The Affluent and Retirement

The three areas of greatest concern to high-net-worth clients are reducing their taxes, preserving their wealth and providing for their heirs. Are you taking care of them?

January 17, 2008
by Lewis Schiff

This two-part series focuses on ways in which CPAs and other financial advisors can assist wealthy clients who are beginning to face broader questions brought on by retirement.

In addition to wrestling with the details of a comprehensive advanced planning strategy, clients may have questions about the right way to transfer assets to children and the best way to teach kids to manage those assets. Another primary concern is retirement — how to live it and what it means to retire with significant assets.

The way some affluent clients think about retirement may surprise you. CPAs and other advisors have observed that many high net worth (HNW) clients still harbor some anxiety about their retirement income and expenses – even though their standards of living would certainly be considered secure by most measures.

A Northern Trust Survey of high-net-worth individuals (more than $5 million in investable assets) discovered that 92 percent of those affluent pre-retirees were “very” or “somewhat” concerned about healthcare costs – particularly how steep rises in healthcare costs would affect their ability to enjoy retirement. Again, these are individuals with the resources to purchase substantial amounts of health and long-term care insurance protection.

Retirement planning for affluent clients “is like solving a puzzle,” says Peter Carnathan, a planner with Washington, D.C.-based Fiduciary Trust Company International. “We need all the different pieces sitting on a desk.” The puzzle pieces include more than just assets and goals. In terms of client attitudes, he finds that more and more of them just think of retirement and age as states of mind unbound by biology and social convention. Those attitudes need to become part of the planning mix to create the strategies that will work for these clients.

Note to Readers: Lewis Schiff will be holding workshops to introduce the newest solutions for your high net worth clients at select U.S. cities. View more information.

Emotional ROI

Another high-net-worth advisor, Greg Kyde from Boulder, Colorado-based Kyde Capital Strategies LLC, sees a major issue arising as pre-retirees’ make the transition from focusing on their career and wealth accumulation to their post-retirement phase, which requires them to redefine themselves professionally and financially. “These folks typically spent their adult lives assessing and evaluating opportunities, calculating risks, comparing potential returns, all with an eye on creating wealth. Retirement sort of flips the switch. They begin to consider more heavily what I call the softer side of return, the emotional side.”

Often, it’s the first time that HNW individuals really delve into the emotional return on their assets and it becomes a challenge. Like many retirees, they question what they should do with the rest of their lives, although their accumulated wealth allows them a greater menu of possible answers than the average American.

Fears regarding dips in their retirement income stream can also affect how advisors plan for them. Before they retired, many affluent clients had regular salaries. Often, they want something to replace that paycheck — and they expect their investment portfolio to provide that safety net and income for them. They may have a $10 million net worth, but they still want to receive a “retirement salary.”

Philanthropy and Retirement

Those with substantial assets often think about philanthropy and retirement together. In a U.S. Trust survey of affluent Americans ($11.78 million in average investable assets) 21 percent cited retirement as the reason they would increase their charitable donations.

For such clients, retirement and charitable planning could include helping them decide whether to make contributions to a community foundation (see related article on Community Foundations in today’s issue) or creating a family foundation of their own in which loved ones participate in running the organization.

In addition to the financial aspects, your client may want to weigh the emotional return of each charitable avenue to see which best suits his or her retirement lifestyle. “It’s a challenge at times to get someone actually to spend the time, slow down and be introspective,” notes Kyde.

Philanthropic interests often come to the fore in retirement, especially when driven by a client’s genuine interest in a particular organization or cause. A client of Kyde’s in his early 60s, for example, has a net worth of about $20 million and was considering retirement. He needed to decide what to do with assets in a way that would be meaningful to him. He found his goal: sending as many people to college as he could, starting with his nieces and nephews. The scope of his retirement and the source of his happiness during these years went far beyond personal comfort and leisure activities.

“With good planning, reporting, and risk management, retirees begin to think beyond one more cruise to Alaska,” says E. W. “Woody” Young, a planner with Raymond James in Dallas, Texas. These clients ask the broader questions — How much is enough? What’s really important? Can I make a difference? How do I want to be remembered? These issues start surfacing when they have a comfort level that their lifestyle is secure, observes Young. The more secure they feel, the earlier they address these questions.

Next month, we’ll look at how client spending habits can dramatically affect even the most thorough investment plan.

This article is adapted from an article that originally appeared in the September 2007 issue of Investment Advisor Magazine.

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Lewis Schiff is a senior managing principal for Advanced Planning Group, where he leads a team of private wealth experts who specialize in the needs of high-net-worth clients globally. His forthcoming book, The Middle-Class Millionaire will be published in February 2008.