How Do You Evaluate a Retirement Plan?

If you are a financial advisor, helping clients retire with financial security is likely a regular part of your work. But how do you evaluate their existing retirement plan to see how it stacks up with their needs and fulfill your own fiduciary responsibilities? In this article we’ll go over some of the most common ways this can be done, along with a specific example of how a hypothetical retirement plan could be evaluated.

What Is Retirement Planning?

Retirement planning is just what it sounds like— helping an individual develop a strategy for meeting their financial needs after they retire from working. A retirement planner is a subset of financial advisors that specialize in working with clients to develop and carry out these plans.

The benefits of retirement planning for a client are easy to imagine. Having a specific system in place to financially support oneself during the golden years means a person is very likely to be able to live comfortably without financial stress as they age. It also means for many people, less stress before retirement as well, since they know how they will be supported when they eventually stop working.

What Factors Should You Consider When Evaluating a Retirement Plan?

As a financial advisor/retirement planner, there are common factors to consider when evaluating a client’s existing retirement plan or helping them develop one for the first time.

These include:

  • How much income they will need in retirement to maintain their desired lifestyle – It’s not possible to perfectly estimate financial need after retirement, since things like lifespan, healthcare needs, and inflation aren’t set in stone. But experts agree that for most people 80-90% of pre-retirement income is best to maintain a similar standard of living after retirement.
  • What sources of money they will have coming in after they stop working – For many, there are three main sources of income during retirement, also known as the 3 legged stool model; pension/401(k), Social Security, and personal savings/investment. Some clients will have additional sources of income in retirement, including things like a life settlement (selling life insurance) from an unneeded life insurance policy.
  • How managing their taxes could increase their financial security – Different assets are housed differently and each may have unique tax ramifications. Helping a client allocate assets to reduce their tax bills and avoid penalties means more money they get to keep. 
  • What specific insurance needs they might have – Exploring insurance options with clients can be an important tool for saving them money during retirement. Supplemental health insurance during retirement is especially important to consider since the average annual out-of-pocket healthcare costs are projected to be $38,000 for people over 85.
  • How they want to handle their estate planning – Making sure that a client has a plan in place for distributing their assets to loved ones after their death is another important element of retirement planning. It can be a delicate subject to broach, but there are important tax implications and distribution issues to work out that make it an important conversation to have.

Now that we’ve covered some of the main considerations for helping a client plan for retirement, let’s look at a specific retirement plan example to see these factors in action.

How Much Should a 60 Year Old Have for Retirement?

For many individuals, the totality of their retirement planning might be to follow generic recommendations they have heard. One such piece of advice is that if you plan to retire at 67, you should have eight times your annual salary in savings. So if you earn $50,000 a year, at 60 you should have around $400,000 saved to retire comfortably. Although there’s nothing wrong with this advice, it doesn’t go far enough in helping someone truly plan for their specific situation.

Let’s consider some of the factors listed above and see how a plan tailored to your client’s specific circumstances can improve their retirement planning.

  • Post retirement income needs: Assuming 90% of pre-retirement income, our hypothetical 60 year old would need $45,000 a year to live comfortably (90% of their $50,000 income)
  • Post retirement money sources: The three main sources of this income will be:
    • 401(k) – This client’s 401(k) contributions will mean they have $50,000 invested when they retire at 67. Depending on investment growth and other factors, the 401(k) number will be around $370 a month in retirement.
    • Social Security – According to the retirement plan calculator from the AARP, a person who retires at 67 with an income of $50,000/year will receive about $1,900 per month in benefits.
    • Personal Savings – Assuming a conservative 4% return on personal savings of the recommended $400,000, the client can expect to earn $16,000 per year.

If you use these specific numbers for a client, you can help them develop a savings plan that makes sense for their exact needs. Let’s do the math for this hypothetical client:

401(k) annual income = $370/month x 12 = $4,440 annually

Social Security annual income = $1,900/month x 12 = $22,800 annually

Personal savings annual income = $16,000 annually

Total annual income after retirement = $43,240

Estimated annual income needs = $45,000

As you can see from this example, this client’s estimated income during retirement doesn’t quite meet their income needs. Therefore, the generic advice that they should have $400,000 in personal savings at their age to be able to comfortably retire at 67 isn’t correct in their case. They might want to consider other sources of income to increase their financial comfort.

As their financial advisor, you might know they have a life insurance policy they no longer need and do not want to continue making monthly premium payments on. Selling this life insurance policy could give them a lump sum payment they could use to increase their personal savings.

Life Settlement Advisors: Another Tool for Financial Security

We at Life Settlement Advisors know that financial security is important to clients working on planning their retirement. So if you are a financial planner, estate planner, CPA, or other trusted advisor, learning more about life settlements can help you serve your customers better. Visit our website to learn more.

Did you know you can sell all or a portion of a life insurance policy, even term insurance? Selling an unwanted life insurance policy is no different than selling your car, home or any other valuable asset that will create immediate cash. Contact us today to learn more.

Get in touch with Life Settlement Advisors today to take the first step toward converting your policy into cash.
Life Settlement Advisors
Leo LaGrotte
At Life Settlement Advisors, we strive to be a voice of confidence and assurance for our clients. Our goal is to educate you about the life settlement process so you can make an educated decision about whether it is right for you.