Being rich is not a retirement plan

At first, the phrase high-net-worth retirement planning seems almost a contradiction in terms. After all, once you’ve accumulated $1-million in investible assets (the standard definition of a high-net-worth individual), a comfortable retirement is almost a given. Consider the usual assets that an individual would acquire throughout the years — a principal residence, perhaps a vacation home, a vehicle or two — and really, what’s left to plan?

Quite a bit, actually. Truth be told, a shocking number of HNW individuals seem to be unaware of the necessity of a coordinated retirement plan. In fact, in a survey of affluent Americans conducted by Phoenix Marketing International discovered that only 38% of HNW individuals have discussed their retirement plan with their advisor within the past 12 months. Twenty-four percent have never discussed retirement with their advisor. Of those, 66% simply don’t feel they need advice on the issue of retirement.

This needs to change. Retirement planning is a key component of the mass-market financial planning practice. We believe it should be a key component of the HNW practice as well. Here are several reasons why:

HNW individuals rely on salary

Contrary to popular belief, not every HNW individual is a member of the leisure class. Professionals (doctors, dentists, lawyers, accountants, etc.) and executives often have a substantial net worth, but rely upon their enviable salaries to fund day-to-day living expenses. Obviously, when such individuals decide to leave the workforce, they will need guidance on how to structure their financial affairs so they can rely on their investment portfolios for their income.

The wealthy tend to live longer

Perhaps not surprisingly, life expectancy tends to increase with wealth. Not only are wealthy individuals able to spend their wealth on life-extending health care treatments and therapies, they are more likely to be able to afford a healthier lifestyle throughout the years. All of which suggests that your HNW clients will have to rely on their retirement portfolios for longer than the average Canadian.

HNW individuals retire early

Despite commercials extolling the virtues of “Freedom 55,” most Canadians retire within a few years of the mandatory retirement date. For HNW individuals, it’s tough to make such predictions. For entrepreneurs, for example, retirement is more often a matter of selling a business at the right time than it is about celebrating a given birthday. Obviously, such scenarios place an extra burden on the retirement portfolio, which must support the individual earlier than the average Canadian.

The wealthy feel inflation more

While inflation has been relatively benign for the past several years, the cost of luxury goods and services has increased dramatically. According to Forbes magazine, the cost of a representative basket of luxury goods and services has increased an average of 6.6% since 1996. While not every client will go on a luxury shopping spree every year, it’s reasonable to assume that your HNW clients will “feel” inflation during their retirement more than the average Canadian.

Saving for retirement is often difficult

Many HNW individuals are excellent savers, diligently putting aside a portion of their wealth every year for their retirement. Many others, however, cannot. Business owners are a typical example. Often the bulk of an owner’s wealth is tied up in an operating company. Needless to say, this uncertainty can represent a considerable planning challenge for the advisor, and may make retirement savings strategies and projections difficult or even impossible.

Complacency is a problem

Perhaps the most significant barrier to HNW retirement planning is complacency. Simply put, many HNW individuals are unaware of the need for retirement planning. Needless to say, this laissez-faire attitude leaves HNW individuals at considerable risk. Without a cohesive plan, many HNW individuals will enter retirement with little or no idea of how much they can reasonably spend in their golden years, or how they should invest their retirement portfolio to ensure they don’t outlive their savings, or how much they can reasonably leave behind for their families or communities.

As a steward of client wealth, it’s your duty to ensure these issues don’t prevent your clients from achieving a long and financially secure retirement. Here’s how:

• Perform a full retirement saving/spending analysis — in our practice, we use “Monte Carlo” software simulations to estimate the longevity of the client’s portfolio. We perform this analysis within the first six months of the client joining the practice. Such an early focus on retirement allows us to sharpen the client’s focus, and reminds the client of the importance of such planning.
• Develop a plan, and make sure clients stick to it — regardless of your client’s wealth. In our practice, everyone receives a detailed and comprehensive retirement savings plan. We make it clear to the client that we consider it our primary responsibility to ensure they stick to this plan.
• Conduct ongoing reviews to ensure everything is going to plan. Every time a client sits down with us for a portfolio review (typically semi-annually, but sometimes more often), we make sure to review their retirement portfolio. Even if there’s nothing new to discuss, the discussion serves to remind the client of the continuing importance of retirement planning.
• Remind clients about the danger of overspending. Some HNW clients are keenly aware of how much they can spend without impacting their financial position. (In our practice, we use a spending rate of 3 to 4% of capital as a sustainable long-term target.) Others, however, require more guidance. We believe in taking a proactive approach, advising clients when we believe spending is unsustainable. Again, such an approach fits in with our role as stewards of client wealth.

At the end of the day, retirement planning for HNW individuals isn’t a whole lot different from retirement planning for any other client. It takes discipline and hard work to fund a retirement. Your HNW clients need to realize this as much as anyone else.