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Financial Advisors: Guide Clients through the 4 Phases of Retirement

Financial Advisors: Guide Clients through the 4 Phases of Retirement

Estimated Reading Time: 10 minutes

For many people, retirement planning can feel overwhelming. Having a “big picture” retirement strategy can help to ease some of the stress and uncertainty. As a financial professional, you already know retirement planning includes everything from setting goals, to creating an investment plan, to considering tax implications, and ultimately even using retirement savings. Having expertise in these areas can make you an invaluable asset to your clients.

While some people retire voluntarily, a surprising number of people are forced to retire involuntarily. This reality highlights the importance of having a detailed plan in place. In addition, many taxpayers are unaware of the tax saving benefits of contributing to retirement plans. Financial professionals like you are perfectly positioned to guide your clients through this retirement planning process by helping them develop a plan, understand their account options, and optimize  their tax situation.

Most people progress through four phases as they plan for retirement: accumulation, preservation, distribution, and wealth transfer. Understanding each of these phases enables you to provide perspective and assistance throughout your clients’ retirement journey. Doing so can also provide a framework for you to think about the services you can offer to help them prepare for a successful retirement.  

Keep reading to learn more about the four phases and what should be done during each of them.


Phase 1: Accumulation

The accumulation phase is marked by the majority of the working years leading up to retirement. Whether brand new to work or further along on a career path, the accumulation phase is the time when your clients are often thinking about their retirement goals and dreams. As you help them identify their goals, you can create a strategy to meet them. 

During their working years, your clients will have the opportunity to pay into different types of tax-advantaged retirement accounts. Since the passage of the Employee Retirement Income Security Act of 1974, retirement plans have been one of the three retirement savings options for Americans to contribute to as an eventual source of income for retirement. 

Your clients’ goals will drive the type of retirement plans they’ll want to consider. Are they trying to reduce taxation? Or transfer wealth to the next generation? Perhaps they want to create a consistent stream of income during retirement? No matter what your clients are striving for, it’s crucial to keep their goals in mind when working with them to create their retirement strategy. 

Two of the most obvious choices for your clients are employer-sponsored plans and IRAs. But what if they’re self-employed or an independent contractor? It doesn’t eliminate the need for diligent planning and saving in the ‘accumulation’ phase.

There are three self-directed small business plans your small business clients can consider to achieve this. Each of these plans can be effective for saving for retirement and also providing a mechanism to reduce taxes. 

A Simplified Employee Pension, or SEP, can be a great option for both the self-employed and employers with any size business. With this plan, an employer can reduce their taxable income through contributions to the individual’s SEP IRA. These can then be invested on a tax-deferred basis. With this plan, an employer can reduce their taxable income of up to 25%, not to exceed $58,000 for tax year 2021 and $61,000 for tax year 2022.  

An employer with fewer than 100 employees can also look at establishing a Savings Incentive Match Plan or SIMPLE. SIMPLE plans work similarly to the 401(k) plan, but do not have the annual tests and reports most 401(k) plans are subject to. The employer must generally make a matching dollar-for-dollar contribution of up to three percent of what the participant contributes. This plan allows employers to offer a retirement plan that has fewer administration requirements and is economical. The maximum each employee can contribute out of pocket is $14,000 with an additional $3,000 for individuals who are 50 or older in 2022.

Lastly, an Individual 401(k) plan, also called a Solo 401(k) plan or an owner-only 401(k) plan, can be a good option for business owners without employees. This plan can only be used for business owners and their spouses. Because all the “employees” of this plan are considered owners, this plan is not subject to the non-discrimination testing requirements most 401(k) plans are subject to, thus reducing administrative costs. With this plan, the owner may make a contribution as both the employer and the employee. 

The maximum contributions for an Individual 401(k) are $19,500 for tax year 2021 and $20,500 for tax year 2022. Plan holders over 50 can also contribute an additional $6,000 annually.   Above and beyond deferrals, the employer could also make a tax-deductible, profit-sharing contribution of the smaller of 25% of each eligible participant’s compensation not to exceed $58,000 for 2021 and $61,000 for tax year 2022. Keep in mind, however, that any deferrals are included in those limits.

Many of your clients may also have the option to contribute to a traditional IRA or  Roth IRA. The tax implications for each of these are different, and helping your clients to understand them is an important part of your role.. 

Put simply, traditional IRAs may reduce the IRA holder’s taxable income for the year of contribution. Although distributions from the account will be taxable to the beneficiaries after the account holder’s death, if taxation is not an issue, a traditional IRA may be a good option. 

On the other hand, Roth contributions, although taxable when your clients contribute, will produce an eventual tax-free distribution of earnings (if certain conditions are met). This will not only reduce taxation during retirement, but the tax benefits are also passed on to the named heirs. 

In addition to IRAs, SEPs, and SIMPLEs, there are also non-retirement accounts, like HSAs, that can be used as a supplemental retirement plan. Since HSAs can be distributed tax-free if used for medical expenses, they can be a great option to save for health expenses that may occur during retirement. 


Phase 2: Preservation

As employees get closer to retirement, they will begin to move into the preservation phase. While the previous phase was focused on accumulating assets by paying into and growing accounts, individuals in the preservation phase may place even more emphasis on actively managing their retirement accounts. 

They may want to change their investing philosophy and choose more conservative investments to preserve the gains they’ve already made. This shift may mean that they begin to look at the types of retirement accounts they hold and consider how they can best organize and prepare for distributing their funds.  This is a great time for you to help provide perspective and educate your clients about their options. 

It is important to remember that many employees only have restricted access to the common employer-sponsored plans such as a 401(k), 403(b) or Governmental 457(b) plans while they are still working. This means they will only be able to access their hard-earned savings when a distributable event occurs. It also means they are limited to investing within the plan’s investment offerings.

During the preservation phase, there can be advantages to having retirement accounts that provide flexibility in the way they are managed. If a client decides they want to continue working for several more years, it can be frustrating to not have complete control over employee-held retirement accounts.

As a financial professional, this gives you the opportunity to share your knowledge on more flexible options that can help them reach their goals. The funds in an IRA can be managed by the account holder throughout the entire life of the account, and contributions can even be taken out of a Roth IRA at any time without a penalty. 

This flexibility associated with an IRA, and often specifically a self-directed IRA (SDIRA) that allows for alternative investments, can be a great advantage during the preservation phase. This is because it can empower your clients in their efforts to consolidate investments, preserve growth, and move toward retirement.  


Phase 3: Distribution

Moving into the retirement years can be an exciting time as your clients begin to see their retirement dreams and goals become reality. All the hard work they have done to contribute to their accounts culminates as they begin to take distributions to fuel their retirement plans. 

While it may seem like their need for retirement planning is wrapping up, the truth is that quite a bit of planning and strategy are needed in the distributing phase. Financial professionals who have created long-term relationships with clients are often seen as trusted allies during this phase. 

Because the distributing phase is about living a good life in retirement, clients will need to plan how to allocate their retirement funds. They will want to balance their expenditures with their available assets, and working with them to manage the withdrawal of funds in a sustainable way is essential to helping them retire well. Some people may even use these years to continue to grow their accounts if they find that it fits with their strategy and goals. 

If your clients have an IRA, during this phase they will likely be subject to required minimum distributions (RMDs). RMDs begin in the first quarter of the year after they turn 72. It is important to help clients stay up to date with requirements and regulations as they manage their accounts. If they do not complete their RMDs or fulfill other requirements, they may face steep penalties. Including these requirements in your retirement strategy planning is an essential part of helping your clients manage their accounts.  


Phase 4: Wealth Transfer 

Retirement accounts often outlive the account holder and consequently can provide a great way for your clients to leave a financial legacy for their beneficiaries. Because these types of accounts can be a way to transfer wealth, you have an opportunity for your services to include planning for beneficiaries. The ownership of an IRA upon the account holder’s death is transferred to the beneficiaries that have been selected for the account. The account is then considered to be an inherited IRA or a beneficiary IRA. 

When helping your clients design a beneficiary strategy, it is important they understand the IRA’s rules and how they may impact the taxes and requirements for beneficiaries. Spouses who inherit an IRA may have the option to roll the account over into their own IRA and thereby defer required minimum distributions until they are 72 years old. 

Non-spousal beneficiaries, however, cannot treat the account as their own. This means that they may not grow the account by contributing or transferring the funds into their own IRA. And given the new rules of the SECURE Act of 2019, most non-spousal beneficiaries are also required to distribute the account within 10 years of inheriting it. 

Another important part of this phase for some retirees may be sharing their wealth transfer plan with their beneficiaries. Letting beneficiaries know that accounts will be transferred to them and sharing plans may be a way to help them carry on the financial legacy in a way that fits with the account holder’s desires. It can also be a path for you to provide guidance during a time of need to those closest to the original account holder. 

As a financial professional, you are in a unique position to offer advice and insight for both retirees and their beneficiaries. Since assets in a traditional IRA have never been taxed before, it is essential for beneficiaries to know their distribution options to avoid potentially distributing more assets than they need to and prematurely depleting the IRA. For Roth IRAs, although distributions may be tax-free, knowing the available options may help prolong the tax-deferred growth of the Roth. 

Beneficiaries may also need to plan for other situations when inheriting a retirement accounts such as the death of a beneficiary, capturing non-deductible balances, Federal Transfer Tax, and rolling over an employer-plan beneficiary accounts to an inherited IRA. 


Advancing Your Career

Whether you’re developing a strategy to help people meet their retirement goals or working with a client to help them understand the financial implications of transitioning from work to retirement, financial professionals are often at the forefront of personal retirement planning.

With a growing demographic seeking retirement planning advice, professionals such as CPAs, CFPs, financial advisors, banking personnel, brokerage firm representatives and others need to make sure that they are up to date on the latest retirement planning information in order to provide their clients with exceptional service. 

Entrust’s IRA Academy provides professionals with educational classes on IRAs and IRA-based employer-sponsored plans. This highly recommended Retirement Plan Masterclass is open to anyone who wants to stay competitive in the retirement field.

Or check out our new Online Courses that offer the same great educational experience. Get your financial designation or continuing education credits on your own time, and boost your financial knowledge today. 

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