NAPFA Shares Client Action Checklist

The National Association of Personal Financial Advisors (NAPFA) recently polled about 100 of its member advisory firms, collecting the top pieces of advice given to clients in different age ranges.

“We conducted this poll to raise consumer awareness about the urgency of preparing for retirement and the importance of having a comprehensive plan in place,” notes NAPFA CEO Geof Brown. “We encourage consumers to act on these tips which advisers rank as the most important steps to take. When it comes to retirement planning, consumers need to remember that while the days are long, the years are short.”

For clients with 20 working years or more left before retirement, NAPFA advisers first urge saving towards an emergency fund that could cover three to six months of living expenses, “to avoid tapping into your 401(k) or home equity in the event of an emergency.”

Beyond this, younger workers should find ways to boost earning potential and benefits packages now, and should take full advantage of offered benefits by contributing the maximum annual amount to the 401(k), “or at least enough to receive a full employer match.”

Other tips for younger workers include:

• Contribute money to a Roth Individual Retirement Account (IRA) or other account to make sure you are saving in a tax-optimized manner.
• Coordinate your insurance needs with your employer’s benefits package to be sure you have adequate coverage should you become disabled (long-term disability), and evaluate the level of life insurance you need.
• Ensure you have a diversified investment portfolio so that you are investing for growth, and create tax diversification by allocating assets across taxable, tax-deferred and tax-free sources.
• Consolidate multiple retirement accounts and/or brokerage accounts you may have.
• Make sure you have basic estate planning documents in place (i.e. a will, power of attorney, possibly a revocable trust, a living will, health care proxy, etc.)
• Set a benchmark “magic number” for an adequate retirement fund and establish a step-by-step plan for reaching your goal.

NEXT: 10 years out

With 10 years left before retirement, NAPFA advisers’ mantra is “be tax efficient with your investments … for example, you should defer as much of your salary as you can to your defined contribution plans.”

Workers in this age range should also have an emergency fund but should be particularly mindful of their company’s financial situation, as employers are prone to reorganizations and layoffs over time, and older workers can be vulnerable. This is also the age to “brainstorm any big ticket financial commitments” that could arise down the road and wreck an otherwise effective retirement plan, such as caring for a sick family member for an extended period.

NAPFA shares these additional pieces of advice for those with a decade of working life left:

• Take a hard look at any major debts that you have and develop a 10 year plan to eliminate them.
• Reallocate your portfolio based on your earnings timeline with a focus on performance, risk and expenses. Decide when—or if—you should shift to a more conservative asset allocation.
• Review what your tax obligations may be with your current investments and use tax optimization strategies to benefit your savings.
• Review your estate documents to ensure the language is still accurate. For example, are the named trustees and beneficiaries still alive and capable?
• Research when your stock-based compensation might expire and what stock awards you can retain after retirement.

NEXT: When retirement is on the horizon 

With five or fewer years left before retirement, NAPFA advisers commonly encourage clients to make a list of needs and wants, and “if you do not have enough savings for all your needs, make a five-year plan to increase your funds.”

This is the time to fine-tune the retirement income plan, NAPFA advisers feel. This includes reviewing projected expenses, adding up reliable and potential sources of income, and figuring out how the investment portfolio might cover the gap.

NAPFA concludes with the following advice for those about to retire:

• Run tax projections periodically to ensure you take advantage of opportunities the IRS provides, such as Roth IRA conversion strategies.
• Double check your reported Social Security earnings and resolve any discrepancies now. Explore your Social Security claiming options and make sure you understand the timing of applying for benefits.
• Ask your HR department about the relationship between your current health insurance and Medicare, as well as what your options are when you reach age 65. Get information about any pension or defined contribution options and any other retiree benefits.
• Continually monitor and analyze your asset allocation to make sure it is the right one for you. Understand whether you should move to a more conservative asset allocation or continue investing for growth.
• Research when stock-based compensation might expire and what stock awards you can retain after retirement.
• Make sure that all of your estate documents are up-to-date. Verify that your named executors and proxies know your wishes and are willing to act on them if needed.

Additional research and information on NAPFA is at www.napfa.org.