When it comes to retirement planning, asking questions about how retirement will look develops a clearer path to success. It’s easy to get lost in the nuts-and-bolts of planning or to become fearful of missing some crucial step, but having a set of ground truths helps keep focus on an ultimate goal. Knowing where to start is especially important for financial advisors, as helping clients retire can be a unique challenge—especially in the 21st century. As the economic landscape continues to evolve and the options we’ve relied on for retirement change—or disappear altogether—it’s not uncommon for hopeful retirees to feel uncertain, or even lost as they ponder their future. While things are definitely changing, this does not mean that retirement has to be scary. As a financial advisor, you just need to know how to help your client start.
If you have a client that’s wondering “Am I ready to retire?” Below are ideas for some retirement questions for financial advisors to ask clients as they consider leaving the workforce. Use these as a starting point for planning your client’s retirement. Let’s start with a question that many hopeful retirees will likely be asking:
How Much Money Do I Need To Retire?
Generally, the amount of money a person needs to retire varies depending on three factors:
- Ideal retirement age
- Current spending habits
- Desired future lifestyle
Each of these factors give you different metrics that, when combined, will give a target income to aim for. While spending habits and retirement age will tell us roughly how much a client will need (and for how long), knowing whether they want a change in lifestyle is just as important. For example, if they’re looking to downsize their life in retirement, they will likely not need as much money, and vice versa. With this in mind, if you have a client considering retirement, start with these three basic questions:
- Around what age would you like to retire?
- Are you looking to maintain your current lifestyle, or change it?
- How much money do you spend on a monthly basis?
To give you an idea of what that number may look like, average monthly income in 2021 for retirees was around $4,000 a month, and retirees generally need to make about 80% of their working income to maintain their current lifestyle. Keep in mind, though, these are countrywide averages that may or may not necessarily reflect your client’s goals or specific situation. These numbers are helpful to know for your purposes, but as you work with a client, it’s better to focus on what they want out of retirement, rather than what other retirees are doing. Try to reassure them that even if their numbers aren’t reflecting what they see online, as long as they have a goal and a plan to reach it, they’re doing fine.
That being said, it’s still important to understand some of the rules of thumb that go into retirement planning—if for no other reason than to answer your client’s questions. Let’s examine two common benchmarks in retirement planning: the 25x rule and the 4% rule.
What Is the 25x Retirement Rule?
The 25x rule is a way to quickly estimate the lump sum of money needed to retire—simply, by taking the retiree’s current annual salary and multiplying it by 25. As an example, if someone currently makes $75k a year, they will need around $1.9 million to retire. This estimate assumes that your client wants to maintain their current lifestyle, and that they are retiring around the median age of retirement, which is 65 years for men and 62 years for women.
What Is the 4% Rule in Retirement?
The 4% rule gives retirees a rough guideline for how much money they should be withdrawing from their retirement savings annually—namely, 4% of the starting savings amount. As an example, if the starting savings is $1 million, retirees should aim to be pulling no more than $40,000 a year from that sum. In essence, this is the mathematical inverse of the 25x rule, which is likely why you’ll see both of these rules commonly referenced. And like the 25x rule, the 4% rule is helpful for getting a ballpark figure, but it shouldn’t be something a retiree is worried about hitting exactly. If nothing else, take this estimate lightly because as of 2022, some even argue for a 3 percent rule. Rather than focusing on numbers, it’s better to focus on determining reliable sources of consistent income for retirement.
Where Will Your Retirement Savings Come From?
One of the most important things to consider before retiring is not just how much money is coming in, but how many sources it’s coming from. With several of the go-to options for retirement funding in question, it’s more important than ever to diversify income sources. Of course, this does not mean you should abandon social security or pensions as viable options, but supplementing those sources with things like life settlements is a great way to provide a more stable retirement plan.
Regardless of what your client wants out of retirement, if they have a life insurance policy, a life settlement provides financial cushioning that will make their planning process easier. If your client is interested in the possibility of a life settlement, we at Life Settlement Advisors are proud to help retirees attain the financial freedom they want. Reach out to us and learn more about the possibilities for a happy, comfortable retirement plan.
