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- [00:00]
A
Some of my favorite client meetings over the years I can think of are ones where we talked about some new possibility about how their plan can go that they hadn't even been considering or thought of. And suddenly everything changes on their life trajectory.
- [00:22]
B
Hello, and welcome back to the Financial Advisor Technician podcast. I'm your host, Adam Van Dusen. On today's episode, we're going to discuss how clients often think about their future retirements and how financial advisors have the opportunity to widen their horizons for what's possible to start. Many clients might come to the table assuming that they're going to follow what might be called the traditional retirement path of working full time into their 60s before leaving the workforce entirely to enjoy the remaining years. While this path no doubt works for many, in reality, there are several different ways to approach retirement that, that could be a better fit for certain clients, which offers advisors the opportunity to create a truly transformational experience for clients by introducing them to types of retirement that they might not have considered. To help us dig deeper into this topic, I'm joined today by the blue shirt himself, Kitsis.com Chief Financial Planning nerd Michael Kitces, to discuss how the common view of retirement is a relatively recent phenomenon. For alternative paths, retirees might consider how advisors can introduce these strategies to clients and how they can add further value by helping clients execute a chosen path. So welcome, Michael, and thanks for joining us here on the Financial Advisor Technician podcast.
- [01:35]
A
I am. My pleasure, Adam. I'm glad I was able to make the cut and make it onto the podcast. I'm super excited.
- [01:41]
B
Of course. So now today is actually a bit of a special episode of Financial Advisor Technician because I'm actually the author of the Nerd's Eye View article underlying this discussion. So with that in mind, I'm actually going to turn the microphone over to Michael today, get our conversation started.
- [01:56]
A
So if everyone's literally envisioning us turning a microphone around, the truth is we're virtual and a digital organization. So envision it in your heads. So, Adam, as we then I guess kick off to this, to this topic, just as you said, right? We're, we're here to talk about like, different alternative paths to retirement, or I even think these, like just different mental models around what could retirement be, what's, what's possible. But let's start with the traditional view, right? If we're going to contrast alternatives to the traditional, let's make sure we're same page on the traditional. So how, how would you frame traditional retirements that were we're going to Contrast in a few minutes.
- [02:35]
B
Yeah, I mean what you might call this sort of default path, I think of a lot of individuals in their working years, you know, they, they see the light at the end of the tunnel being, you know, sometime in their mid-60s, they're, they're working full time up until that point and then all of a sudden they're going to leave the workforce permanently and then enjoy their, you know, what you might call the gold, doing leisure and other activities. So I would say that would seem to be the sort of common expectation for, for a lot of people. Is that what you found in your experience, Michael?
- [03:03]
A
Yeah, I, I mean I just think of this as every commercial since forever, right? Retirement is your golden years where you finally finished all the work and you get the, the, the walks on the beach with, you know, the lighthouse in the distance and the Adirondack chairs and I guess literally like, with the, like the traditional view of retirement is basically what a lot of us put on our websites as financial advisors of. This is what it's supposed to build up to. Right.
- [03:35]
B
I was going to say for any listeners out there, you can virtually raise your hands right now if you have the piggybacking couple on the beach on your website, as Michael said.
- [03:43]
A
Yes, yes. I feel like ideally the whole point is you're supposed to enjoy 30 golden years of, of retirement. I said that depressingly. 30 golden years of retirement that you saved for successfully. So, so I guess just talk to us like why alternatives or what alternatives? Because that ideally sounds like a pretty good thing.
- [04:07]
B
Yeah, and no doubt it's worked for. A lot of people have had enjoyable retirements. I'm sure a lot of our listeners have followed clients through their pre retirement into their retirement years, seeing fruit of all their savings being enjoyed. But you know, there are a couple of angles where people might have different preference. So you know, to think for one, you think about your lifespan, right? Maybe, maybe an individual is going to live until 80, 85 beyond. So you have a 20 year retirement. But you know, there's the concept of what's called health span, the idea that you probably have fewer, healthier years to enjoy your retirement. Let's say if you're trying to do more adventurous things, whether it's physical activities, extensive travel, things like that, those might be fewer years than your full lifespan. And you know, some individuals might want to pull that earlier. You know, when you're in your 40s or 50s, let's say you might be in better physical shape that, that could be the time to Take on some of these activities that otherwise you might be putting off until your, your mid-60s or later when you don't quite know what your health is going to be like.
- [05:06]
A
So this is essentially the model of, the only thing better than 30 years of, 30 golden years of retirement is 40 golden years of retirement. So you should try to retire earlier.
- [05:16]
B
Yes, exactly. So that's, that's one option is, is actually retiring earlier though, as we'll discuss, it's possible to, to take shorter, perhaps like periods throughout your career, you know, moving some of that retirement time up a little bit. Similarly, you know, the traditional view of retirement is this sort of working full time up to the point of retirement and then leaving the workforce completely, which I'm sure, as a lot of advisors have experienced with clients is, that's a real shock to the system from having your schedule worked out for 40 hours a week, knowing what you're doing to all of a sudden, to having all of that time back on, back on your plate. So, you know, with that in mind, some folks also might enjoy their work and you know, instead of this sud shift, might prefer a more, prefer a more gradual approach. Maybe they, they cut down their hours and perhaps work for longer than their mid-60s.
- [06:04]
A
So, so I guess break these down a little bit further. I guess like just now, like what are my alternative paths? I'm going to envision having a conversation with a client about them at some point. Like what, what are, what are my alternatives? Exactly? It sounds like the, the first is some version of if retirement sounds awesome, early retirement sounds better.
- [06:26]
B
Right? Right. So if an individual is originally planning on, let's say, retiring at age 65, it's very possible, depending on their financial circumstances, how much assets they've saved to find or guaranteed income streams they have coming in, their lifestyle expenses, that it's very possible that they could afford to retire much earlier at 60, 55 before. A lot of you have probably heard about the fire community, the financial independence, retire early community. Some of those folks are looking to retire, you know, in their 40s or even before. But I think the key point here is it's not just a matter though of retiring early. You know, in terms of that FIRE acronym, it's the financial independence element. So, you know, it could come to a point where the advisor can confidently say to their client, like, hey, you've reached the point you have sufficient retirement savings that even if you left the workforce today, your assets would be able to support you through what would expect to be the remainder of your life. So it does introduce the possibility of following through on that. But I think there's also sort of the side benefit of having that optionality and sort of having that in an individual's back pocket to know that, you know, they don't need to keep pushing the pedal to the metal as it is until, you know, they reach their mid-60s or beyond.
- [07:41]
A
So it's just the re anchoring for the client is let's get away from, we're going to work until our early 60s, and then I'll do the math and tell you what you can afford to live on in retirement. It's no, no, no, let's figure out what it takes for you to live in retirement. And whenever we can get to that financial independence number, congratulations, you've, you've hit your number, you're done. Let's move on.
- [08:06]
B
Right, right. And, and then the client can sort of decide from there. You know, maybe they've been telling you all through the years, you know, this, I enjoy my job, but it's really grinding me down. You know, I'd really like to have a few extra years. Maybe they're very concerned about that health span issue. You know, maybe they have know something about their own medical conditions or family members that they've experienced that maybe makes them want to pull up some of the activities that they want to do in retirement earlier and want to see if that's actually financially feasible for them to do.
- [08:34]
A
I mean, I feel like from the advisor end. Well, yeah, the whole point is here, you know, like, tell me when you retire, when you want to retire, when you want to live on, and I'll do the math and figure out, like, how much you need to save and how to invest the dollars to get there. It feels very natural for us. But I can think of a couple of client situations over the years where the reality was they were just so wired into, I'm going to be working until 62 or 65 or whatever number that they were anchored to that it was actually a really significant conversation to say, well, you, you do realize if you wanted to save a little bit more and do some things differently, like you could make that number, you could make that age a different age. Like, we, that's actually a variable we can solve for because they were so anchored to traditional retirement path. You know, my dad retired 65 and retired 65, that it, like, it was an impactful conversation to say, no, you actually get to choose and control that. Like, it could be a different age if you can, you know, quote unquote, get to financial independence earlier.
- [09:37]
B
Yeah, and I think that's sort of going to be a common theme across some of these different alternative paths that we discussed is that, you know, we'll get into some of the technical things that advisors can do to support clients. But you know, a really good opportunity here is just opening the client's eyes to these alternative possibilities because as you said, many of them might have just been focused. It's, hey, I'm just assuming I'm going to retire at 65 and, and leave the workforce right then. So just introducing these concepts could be quite revelatory for comp. For different clients.
- [10:05]
A
So, so then what else is in my bucket of options, I guess, like are, you know, retire early. Financial independence. Sorry, F I R E is one. So what are, what are my other choices if we're going down this path?
- [10:19]
B
Yeah. So when you're, you're thinking of that financial independence, it's of course the one side of it is it's going to require assets. You know, one of the reasons a lot of people end up retiring in their mid-60s is that it takes that long accumulate sufficient assets to support them throughout the rest of their retirement. So it might be very feasible for some individuals who had high incomes, for example, maybe they received a large windfall. But you know, for others, you know, they might actually need to wait till 65. Now that said, though, some people again might want to enjoy retirement like periods earlier in their career. So they could take what you might call a sabbatical. So perhaps during their career, maybe every five years or whatever they choose, they take six months off or nine months off or maybe even a year off to pursue an interest. Maybe they have an extended travel that they want to do, maybe a hobby, skills development that they want to do that they want to get away from, from work full time to pursue. So it's kind of the things that they would, you might expect someone to do in a post 65 retirement, but very possible to, to bring that earlier in their careers.
- [11:22]
A
So I feel like this is one that we balk at sometimes as advisors because as I'm hearing you describe it, I'm already thinking the like. But, you know, you might slow your career progression and you know, if you have a year where you're not saving, like, do you know what that compounds to after 30 years of having not saved for the year? Or like you may have to draw down the portfolio when you're 35 taking your sabbatical. Like, do you know what the future value of that is at 7% compounding growth rate for when you would have been age 65. This feels like one that we often pause or balk at a little bit as advisors because it, it in the spirit of, we're trying to get to financial independence. Like this is like a financial independence setback. I mean, I understand, yes, sabbaticals people may enjoy for literally the thing you get to do on the sabbatical, but it, I know it feels like it tears at me to say, but you're literally setting your financial independence goals back potentially materially.
- [12:29]
B
Yeah. And that's a good point in that all of these strategies are going to have trade offs. So you know, we talked about financial independence that you're retiring earlier, so more years that the portfolio needs to support you and less overall lifetime income coming in. As you mentioned here on sabbaticals, it's, you know, a period where, where no income is coming in, you're, you're not going to be able to save, but you're still going to have lifestyle costs to, to fund. So you know, the trade off here is, you know, maybe that ends up that the individual works extra year or whatever it is down the line or introducing that possibility. You know, you don't know what the future necessarily holds. But that might be worth it for I think for many individuals to, we talked about the health span issue. If they can sort of guarantee that they'll have a certain experience by doing it today, that trade off might be worth it for them.
- [13:12]
A
So I guess, hey, you're saving well enough that you could retire at 60, but would you like to take a sabbatical now in your 30s with your young kids to do a cool thing and you'll work until 61.
- [13:24]
B
Right.
- [13:25]
A
How does that sound? That's maybe appealing for a lot of people if you, if you frame it that way like you'll work a little longer, but you can do a cool thing now with, with your kids, your family, who, whatever situation you wanted to enjoy that sabbatical today.
- [13:41]
B
Yeah. And there are other trade offs as well. For example, whether you can get your employer to agree to the sabbatical. Now it's usually going to be unpaid, but some employers might agree to let you take that time off and come back to your position. Others might not. In which case then you're considering, are you willing to leave the job and then what do you think the prospects are of finding a similar job when you finish the sabbatical? So definitely some career conversations to be had there.
- [14:04]
A
I guess some of that just depends on how Long the sabbatical is, I mean there's one month sabbaticals, there's like three month sabbaticals, there'S people who take a one or two year sabbatical. Those are pretty materially different in how much it actually shows up for your job or your long term savings.
- [14:21]
B
Yeah, a lot of flexibility and options in terms of the length and how often you take them.
- [14:26]
A
So then what else is in my list? Here we have my fire financial independence retire early version. We have our sabbaticals. Do you want to actually work a little bit longer but pull up some of the, you know, the fun, do some golden years things now instead of waiting for your golden years. So what, what else is in my, I guess like proverbial quiver as an advisor?
- [14:47]
B
Yeah, so there might be a different group of people who, who have been pretty good at saving over time. You know, they haven't quite reached the full financial independence level. They have a lot of savings. So that, that if with the expected future returns of the savings as they're expected to compound over time that that would actually be enough to support their retirement goals without adding additional savings. So at that point, you know, such an individual will still need to earn enough income to support their ongoing lifestyle costs pre full retirement, but they don't necessarily need to save more. Which means that they could potentially take a job that doesn't earn quite as much or a position within their current company. You know, this is a concept that some call Coast Fire Coast. Again the financial independence retire. So you know, the idea here is, you know, let's say an individual's been working at a very hard charging 60 hour a week job and they've always had their eye on doing something else, maybe a different field or they want to get into teaching. Whatever it is. This is potentially that opportunity. If the advisor is able to identify that, hey, the saving retirement savings that you've built up, those are, that's expected to be able to support you when you retire 5, 10, 15 years down the line that you actually have this optionality that you can stand to earn less and perhaps do something that you enjoy more.
- [16:03]
A
It's an interesting framing. This isn't the same thing as semi retirement or is it? Right, just I'm, you know, I'm dialing back and I'm working part time but I'm not fully retired yet.
- [16:18]
B
Yeah, you know, this one potentially could be an hours thing. I like to think of this as a little bit more of where do you want your career to be in terms of what you're actually doing and the position you're in for your remaining working years. So this is the ability to, to downshift to something. Maybe it's, you know, 40, still 40 hours a week, but a totally different field, a different position within your current industry, something like that.
- [16:41]
A
So I'm not necessarily limiting my hours in some like semi retirement, you know, sort of like cruising on ramp. I'm just picking a full time job that maybe pays less and I enjoy more. So I'm doing that trade off because I figured out like, look, we, you know, the kids are out of the house, we live on $80,000 a year. As long as I can cover $80,000 a year, I don't need to earn more than that because I don't need to save more because I've got a half a million dollars or whatever is I got enough in the portfolio that if we just don't touch it and it compounds for another 10 or 15 years, there should be enough in there to cover retirement on top of Social Security. I just need a job that pays enough to literally cover our bills while the portfolio compounds.
- [17:26]
B
Yeah, that's right. And so. Right. The idea here is, hey, I'm willing to work till 65. I'm interested in that. It's just there's a different view of what I'd like to experience on the path there.
- [17:37]
A
And so then what's my last option? I think we said there were like four alternative paths we get to think about here.
- [17:44]
B
Yeah, and you sort of mentioned it in the previous section, but the idea here is sort of a semi retirement. So this is you don't want to do the full on, you know, one day, one week I'm in the office for 40 hours, the next week I'm gone. You know, maybe the idea here is that, hey, maybe I want to reduce my hours, I want to get additional leisure time during my week, but I'm not ready to leave the workforce because again, of course there's lots of benefits from, from being at work, whether it's the sense of purpose or meaning that comes from it. A lot of people have their social networks in the workplace and of course the ability to continue to earn income can be attractive. So here maybe you're at the point where you decide to dial back the hours. So maybe we go from working 40 hours a week to 20 hours a week potentially with the option if folks are interested, to continue past traditional retirement age. So maybe instead of working full time to 65 and then leaving, we're dialing it back to 20 hours a week at 60, 61, 62, and following the path to see how long it feels fulfilling for both financially and personally.
- [18:47]
A
This just reminds me, I had a client a long time ago, Sheila, who kind of wanted to retire, couldn't quite make the math work yet, really didn't like her work and wanted to get out. And we got into this conversation of, Sheila, what would you do if you did retire? I just, I always like to ask, like there's clients who are retiring from something. Clients are retiring. Two, the clients who are retiring too, it tends to go better. And her retiring too thing was she had a hobby of making window treatments. That was her thing. She had a gift. Her house was lovely. She would do this for some friends who said, you should go to craft spares and sell these. You have a real gift for it. And that was her thing. As we sat down and said, sheila, is that actually a thing? Can you take these to craft fairs and sell them? She's like, yeah, I wouldn't, I wouldn't make that much. I'd probably make something like, well, how much are we talking about? She was like, I don't know, 15, $20,000 a year if I, if I did a bunch of this. And then we start plugging it into her planning software analysis. It's like, Sheila, if, if you really want to do this for five or ten years, I mean, it's, it's, it's 20 grand a year. You're not taking from your portfolio. That's a couple hundred thousand dollars over 10 years with growth, like, that's enough. You could stop now. She was 60. We don't have to keep doing this for another three or four years. That she was trying to save aggressively and do other things. You could just stop now. As long as you promise to give the window treatment thing a real go and make some dollars at it. You could transition today into window treatment semi retirement. And she did. She pulled the trigger almost immediately.
- [20:32]
B
Yeah. And that's actually, I think, also a really good example of how these strategies aren't necessarily in isolation from the example that you gave. You know, for example, someone could combine sort of the Coast Fire idea, Right. I don't need to earn as much, so I can go into a different field. Perhaps with sort of a semi retirement. I'm not just going to go into a different field, but also be able to reduce my hours as well. So, you know, these strategies can be combined together.
- [20:57]
A
What's our role as advisors in navigating this or setting this up? For clients. Like how do, how, how, what do we, how do we do this with clients?
- [21:08]
B
Yeah, I really see two sides of this. So, so one is sort of the, the qualitative side in terms of identifying clients who might be interested in an alternative path and introducing it to them. Perhaps, you know, some of our listeners right now are thinking in their heads, you know, yeah, I've thought of a client who said this. You know, maybe they said, you know, I'm on this hard charging job, I have this dream job, I want to do that. I, I just don't. But it pays less. You know, maybe that's a candidate for Coast Fire again. Maybe you have a client who's 60, 61, who just seems like they want a little more time in their day. Maybe that's an opportunity for semi retirement. So an opportunity both for current clients as well as, you know, whether it's mixing it into a regular client review meeting or when meeting with new clients, using what might be called a magic wand question of opening it up to them and saying, hey, if you're, you know, what would retirement look like to you if there were no boundaries or money wasn't an issue? And that might unearth ideas of saying, hey, I'd like to retire earlier. That could be a financial independence candidate. It would be, hey, I really want to get some of these benefits of retirement earlier in my career. You know, maybe that's a candidate for sabbaticals. So, you know, over the natural course of conversations or even as a conversation starter, I think there's room to discover what clients might be interested. Of course, then when you're turning it to introducing these concepts to them, I think in general it's important for advisors to avoid jargon, but particularly so here, you know, very few clients are going to have heard of Coast Fire before for. So I think there's sort of more plain language that could be used. So let's look at that Coast Fire example. It says, hey, you know, you've saved enough that you actually don't need to save any more in your retirement accounts to meet your retirement lifestyle goals. You know, that means you only need to earn enough to cover your ongoing expenses. Or, you know, financial independence is perhaps the more simple one. It says, hey, you know, you've saved enough, you could quit working today and meet all your lifestyle goals. So I think introducing it in plain language is an important piece of this as well.
- [23:02]
A
The Coast Fire one to me gets interesting. I just find for, again, I mean, relative to call it traditional retirement or financial independence, the Only thing better than saving and being on track to retire at 65 is saving more and being able to retire at 62. There's this natural, you know, if the advisor has run the projections and I'm on track to retire when I wanted to, any additional savings just pulls that forward a couple of years and moves it up in a nominally in a good way. And so to me it's an interesting contrast from the coast fire end to say, no, no, what if we actually didn't try to pull up retirement from 65 to 62? We're going to leave it at 65, but if you want to hold at 65, we can just let the portfolio compound and you should have enough. What would you, Is there a different job you would take if I told you you don't need to earn enough to save, you just need to earn enough to cover your expenses?
- [23:57]
B
Yeah, exactly. And the other side of this is sort of what you might call the technical or planning side of this. So a client says, wow, you know, this, this strategy is of interest to me. The issue is they have to have sort of the financial wherewithal to, to be able actually be able to execute it. So a really large role for advisors here. You know, we've talked about some of the trade offs. For example, if you're taking sabbaticals earlier, that might be drawing down some of your assets, which could mean working later, semi retirement or actually sabbaticals as well. You're thinking about, hey, am I going to be able to continue my job for as long as I expect to or for sabbaticals regaining my job. And you know, in a world of AI and disruption that's being talked about, not necessarily a guarantee that your current position is going to be there for the long run. Some things like financial independence and coast fire as well, you're baking a lot of assumptions in there about future rates of return, inflation rates, consistent client spending. So there's a lot of elements here both to model and to stress test to ensure the clients, I think have a full perspective of not just the opportunity set available to them, but the potential risks and trade offs that are involved with it as well.
- [25:07]
A
So we get to do scenario planning in our financial planning software. Yay.
- [25:12]
B
I know that gets you excited, Michael.
- [25:14]
A
Well, I'm very happy to get to do scenario A, B, C, D and E in my planning software. That's always good news.
- [25:20]
B
And I should say on the opposite side of the technical coin, some of these strategies offer very interesting planning possibilities, particularly when it comes to tax planning. So if we're thinking about an individual who pulls their retirement earlier, let's say from 65 to 60, that's going to introduce some more, you know, relatively lower income years where strategies like Roth conversions, capital gains harvesting could be executed.
- [25:42]
A
Maximize my premium assistance tax credits if I'm buying insurance on an exchange. Yep.
- [25:49]
B
Yes. Again, that, yeah, health insurance is a good point in terms of one of the risks here. If you're leaving early and buying insurance on the exchange, income management becomes very important. Though it's also available, let's say, to someone taking a sabbatical, has a very low income. Here could be an opportunity for some these tax strategies as well.
- [26:03]
A
So we have to align your sabbatical to the calendar year so we can optimize your Roth conversions. Love that.
- [26:09]
B
I love that. Always the planner, right?
- [26:12]
A
Always the planner. So, Adam, as we come to the end here, I guess, like, we've covered a lot of stuff. So like, is there a key, like takeaway or theme that you would have folks kind of bearing in mind as we, as we wrap up?
- [26:27]
B
Yeah, I think one of the big things is that, you know, advisors might find a lot of their clients sort of following this traditional or defaul path to retirement, you know, assuming they're going to have to work full time in their current career, all the way to their mid-60s in order to have this period of full retirement afterwards. So I think there's a lot of value for advisors in introducing these concepts to clients. It could really open their eyes and create what could be a real transformational moment for them in terms of seeing possibilities that could affect as much as 10, 15 years of their lives that they might not have considered before. And then it also provides advisors an opportunity, a significant way to add value for their clients, both in modeling the possibilities and stress testing some of the different strategies. But over time, if the clients do choose to follow that path, monitoring and executing the plan, which again, can involve tax planning strategies and other elements that clients could really get a lot of value out of.
- [27:25]
A
I'll admit, I, you know, some of my favorite client meetings over the years I can think of are ones where we talked about some new possibility about how their plan can go that they hadn't even been considering or thought of. And then suddenly we're doing the math and looking at the planning software. It's like, this would actually work. We could do this and suddenly everything changes on their life trajectory. So I'll bet just there's a piece of this that very much calls out to me of showing clients just other models or mental frameworks of how retirement could go that just don't, don't underestimate that they just really might not have thought about that as another way to do it and might get really excited about it or not. And then we'll just say, hey, we can keep going on the traditional retirement path.
- [28:13]
B
Yeah. I think another point for the advisors is that I think there's been research in terms of what drives client referrals and one of those is creating these sort of major sort of aha moments in the client. So, so that's quite a talking point at the next neighborhood barbecue when it says, oh, I was able to switch jobs or I'm taking a year long sabbatical. And you might get some curious people saying, well, who helped you do that?
- [28:35]
A
Yeah, you take a sabbatical. How did you do that? Oh, let me introduce you to my advisor.
- [28:39]
B
Terrific. Well, thank you so much for joining us today on the Financial Advisor Technician podcast, Michael, and for leading our conversation.
- [28:46]
A
Absolutely. Thank you.
- [28:48]
B
And for our listeners, if you'd like to dig deeper into the different types of retirement, you can go to kids kitsas.com/four fat the number four to read our full length article on this topic. And as a reminder, kidsis Premier members can earn CE credit for taking quizzes on our technical content and also have access to our regular CE eligible webinars, recordings of which can be found in the members section. If you're interested in becoming a Premier member, we'll put a link in the episode description. Also, if you're enjoying the Financial Advisor Technician podcast, please subscribe so you never miss the an episode and leave us a rating or review on your favorite podcast platform to help others discover the show. So thanks again for listening and we'll see you next week on the Financial Advisor Technician podcast.