High Net Wealth Partners Retiring

On April 28, 2014 The American Lawyer published its annual (2014) Big Law report in which it found that 16% of partners in the US’ largest 200 law firms by revenue are 60 years old or older, with at least 8% 65 or older.  These 16% of big firm partners will be retiring over the next five years.  Moreover, right behind this retiring group are 28% more partners that have reached at least 50 years of age.

While these thousands of retiring partners leading up to retirement may have been earning between $750,000 and $3 million annually, most also have lifestyles that correspond to spending this level of income.  These retiring partners are now asking “Will my retirement portfolio maintain my spouse and my lifestyles if we live another 30 years?”  “Will we have enough to truly enjoy our retirement, or will we have to cut back our lifestyle to make due?”  Will plans for luxurious global travel and spas be thrown out the window?  Wealth managers and financial planners have turned attention to these retirees.

Baby Boomers and Social Security Income

“The 10,000 baby boomer that reach retirement age each day in America are waking up to the probability that they will outspend their retirement plan designed before the financial crisis, forcing a drastic reduction in quality of life style for the ‘golden years’” shared William Byrnes, author of National Underwriter’s Tax Facts.

“The largest concern for most middle class Americans is that social security since Ronald Reagan’s presidency did not increase enough to beat actual inflation.  The average social security monthly payment in 2014 is only $1,294 for a single retiree, and $2,111 for a married couple.  And it is possible that Congress will further reduce inflation adjustments for the future.”

Outliving a Retirement Plan?

“Moreover, baby boomers are outliving their retirement plans by at least ten years, and thus selling off their remaining assets and relying on children”, continued Professor Byrnes. “It’s no wonder that reverse mortgages have become so popular.”

“It’s not just the middle class retirees trying to survive on $2,500 a month over at least the next 20 years as lifestyle becomes more expensive, upper middle class Americans and even the wealthy also have lifestyle challenges.  A couple who for the past twenty years is used to spending $200,000 a year after tax needs to have significant assets.”

Is $2,439,817 Enough at 67 to Retire ?

“Let’s run an example using a National Underwriter Advanced Markets retirement calculator.  A 50 year old partner at a law firm that requires retirement by age 67 currently earns after tax $300,000.  The partner will begin saving $60,000 a year toward retirement, and already has $400,000 saved and earned in tax deferred retirement accounts.  The partner expects earnings to increase 1.5% on average per year.  The partner expects to live until 90 years old, and will cut the annual lifestyle by 30% to $210,00 a year upon retirement.  The partner expects a healthy annual rate of return on the investments until reaching 90 of 5%, and average annual inflation of only 2%.”

“The question is: Will the partner’s retirement dollars last  until age 90? Unfortunately, the partner has only 13 years of retirement based on this scenario, and that only if including $42,937 of average annual social security.  At age 80, the $2,439,817 of retirement savings simply runs out. So given these variables, the partner must either save significantly more for retirement, have assets that can be sold down during retirement (such as the family home), or live on only $150,000 a year.  While $150,000 a year sounds like a lot to middle class retirees, for law firm partners living in New York, Miami, DC, LA, San Fran who are used to an upper class lifestyle, living on half the income with double the free time is a shock. And remember, this includes social security paying out over $40,000 of that $150,000 a year.”

Stretching the Retirement Dollars by a Decade

“Stretching the retirement savings available for these additional ten years of life expectancy in the example above requires correctly calibrating a retirement plan over the next 20 years which includes managing the complex retirement savings and retirement plans tax rules.”

Robert Bloink added, “Baby boomers retirement taxation questions include: How are earnings on an IRA taxed? What is the penalty for making excessive contributions to an IRA? How are amounts distributed from a traditional and from a ROTH IRA taxed?  How is the required minimum distribution (RMD) calculated?”

“By example of managing the retirement taxation rules, if the baby boomer engages in a prohibited transaction with his IRA, his or her individual retirement account may cease to qualify for the tax benefits.  Thus, then baby boomer needs to understand what is a prohibited transaction?  When can the baby boomer tax pull retirement funds as a loan from a retirement account or policy without it being prohibited?”

Complex Modern Families

“For complex modern families with multiple marriages and various children, a retirement and estate planner should analyze the non-probate assets”, interjected Dr. George Mentz. “Such assets may include the client’s 401k, 403b, 459, annuities, property and joint tenancy, among others.  Regarding insurance policy designations, the client may need to reexamine the beneficiaries, contingent and secondary, and percentages among them, based on current circumstances.”

Robert Bloink included, “Other important issues to address with the client include pre-marital property contracts/pre-nuptials involving the second marriage(s), IRA beneficiary planning in blended families, spousal lifetime access trust (SLATs), and planning for unmarried domestic partners.”

Incapacity

“Because client’s are outliving their life expectancy and thus outliving their retirement planning, and medical expenses certainly factor into retirement planning, long term care for family members must also be addressed,” said William Byrnes.  “Moreover, recent press has focused client’s attention on tragic incident and end of life issues, such as a durable power of attorney for health care (DPA/HC), living will, or advance directives that explain the patient’s wishes in certain medical situations.  Finally in this regard, a client may require a Limited Powers of Attorney to address situations of incapacity, as well as orderly continuation of immediate family needs upon death.“

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