Retirement planning is a critical part of the financial services industry. With the baby boomers ranging from middle age to early retirement age, the number of individuals with significant savings and retirement planning needs is increasing dramatically. At the same time, the economic and tax complexity of all types of retirement-related financial planning has also increased.
Retirement planning is “interdisciplinary.” It combines the skills of the traditional estate planner, the financial planner, and the benefit/compensation planner. The broad range of issues that must be addressed makes this one of the most challenging of the financial services disciplines.
Retirement planning is also multifaceted because of the broad range of clients that must be served. For example it encompasses advice to clients many years in advance of retirement, as well as to clients just at retirement and thereafter. Clients may also range from business owners who are able to use their businesses to help provide retirement benefits, to key executives who can bargain effectively with their employers regarding retirement benefits, to employees who have no significant say in their employee benefit package. All these different types of clients may have needs for retirement planning as well as sufficient assets to require the services of a planner.
Perhaps no single advisor should attempt to handle all aspects of retirement planning alone. Any person giving advice in these situations should know when it is appropriate to call in an employee benefits expert, a lawyer specializing in estate planning, an expert portfolio manager, or whatever other specialist is required. However, all financial planners should understand the basics of retirement planning-the broad general approaches, the tools and techniques-and where they fit in.
Retirement planning is fundamentally composed of three basic steps: (1) assessing the financial needs the client will have at retirement, (2) determining how much of this need will likely be met, based on current assets and income, and (3) establishing a plan for any projected shortfall in cash flow. But before any of these steps can be undertaken, the planner must determine what the client’s current assets and income sources are, and evaluate the impact that major financial goals may have on these assets.
CURRENT INCOME SOURCES AND ASSETS
A worthwhile retirement plan cannot be provided unless the planner has detailed and precise financial information about the client’s existing assets and income sources. In fact, “due diligence” in retirement planning requires the planner to make every effort to obtain accurate and complete financial information. The planner should be wary of clients who are reluctant to provide such information. (See Appendix I, Malpractice.)
Retirement planning practitioners should develop a “fact finder” for clients that will systematize this process. A sample fact finder, titled Retirement Planning Asset Worksheet (see Figure 2.1) is included at the end of this chapter. Some key elements:
A. Benefit plan information. Retirement planning requires complete information about all employee benefit plans in which the client and the client’s spouse are currently participating or have ever participated. Not only retirement plans (qualified or nonqualified) but other benefit plans such as health insurance, life insurance, or even such fringe benefits as membership in company athletic or health clubs after retirement may be significant in the retirement planning process.
In addition to private employer benefit plans, government benefits also should be estimated-Social Security, veterans’ benefits, and the like.
In order to accurately forecast the level of employee benefits available, the planner needs to see actual benefit plan documents; it is not enough to rely simply on the client’s informal impression of what his benefit programs provide. Generally, if a plan provides a Summary Plan Description (SPD), as do most ERISA-affected plans (see Chapter 12), the SPD should be sufficient. For qualified plans, employers are required to provide an individual benefit statement at least once annually. In some cases, the planner might wish to look at the actual underlying plan documents, which the client has the right to request under ERISA. (Companies can charge a reasonable copying fee for providing copies.)
For non-ERISA plans, there often are no formal documentation requirements, so it may be difficult to obtain adequate written information about such benefits. However, most companies provide a “benefits manual” or other literature covering these benefits.
In general, when examining benefit plans, focus on:
* What vested benefits at retirement does the plan now provide-that is, even if the employee terminated employment today?
* What will the plan provide at retirement, if the employee continues working? If the benefits are based on salary, what is a reasonable salary forecast?
* How solid are predictions of future benefits? For example, health benefit plans are currently in constant flux. Can a planner have any confidence that if health benefit plans are even available at retirement 15 years from now, they will have any resemblance to current benefits? The employer’s financial stability also has a bearing on this issue.
* To what extent can the employee control the employee benefits available at retirement? Do employer plans have options available to the employee to change or increase benefits, possibly on a contributory basis? (See the chapters on FSAs (Chapter 40) and Cafeteria Plans (Chapter 39), for example.) Can the employee individually negotiate better or different benefits? At the extreme, an owner or majority shareholder can-and generally should-arrange the company’s benefit plans to be consistent with his own individual retirement planning.
B. Current asset information. The planner must have detailed information about the client’s current assets and sources of income. Completeness is a must–it is not optional. The fact-finder worksheet at Figure 2.1 includes categories for cash and cash equivalents, investments (detailed by type), and personal assets, including real estate.
Assets must be valued-book value is of little use in developing a financial or retirement plan. Some assets are easy to value; others may be impossible to value with certainty. Asset valuation is discussed in The Tools and Techniques of Estate Planning.
Owners of closely held businesses are in a special category. It is difficult to value an interest in a small business, of course. But retirement planning requires more than this. The important factor about a small business interest is not what it is worth now, but what will happen to it in the future-including the extent to which it will continue as a source of income in retirement. In other words, retirement planning for closely held business owners is inextricable from planning for business succession through buy-sell agreements, gifts or sales to successors, or whatever mechanism is set up for continuation of the business or retrieving its value for the owner’s benefit. For additional information on business succession planning, see Appendix B.
In obtaining asset information, do not overlook liability information. This includes not only traditional debts outstanding, but also legal obligations such as future alimony or child support that involves a recurring obligation, property settlement payments that are outstanding, state or federal tax liabilities outstanding, or fines or judgments not yet fully paid. Many of these are things that clients understandably would rather not think about and they may not be volunteered.
C. Nonretirement goals and objectives. As with estate and financial planning, retirement planning requires the development of a complete profile of the client’s…