Never Too Late

Daniel Milan blames human nature. “Most often, if someone is starting late saving for retirement it’s because people [tend] to ignore problems—‘If I ignore it, it’ll go away,’” says Milan, a financial adviser and managing partner of Cornerstone Financial in Southfield, Michigan.

Therefore, it is key to understand why the person started saving late, agrees Gilliane Isabelle, chief distribution officer at AIG Retirement Services in Houston. The problem could be they had financial challenges: They had children late in life, or had to pay for education, or maybe they had to take care of their parents. “If we are going to help them get on track, allowing them to share their story is a start,” she says. “It can be emotional; they may feel fear and anxiety or maybe even embarrassment.”

The answer is for advisers to encourage them to see that it is not too late. “We can help,” Isabelle says. “Try to empower savers to do what they can. Start with congratulating them on taking the step of talking to an adviser, but set the stage that there’s lots of work to do and difficult decisions to make.”

Take Inventory

Before engaging a client within 15 years of retiring, Milan says, his firm asks for a breakdown of the person’s finances. “They use our very detailed household budget spreadsheet,” he says. Cornerstone’s budget process includes identifying what is needed, what the client is spending and how to dial that back without greatly affecting standard of living so the person or couple has money left over to save. “Once they put it on paper, they usually see, right away, ‘X’ amount a month that is unnecessary.”

When calculating their budget, Isabelle says, individuals also must consider the budget they will have once retired and whether they can live on less than they have anticipated. “They can think about downsizing or relocating to where it’s more affordable to live, for example,” she says. “Put it into context for people.”

A good starting point is to help the client plan to become debt-free. “That’s where a budget worksheet comes in,” Isabelle says. “It lets them analyze whether they have money they can use to pay off debt or save.” Also talk about the individual’s mortgage debt, if he has one, and help him budget to pay it off while still working, she says.

Part of the discussion should also be about having emergency savings so the person need not take drastic actions if a major expense crops up, Isabelle adds.

Another “first thing” a late starter should do is take a financial inventory, says Ryan Marshall, a partner at Ela Financial Group, a Cetera-affiliated firm in Wyckoff, New Jersey. What assets do they have? What assets might they have in the future? What liabilities do they have? What liabilities can be paid off before retirement? They also should determine how they want to live in retirement.

According to Marshall, if you show someone with credit card debt where they stand financially and where they will stand at retirement age if they fail to make lifestyle changes now, it frightens them and can prompt a change.

Start Saving in the Employer Plan

“Part of taking inventory is identifying whether they are offered a DC [defined contribution] plan by their employer,” Marshall says. “They need to know the employer match limit and save up to that. They may have questions about whether to save on a pre-tax or Roth basis.” Even if a Roth option makes less sense for late savers, the firm still models for them the outcomes of both that and pre-tax options.

Starting with their employer plan is easiest, he notes, because the savings comes out of their paycheck before the rest goes into their bank account. “Much of this is behavioral more than anything else,” he says.

The reality, of course, is that individuals getting a late start will have to save more now than if they had started earlier, Isabelle says. “Talk to them about tucking away as much as they can, taking advantage of statutory limits and catch-up contributions,” she advises.

There is always a risk that individuals will feel they need to invest aggressively in order to catch up, she observes, and they should be reminded that they can no longer invest like they could in their 20s. “While it’s tempting, especially when the markets are doing well, they can’t take on the same risk.”

To encourage all late-starting employees to save, advisers can work with the plan sponsor to create targeted messaging, she says. “Sponsors and recordkeepers can use plan data to identify what targeted education is needed and for whom,” she says. Data that can be leveraged include plan demographics such as department, role, salary grade, age—uncovering where participation might be low, where deferral rates might be low, where extra attention might be needed.

Distribution Planning Is Just as Important

Having different types of accounts is a powerful tool in a person’s distribution strategy, Milan says. For example, for a distribution from a brokerage account, a person is taxed on capital gains, which is less than ordinary income tax. So, a person in the distribution phase may pay 22% or 25% for distributions from his DC plan, but only 15% on capital gains for a distribution from a taxable brokerage account. “This means he will need to take out less from the brokerage account to reach his monthly or yearly income goal,” Milan says. “Blending those two together allows for a lower gross income distribution.”

He adds that people rarely think about manipulating assets for distributions—usually they focus on accumulation—but distribution planning can be just as useful as accumulating more dollars.

Likewise, attempting to reduce long-term asset requirements can help someone who got a late start saving for retirement. “Specifically, people can focus on health care and long-term care,” Milan says. “The risk of long-term care in financial planning can be extremely onerous.” He says people who use long-term care asset strategies to eliminate that potential asset requirement will not have to save as much for it or use savings to pay for it. “If you use $110,000 today to cover a $300,000 future expense, it reduces the amount of money you will need to have accumulated,” Milan says.

Employees can also strategize how they draw Social Security; for example, the person who got a late start saving may need to postpone filing until age 70. He may have to retire at a later age than planned or retire from one job and work part-time at another.

Still, advisers should remember that there are as many visions for retirement as there are workers, and each will require a different amount of savings, Marshall points out. “Sometimes I don’t agree when someone says, ‘If I just put ‘X’ dollars away, I’ll be good,’ because everyone’s goals are different. Each person needs an independent plan for retirement to help them save enough.”

“For people who are starting late, once they sit down and talk through their situation, there’s a huge sense of relief,” Isabelle says. “The goal of any adviser is to help create peace of mind.”

Art by Nikko de Leon