6 Tips to Kickstart Succession Planning with Your Business Owner Clients
Here are 6 tips you can share with your business owner clients to help kickstart their succession planning.
Like a lot of people my age, I find myself thinking more and more often about retirement these days. For me, the key to being ready is having a solid retirement income plan. I wanted to share five simple things that help me feel prepared. I think they can help anyone feel better about their retirement plans.
When we retire, we’re going to have monthly expenses that don’t go away. For many people, housing will represent their largest monthly expense. A lot of us will still have a mortgage payment even after we retire. Downsizers may trade a mortgage for a monthly rental payment. Then there is healthcare. Even with Medicare, retirees will be faced with monthly premiums and potential annual out of pocket expenses. There’s also food, personal care, and transportation. Throw in a little fun, and most people will be surprised how quickly it adds up.
We need to know that monthly number. How much do I need to pay the bills and have a little left over each month for fun? Here’s a tip that can help: many credit card apps will track your monthly spending. We use one primary card for our regular expenses like groceries, personal care, and hobbies. This is a great way to keep track of all the little things that can get left off a budget spreadsheet.
The sooner you have a game plan for Social Security, the sooner you can start refining your retirement income plan. The first question we need to address is longevity. While we obviously don’t know how long we will live, we can decide how long to plan for. Did you know that a healthy 65-year-old male has a 50/50 shot at living to be 88 years old? A healthy 65-year-old woman has a 50 percent chance of living to be 90.1 With that in mind, my plan is based on my wife and I both living to 90.
Why is that important for Social Security? It’s because of the break-even analysis. When I ran my own scenario through Nationwide’s Social Security 360 Analyzer, I was able to determine that holding off on filing until age 70 will provide me with the highest cumulative lifetime benefit beginning at age 84. Therefore, because my plan is premised on living to 90, my goal is to wait until 70 to claim Social Security. If I run into health problems, I can always reconsider.
I have a long-term perspective on taxes. Taxes are fairly low now and I’m worried about potentially higher tax rates in the future. Ideally, I’d like to keep my effective federal income tax rate below 10% if I can. The best way to do that is to spread the taxes on my retirement assets over as long a time frame as possible. This might mean paying some taxes early in retirement before I have to start taking required minimum distributions (RMDs).
Currently, we have a large standard deduction ($27,800 for a married couple both age 65) and relatively low tax rates in the lowest brackets (10% and 12%). If I retire at 65, but delay Social Security benefits until 70, I may have an opportunity to draw down my tax-deferred retirement accounts at a single-digit effective tax rate during that window. I’ll also be reducing potentially larger RMDs later in retirement which will give me some flexibility to avoid paying taxes at potentially higher marginal tax rates in the future.
When you download a copy of your Social Security statement (ssa.gov/myaccount), you’ll notice a key point right on the first page: Social Security is not intended to be your only source of retirement income. In fact, Social Security will only replace, on average, about 40% of your pre-retirement income.
The good news here is that it’s easy to add another source of guaranteed retirement income. Personally, I’ve invested a portion of my retirement savings in a variable annuity with a Guaranteed Minimum Withdrawal Benefit (GMWB). This allows me to remain invested in the financial markets while also accruing a lifetime income benefit that I can’t outlive. My goal is that between Social Security benefits for my wife and me, plus the additional lifetime income provided by my annuity, we’ll be able to cover our essential expenses each month without tapping our other retirement assets.
One of my most important goals is to make sure that if anything happens to me, my wife will have enough income and assets to easily maintain her lifestyle in retirement. One way I’ll do that is by maximizing my Social Security retirement benefit. Because my benefit is higher than my wife’s, it will become my wife’s survivor benefit when I’m gone. By waiting until 70 to claim Social Security, I’m locking in the highest possible survivor benefit for my wife.
Also, when I decided to invest my IRA assets in an annuity, I chose a joint life income option for the GMWB. This means that even after I’m gone, my wife will benefit from an uninterrupted source of guaranteed income for the balance of her life. Finally, my wife will also receive a tax-free life insurance death benefit when I die. Remember, even though I’ve maximized my wife’s Social Security survivor’s benefit, she will still experience a reduction in total monthly Social Security income as a widow (her benefit basically rolls into her survivor’s benefit). Life insurance will give her the resources to address that reduction.
Who cares about me?
Why should you care about what I’ve done to prepare for retirement? Well, I probably look like a lot of your clients. I’m in my 50s and married. I’m still working but am looking forward to retiring within the next 10 years. I have a decent level of retirement savings, but not so much that I don’t have to worry about running out of money.
In other words, I’m a regular guy. The good news is that if I can improve my retirement outlook with these simple steps, your clients can too. If these ideas resonate, share them! They may feel more prepared and appreciate you for it.
American Academy of Actuaries and Society of Actuaries, Actuaries Longevity Illustrator, http://www.longevityillustrator.org/, (accessed May 13, 2021).
This information is general in nature and is not intended to be tax, legal, accounting or other professional advice. The information provided is based on current laws, which are subject to change at any time, and has not been endorsed by any government agency.
Neither Nationwide nor its representatives give legal or tax advice. Please have your clients consult with their attorney or tax advisor for answers to their specific tax questions.
When evaluating the purchase of a variable annuity, you should be aware that variable annuities are long-term investment vehicles designed for retirement purposes and will fluctuate in value; annuities have limitations; and investing involves market risk, including possible loss of principal.
A variable annuity is a contract you buy from an insurance company. It’s designed to help accumulate assets to provide income for retirement. It will fluctuate in value based on the performance of the underlying investment options. You should also know that all guarantees and protections of a variable annuity are subject to the claims-paying ability of the issuing insurance company. They don’t apply to the investment performance or safety of the underlying investment options. Underlying subaccounts are only available as investment options in variable insurance contracts issued by life insurance companies. They are not offered directly to the general public.
You may be charged a penalty if you take your money out early, if you’re not yet 59½ (additional 10% tax penalty), or both. Variable annuities have fees and charges that include mortality and expense, administrative fees, contract fees and the expense of the underlying investment options.