When people first meet with Ylisa Sanford, a private wealth advisor with Spectrum Private Wealth Advisors in Santa Rosa to discuss retirement planning, they’re typically full of questions and concerns. “They don’t know if they’re saving or investing enough, or making a return that’s appropriate,” she says. “They have a lot of disparate goals they may not feel are connected—college, education for children or grandchildren, retirement or estate planning, tax reduction. Then, they think about their portfolio. Are they saving in the right locations, in the right amount? Are they paying more or less than they should be for advice and investments? What happens if they’re disabled or pass away? What if the market crashes?” Add all that to the thought of advancing age and approaching retirement and you could develop a case of anxiety.
But Sanford walks them through various interactive scenarios of what their lives could look like, based on decisions they have the control to make. This opens their eyes. Clients begin to understand that adjusting an allocation and the portfolio may result in a higher statistical likelihood of never running out of money, based on different modeling scenarios, explains Sanford. Suddenly, the idea of planning for the future becomes almost exciting.
Sanford factors in the variables such as age, health history, parents’ dates of death, morbidity tables, where they live, inflation rate, income tax rate, savings levels, risk tolerance, guaranteed income, pension, social security, health, disability, life insurance, and more. After reviewing all the considerations, she’s ready to look at the future. “We can say, ‘Here’s the path you’re on. Here’s the path you want to be on. Here’s a list of 15 things you need to change, and I and my team will help coach you through to make those adjustments.’”
She compares the journey the client is about to take to driving from Santa Rosa to San Francisco. “You know you’ll need a certain amount of gas. You know how long it takes and how much gas you’ll need. But if the car runs out of gas, you need to adjust. If the car breaks down, you need to adjust.” That’s the way planning for retirement works. “It’s not a static thing. You don’t make a plan in 2018 and place it in a drawer. We do annual reviews with our clients because babies are born, people get married, change jobs, benefits change and people pass away. It’s an evolving process that needs to be an up-to-date reflection of what clients want to do.”
“The first step is to think about what you’d want to change,” says David Brown, founder and chief executive officer of Encore Wealth Management in Santa Rosa. “Would you want to stay at status quo and stay living here in Sonoma County? Would you want to think about moving closer to family? People may say they want to travel the world. But, is that really what you most want to do? Getting down to the nitty gritty: you want to keep the lights on. What’s important to one person is not necessarily important to another,” he says. “Some people want to save to give something to their grandkids.”
One of the first obstacles he has to deal with is human nature. “A lot of people want the quick fix,” he says. “There is no quick fix.” You just have to know where you are, know what you have now, know what you can afford to risk and what you are going to need to continue on in the way you desire, then begin to plan. According to Brown, younger people, with retirement far in the distance, may be too conservative and older people, with retirement upon them and no savings for the future, may become too aggressive. “They’ll put money in the riskiest investments,” he says, “thinking, ‘I’ll double down and catch up,’ but it doesn’t work like that.”
For him, the biggest pitfall is putting off thinking about retirement until some magic future date or event. “People may say they’ll start to save when the youngest starts school, or when the kids graduate and there is more available cash,” he says. “This doesn’t work. There’s always something out there screaming for that money.” His advice is to start early. “Nobody can go back in time,” he says. “You can’t get younger again.”
“Clean out their junk drawer!” he says. “Pull out all those old IRAs.” The point is to dig down and get the concrete evidence of where you are right now. “What’s the first thing you do when you’re lost in a shopping mall?” he says. “You go to a map and see where it says, ‘I am here.’ The big red dot.” That’s where you start.
To create a picture for a desirable retirement, Tim Delaney, wealth advisor and founding partner of JDH Wealth Management, LLC, helps his clients determine and assess where they’re at right now, creating a realistic picture of what they have and what they spend, plus what they want to have and spend in the future. Then, he helps them create a plan to get there. To start, he steers them away from the question they usually come in with, which is about investments and portfolios and how to grow them–that will come later, he tells them. Instead, he helps them to focus first on where they are right now, and where they want to be.
“If you’re spending this amount of money now,” he asks his clients, “when you’re in retirement, what do you want to do?” What’s important to you? Is it your family, your friends, your legacy?” He helps them to see the investments as tools in servicing those goals. “We reframe the conversation to being client-centric rather than investment-centric.”
Delaney looks at all the typical materials people bring in––their investment statements and tax returns are usually easily retrievable. But then he gets to the first hurdle–their spending. “They’ll have the routine items in their heads: PG&E, phone and gas. But the big-ticket items—vacations, sicknesses, car repairs, home remodeling—all these are underestimated 20 to 30 percent.” His experience is that people aren’t realistic about estimating their spending. “Generally, clients estimate 25 percent or more below what they’re really spending. It may not be the necessities, but those addictive ones like Amazon, Starbucks and restaurants.” How does Delaney find the truth about spending? He goes to their tax return. There, he sees the disposable income. Whatever’s not shown as being saved, is being spent. He laughs. People will always say, “No way I’m spending that much.” Delaney introduces them to grim reality: “Either you’re saving it or spending it.” Period.
After making a complete assessment of where they are right now, with all of their assets– retirement fund, income, investments and all their spending—he creates a projection which will show in a graphic way how long their income will last at a given rate of spending. “If your income and assets are this, and you’re spending per month is that, then when you retire, here’s your probability of not running out of money before you die.” It’s only a graph. Only a probability, but it is an eye-opener. “To try to get a handle on spending is the key item,” says Delaney. “Then, getting them on a budget [and helping them to] stay there.”
He compares the power of spending and investments as a car with two gas pedals. “The big one is your spending,” he says. “So, take an extreme example. If you have $1 million and you’re spending is $1 million a year, your pedal’s to the metal and you are out of money in a year or so, guaranteed. We need to get your spending in line with the amount of cash coming in from outside third parties (ie, social security and rental income) and fill in the remainder of spending with periodic distributions from your investments.”
The little pedal is your asset allocation. The allocation can be adjusted to be more aggressive or more conservative, provided your spending is in line first. “You can be aggressive, but that comes with more risk,” he says. “Or, you can be more conservative because you don’t need to take the risk if your spending is in line with what you have available to spend.” The little pedal, the investment portfolio, is where you can play, but, he cautions, investments are irrelevant if your spending is out of line. Understanding what you’re spending now is key to planning for what you can spend in retirement. Most people, he says, when they face reality, will have to “throttle down their level of spending, once they retire. There can be a little bit of sticker shock.”
Delaney is a pilot and has been all his adult life. When he visualizes slowing down for retirement, he sees it as from a high vantage point. When looking into the distance, he likes to see big debt cleared away. “As people go into retirement, their mortgage on their home should go into retirement, too,” he says. “As you’re coming in for a landing (ie, retirement), your mortgage should ideally go to zero when you land and enter retirement.” Cut the engine. Nice and easy, if you can do it. “I’ve had too many clients say that having a mortgage in retirement is one of the big millstones,” he says. “They’ll say, ‘Oh, if I just didn’t have that mortgage payment every month!’ Then, they generally will try to refinance one final time and then carry that mortgage to the grave.” He counsels clients to make a plan for paying off the mortgage. “That takes a lot of discipline to do that,” he says. “I’m telling them to pay an extra chunk of cash every month to get out of mortgage debt by the time they retire.”
Delaney describes two standards for how a financial advisor works for clients. Registered investment advisors, such as he, work under what is called the fiduciary standard, which says you have to put the client’s interest first, that you can’t recommend a product that is not in the client’s best interest. Registered investment advisors do not make any money from the investments they recommend. Under the fiduciary standard, advisors such as Delaney get paid on the basis of a fee charged on the amount of assets under management.
“We are extremely transparent with our fees,” he says. “We get paid by the client and by the client only. We have no remuneration from any third party. The more the clients’ accounts go up, the happier they become, and the happier we are as our fee is based on a percentage of the account.” A law, passed during the Obama administration, declaring the fiduciary standard to be required for brokers working with retirement plans, to put their clients’ best interests first, was overturned this year, by the 5th U.S. Circuit Court of Appeals, in March, on the grounds that it was too burdensome.
The other standard, which broker-dealers operate under, is the suitability standard, in which the first allegiance is to the employer, not to the client. A broker dealer will have an array of mutual funds to offer, each carrying a different potential upfront fee, different expense ratio and a potential exit fee. They may also get paid by the fees generated in each transaction. A disadvantage to those who do not keep sharp track of their investments is that they tend not to know what they’re paying in fees.
So, how do you know what you are paying—and how your advisor is getting compensated? “You can tell by the fee structure,” says Delaney. “If it’s transactional–if the broker gets paid by the transaction¬–it’s not in your favor." If advisor gets paid on the value of the account, it is in your mutual interest that the account should grow. Then the only question is, what is the fair fee? “It generally starts out at around 1 percent of the assets managed, and decreases based on a sliding scale as the assets under management increase.”
Keep in mind, he tells his clients, that where you put your investments between taxable and tax deferred accounts determines how they’re taxed. The new tax law will bring changes and your advisor will be able to guide you where to put your investments for maximum tax advantage. “We’re a tax-oriented firm,” says Delaney. With 40 years of experience in tax, accounting and financial services, having an eye toward tax comes naturally. “When you buy a stock, you’re hoping it will go up. And if it goes up,” he says, “you’re going to pay tax on it.” So watch out. “If you buy it in your IRA, when you pull that money out, it’s going to be taxed as ordinary income. If you put it in your taxable account, and you held it for at least a year, it comes out as a capital gain.” The difference in tax rates between ordinary income and capital gain income can be as much as a 20 percent difference in tax rates. Saving 20 percent in taxes on the gain can add up to a lot of money”.
“When you’re looking for an advisor, you need to see if they are client-centric or investment centric,” says Delaney. “If it is investment centric, they’re probably not looking holistically with you as the center of attention. That’s what’s so important. Being client-centric instead of investment-centric.” And don’t wait too long. “It’s never too soon to start planning for retirement,” adds Brown. “You can’t go back in time. You can only deal with right now.” Think of it as part of your life. Or, as Sanford puts it, “It’s life planning.”
Most Americans living beyond age 65 will need long-term care at some point in their lives, according to a 2016 report from the Office of the Assistant Secretary for Planning and Evaluation (ASPE) in the U.S. Department of Health and Human Services.
Long Term Care Services and Supports (LTSS) involves assistance in the daily tasks of living for people who develop a temporary or long-term disability. The report suggests that people tend to underestimate the likelihood of the need or the cost of such care. The report points out that health insurance typically does not cover LTSS and Medicare and Medicaid cover only some LTSS costs, such as, for Medicaid, those with chronic disabling conditions. Private LTSS insurance is available but expensive, it states, to the point where projected LTSS expenses could contribute to retirement deficits.
The report concludes that approximately half the population, after reaching the age of 65, can expect to need LTSS, on average for two years, with an average cost of $138,000. This cost naturally rises with the cost of living and the length of time for the need for care. “Even average long-term costs can be out of reach for many Americans without some kind of financing system in place,” the report concludes. “Medicaid is an important payer for LTSS, but because it serves only those who meet income and asset criteria, many families pay for LTSS out-of-pocket.
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Tim Delaney and his wife lost their house in the Tubbs Fire, in October, 2017. Now, he is zealous about counseling his clients whose assets include real estate, that they be properly insured, including with earthquake insurance. “If your house falls down and doesn’t burn down, what does that do to your retirement?” For many, it could be, as he says, “a game changer.”
As Ylisa Sanford pointed out, the best-made retirement plans can be interrupted by all manner of the unexpected, from flat tires to major catastrophes. Your retirement counselor or family wealth manager can help you imagine and prepare for the possibilities that could set you off course, from physical catastrophes such as fires, earthquakes and floods. Your health insurance professional will help you imagine and prepare for the possibility of health catastrophes such as accident or sudden debilitating illness. While your professional advisor will have the information relevant for you, here are some helpful information can be found on the following sites:
For earthquake risk in California:
For information on flood insurance:
For fire insurance information:
Estate planning, whether it’s a simple will or more complex planning trusts, ensures that your wishes will determine how your assets will be disposed, and by whom, at the time of your death. Lauren Galbraith, a family wealth attorney at Farella Braun + Martel LLP, who practices in the firm’s Wine Country Office in St. Helena, offers a general view of the main options in the complicated landscape of estate planning.
The simple will
A will allows persons of any level of wealth to name their executor and state their intention of how to distribute their property in the event of death. “Tangible personal property is an area where there can be a lot of conflicts and arguments about who gets what,” says Galbraith. “You can plan for that. You can’t guarantee that everyone will be happy, but you can make specific gifts of certain items or set forth procedures where people pick what they like.” The will sets out in writing how a person’s assets and possessions should be distributed, but distribution is not automatic. “If you die with a will, your named executor goes to court; there’s a court proceeding. With the supervision of the court, the executor handles the disposition of your assets,” Galbraith explains. Other options will allow the process to go forward without the encumbrance of the court.
The living trust
Those with assets in excess of $150,000, or any real estate, want to avoid involving the courts can choose to create and fund a revocable living trust. A living trust is a legal document that, just like a will, contains a person’s instructions for the disposition of his or her assets. To fund the trust, a person must retitle his or her their assets into the trust such that the property or assets are no longer owned by the person as an individual, but as trustees of the trust. The advantage is that, at the time of death his or her affairs can be handled and distributed by the named successor trustee without court involvement. The successor trustee is also empowered to manage the trust assets and act on behalf of the person who created the trust in the event of his or her incapacity, akin to use of a power of attorney, which is another recommended estate planning document. “If they move their assets into a revocable trust during their lifetime, they can be planning for incapacity at the same time as they’re planning for death,” says Galbraith.
When to consider estate planning
Younger clients may wish to nominate a guardian for their children should something happen to both parents, while people nearing retirement age may need help deciding the best way to distribute assets among grown children. Galbraith says that often people come in to revise their documents from time to time, as their circumstances change and in response to changes in tax law. They also seek advice when they need particular help making personal decisions—for example, whom they should name as executor, if it’s one of the children, in which order their children should be named, or, if they don’t have close family, who might the appropriate person or persons be to serve as executor. Estate planning also includes documents relating to incapacity, such as powers of attorney and health care directives, and potentially strategies for making gifts during life. All of these issues can be individually tailored and set forth in a comprehensive estate plan.
Putting your affairs in order
Estate planning is a complex process given individual wealth structures and circumstances—including new tax laws—and personal wishes. She advises that when you begin thinking about estate planning, to make sure you have someone with a depth of expertise in all the appropriate legal and tax levels to guide you. Most importantly, don’t avoid the issue. “For people with no plans at all, even a simple straight forward one can just save your loved-ones headaches later,” she says. “I hope people who might be fearful or hesitant about the process can view it as something that will give them peace of mind. It shouldn’t be a scary process, it’s housekeeping,” she says. “Getting your affairs in order.”
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