.