Your Client Wants to Retire Early? Have This Conversation First

Financial advisors and clients have plenty to talk about – budgets, investments, college savings, and taxes are all at the top of the list.

But one conversation that demands a particularly frank discussion is any talk of retiring early. That’s especially true since one in three Americans have zero money saved for retirement, and 56 percent have less than $10,000 saved, according to a 2016 study by GoBankingRates.com.

But if you have a client who’s been saving diligently, and has the cash to call it quits at age 50 or so, it’s a conversation that’s going to happen. So you might as well make some key points, based in financial reality, before a client calls it quits early.

When your client is ready for the talk – make sure he or she is aware of these realities about early retirement:

Get used to cutting back on lifestyle spending: Your client has probably already considered spending items he or she might have to cut out during an early retirement, such as lavish dining, travel, massages, daily Starbucks coffee, and premium cable, said Vic Patel, founder of Forex Trading Group in Fairfield, N.J.

“Why not cut them out right now?” Patel asked. “If an early retirement is truly important to you, start practicing your retirement lifestyle now. You will not only be able to increase your current savings, but you will also be able to ease into a moderated life style by smoothing out your consumption now.”

Get Small: Staying with a dialed-back lifestyle, it also makes sense to shrink your house and car.

“Maybe you already have plans of downsizing in retirement, but don’t wait,” Patel said. “You can reduce your housing expenses right now and save towards some extra retirement perks.”

Conduct a financial analysis: Talk about creating an income/expense analysis pre-retirement and during projected retirement, advised Jack Shinn, founder of J Shinn & Associates in Glen Rock, N.J.

“You’ll want to know how much income will be required to cover projected expenses after retiring,” Shinn said. “And you’ll want to know how much potential Social Security income that will not be taxable.”

Creating a detailed timing report to cover all Social Security scenarios is a good idea, he said. “Your financial analysis should also ensure preparations have been made to provide for healthcare during retirement, and cover any tax liabilities.”

Discuss an investment plan: If a client wants to retire early, tell your him or her to plan for a long time horizon and choose their asset allocation accordingly, said Larry Solomon, director of financial planning at OptiFour Integrated Wealth Management in McLean, Va.

Early retirees are likely to live decades longer, he said.

“Over this period of time, stocks will provide the best long-term growth,” Solomon said. “Sure, stocks or stock funds will have more short-term volatility, but from 1926-2016, U.S. large cap stocks have averaged around 10 percent per year, while bonds returned only about half as much around 5.5 percent.”

When you break that down into rolling 15-year periods from 1926-2016, over those 77 15-year windows, there wasn’t even one 15- year period of time when stocks suffered a loss, he added.

“If your client plans to spend at least 30 years in retirement they should have a portfolio that's heavily weighted towards equities and stays that way long into retirement,” Solomon said. “If you retire early, being too conservative is a recipe for failure.”

Push back: When a client wants to retire early, a key first question is to ask why they feel this way, said Andy Raub, a financial planner with 40 years’ experience who specializes in helping people plan and invest for retirement. “Often a client simply wants to escape a bad job situation and is at the risk of falling into a worse financial situation.”

It’s a good idea to advise clients to retire to something rather than retire from something, he added.

“Often a better alternative is to redefine their life goals with the idea of creating a new career or job situation that will focus on their gifts and passions,” Raub said.

Clients who retire early to a life of leisure usually find that, without a sense of purpose, they soon get bored and feel useless, he added.

Income Impactors: Don't underestimate the impact of inflation and taxes over the long haul. Stocks might average 10 percent per year from 1926-2016, but inflation has averaged 2.9 percent and taxes also take a toll, Solomon said.

Net of inflation and taxes, U.S. stocks have averaged a real rate of return of 5 percent per year, and U.S. bonds have returned a paltry 0.6 percent annually, he added.

“Even if inflation remains at its more muted current level, and averages only 2 percent, the prices of everything they need in retirement will almost double in 30 years,” he noted. “Health care costs will typically go up at 5 percent or more annually, meaning they will double every 14 years,” Solomon noted.

Retiring early takes guts, and it takes money. Now, add to the list taking time for a candid conversation between advisor and client before the latter calls it a career.

Brian O'Connell is a former Wall Street bond trader, and author of the best-selling books, The 401k Millionaire and CNBC's Guide to Creating Wealth. He's a regular contributor to major media business platforms, including CBS News, The Street.com, and Bloomberg. Brian may be contacted at [email protected]