The three-tiered system for retirement security

When I meet with clients, I often ask: “When you are the old man or woman you hope to become, will you have enough ready money?” It’s never too early in a person’s working life to ask this question. However, there is a time when it becomes too late in the game to make up for poor planning.

I think of this approach as a three-tiered system, based on three age groups. Ages 20-40 are the most important, ages 40-60 are where distractions are the greatest, and age 60+ is when “ready money” is vital. Here are the strategies I use to determine whether a client is willing and ready to commit to achieving their retirement goal.

Stage one: Just getting by (ages 20-40)

During this time, people are partnering up, settling into new jobs, starting families, buying homes, starting businesses, changing partners, etc. The demands on their limited incomes can lead them to feel as though they never have any money for retirement.
Here are three questions I ask clients.

1. At what age do you hope to retire or sell your business?

2. How much money will you need to retire? Clients likely will not have an answer, or they’ll say $500,000 or about 10 times what they currently earn.

3. When do you think you’ll need to start putting money aside? They likely will think later, but not right now.

Not accounting for inflation, a person will need at least $1.5 million in their retirement account at age 65. If that person starts saving 6% of their pay at age 25 and keeps it up for 40 years, they can end up with $1.5 million.

Although it is impossible to predict how much a person will accumulate or need after a 40-year period, it is possible to predict where a person will end up if they do not save something for their future. The secret sauce is time! The more time you have, the less money you need to put into your plan each month.

Stage two: Don’t quit now (ages 40-60)

How many of your clients started a qualified retirement plan in their 20s and stuck with it? How many made maximum contributions over a 40-year period?

Based upon my experience, the answer is “very few.” Life has a way of forcing us to shift our priorities. Clients often tell me the cost associated with young children is overwhelming. During this stage, couples may change jobs, decide to start a business, experience a disability, have marital problems, get divorced, remarry or even move to a new city.

Now is the time to keep the discipline of funding those retirement accounts. Tell clients to pay themselves first — then allow what is left to fund the necessities and extras. Remind your clients how the Money Formula works, and that time is the most important variable.

Money Formula: Systematic Deposit X Rate of Growth X Time = Baskets of Cash

Advise clients to do the math and they will discover that the more time they have, the lower their deposits can be, and the rate of growth is incidental. Shorten the time available to 10 years — their deposits must be significantly greater and they will feel more compelled to take uncomfortable risks. Helping clients stick with their retirement plans during these middle years is the most valuable guidance we can provide them.

Stage three: I hope these parachutes work (age 60 and beyond)

We can be most helpful at this stage by listening to what our clients say about their dreams for retirement. You’ll want to discuss their health issues, family issues, income reality, reserve cash available, housing issues, travel issues and any special concerns. If you focused on holistic planning with them in stages one and two, everyone will be grateful that the contingencies have been addressed. You also want to be sure insurance solutions and asset allocations are available, or are already in place to provide the parachutes.

At this stage, you will need to ask them what their life expectancies are, who they expect will die first and how long must the assets last for the survivor.

You’ll also need to ask what legacies they hope to provide. In this stage, advisors must identify where guarantees are vital or important, where risk must be taken, and where to build in flexibility for all the unknowns.

My experience is that holistic planning is crucial to implement at each stage of a client’s life.

Older clients typically say two things to me. First, “I do not want to run out of money before I run out of living.” If they love someone or something, they will add, “I want to make sure my survivors have the assets they need, as well.” If we help our clients plan throughout their lives with those statements in mind, we will become their trusted advisors — and they will be confident that our knowledge won’t let them down.

Walton W. Rogers, CLU, ChFC, is the manager of W. Rogers & Associates in Annapolis, Md. He is a 46-year member of MDRT with three Court of the Table honors and is a past MDRT president. He may be contacted at walton.rogers@innfeedback.com.