Last year was a rough year for many people. People think about their own mortality. Jobs no longer seem secure. Your client tells you they want to take early retirement.
They want practical answers. They want a way out. They don’t want to hear “I don’t think you can ever retire.” Let’s assume your client has done a decent job saving and investing. They aren’t mired in debt. They have equity in their home. They are in their late 50’s or early 60’s.
It Starts with Financial Planning
You’ve done these analyses before. What could their investment and retirement portfolio realistically generate? A 4-5% drawdown rate is considered an industry standard.
1. Start collecting Social Security early:
Your client will get less, they should be able to start collecting at age 62. If they have another defined benefit pension from a previous employer or own an annuity, they should have options for drawing an immediate income.
Action: Calculate what they can expect in fixed payments if they retire early.
2. Reduce living expenses:
Could your client intending to spend $10,000 a month in retirement get by with $7,500?
Action: Run analyses determining how long their money would last at different levels of income. The tools you utilize should take account of inflation.
3. Remember health insurance:
It will be an enormous expense. Currently it comes through their job. This will change when they retire.
Action: Get realistic estimates of health insurance costs until they qualify for Medicare and another for afterwards.
4. What’s the shortfall?
Chances are, they don’t have sufficient assets to produce enough income.
Action: Determine the lump sum they would need or the additional cash flow to fill the gap.
Options for Clients with Assets
How will your client raise the cash? That’s the next problem.
1. Sell the business:
Their business is their biggest asset. At fair market value, it could provide the nest egg they need.
Action: Help them get the business into the best shape possible. They boost revenue. They cut expenses. They clean up the premises. They pay down debt. You introduce them to a few business brokers.
2. Sell the house:
They have paid down the mortgage. Selling the house would give them an infusion of cash that could be used to produce income.
Action: Do financial planning. Where would they live? Would they downsize or move to a rental property?
3. Sell the house to their children:
The kids want to help financially. They buy the house. The client continues living there. They pay them rent. For them, it’s an income producing asset.
Action: Learn how attached the kids are to their childhood home, now in an expensive neighborhood.
4. Sell tangible assets:
They bought gold coins for years. They own vacation property. They have a boat or an RV. They sell it.
Action: They are raising cash that can produce income.
How to Reduce Living Expenses to Meet Projected Income
Your client is looking at raising cash or generating income. Now, get expenses down.
1. Downsize to a smaller property.
They own a big house with high taxes. Why?
Action: They like owning, so they look at smaller houses nearby.
2. Move to a state with lower costs of living:
If they live in the Tristate area, they might follow their friends to Florida. There are plenty of articles highlighting states where your money goes further. Do not listen to friends talking about Mexico or Eastern Europe.
Action: It’s another research project for your client. You can supply some articles.
3. Move in with the grown children:
Many would welcome the live-in babysitting service. It has only been in the past few generations Americans got away from the custom of the multi-generational household. Watch HGTV and you see many people looking for a larger home that will accommodate one set of grandparents.
Action: Tactfully sound out the children. Retirement income can contribute towards household expenses.
4. Don’t own, rent instead:
The client adds an expense (rent). They lose the costs to carry the house including property taxes, school taxes and insurance.
5. Move to an over-55 community:
Houses might be smaller and on one level. Apartments may be available too. There are many types available, most for owning and some for renting.
Action: They reduce expenses while still maintaining their own independence.
How to Increase Income
1. Find another job:
They might not hate working, just at this job. This is a good option if your client is far away from retirement age.
Action: Tell them to start looking. Share your contacts.
2. Exit the business, enter the workforce:
Your younger client is a graphic designer. Their home-based business is struggling. Suggest closing the business and working for a company employing graphic designers.
Action: Talk it over with your client. They have probably thought about it before.
It all started with an allowance. They paid the children’s college tuition. Weddings were the next big expense. They have good careers. Perhaps they can send an agreed amount of money in the client’s direction every month. Their investment is paying off. Your client will know if their children will buy into this idea.
4. Buy rental property:
Their bank deposits are earning near zero in interest. Income-producing real estate is an alternative. They could even live in the building. They need to be comfortable with the idea of being a landlord.
Action: This might have occurred to them. You will need to discuss the amount of work involved.
They can’t swing buying rental property, but are OK with renting out a room on weekends. They get additional income.
Action: They need to do research. Does their community allow this type of rental?
Some solutions might fit. None might fit. You have been able to seriously help your client determine if there is a path to early, even immediate retirement, especially armed with financial planning information and info about the CARES Act and other government legislation.
Dunham: World-Class Trust and Investment Firm
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