5 smart money moves to make 5 years before retiring

Key Concepts

• Corporate Executive Retirement Planning: Strategies and considerations specific to high-level executives approaching retirement.
• Company Benefits: Understanding and maximizing employer-provided benefits crucial for retirement income and security.
• Deferred Compensation Plans: Tax-advantaged plans where executives defer income, requiring careful planning for distribution and taxation.
• Concentrated Stock Positions: Holding a significant portion of wealth in a single company's stock, necessitating diversification strategies.
• Healthcare in Retirement: Navigating health insurance options, including retiree plans, Medicare, and the associated costs.
• Longevity Planning: Preparing for a potentially long lifespan and the associated financial and care needs.
• Wealth Transfer and Legacy: Planning for bequests, charitable giving, and intergenerational wealth transfer.
• Identity Transition: Managing the psychological shift from a high-powered executive role to retirement.

Understanding Executive Retirement Needs

The discussion emphasizes that retirement planning for corporate executives requires a deep understanding of their unique spending needs, travel desires, and how these translate into daily life. The core question is: "What does retirement look like to you in terms of what those spending needs are going to be?"

Steps for Corporate Executives to Ensure a Successful Retirement

Amy Permentor, Head of Corporate Executive Planning at Bank of America Private Bank, outlines critical actions for executives, particularly 5-10 years before retirement.

1. Understanding Company Benefits

• Significance: Company benefits play a substantial role in an executive's retirement, often involving larger dollar amounts and higher risk of forfeiture compared to typical retirees.
• Action: Executives must move beyond a cursory understanding and "dig into the details" of their benefits. This includes reviewing source documents, equity award agreements, and understanding eligibility rules.
• Specific Benefits to Consider:
  • Retirement Benefits: Understanding rules for eligibility and payout structures.
  • Subsidized Healthcare: Investigating access to or subsidized healthcare options post-employment.

2. Deferred Compensation Plans

• Nature: Often entered into with a "light decision," these plans are primarily used for tax deferral but can lack a cohesive strategy within the overall retirement plan.
• Key Considerations:
  • Distribution Elections: Executives need to review and potentially adjust distribution elections to align with their retirement plan. This may involve pushing out the earliest receipt by at least 5 years.
  • Form and Timing of Payments: Decisions on lump sum versus installment payments have significant implications for taxation.
  • State Income Tax Implications: The structure of deferred compensation payments can be heavily influenced by the tax laws of both the working state and the intended retirement state (e.g., Florida vs. New York).
  • Integration with Overall Plan: Distribution elections should not be treated as a separate decision but integrated into the comprehensive retirement strategy.
  • Impact of Other Income: Executives may receive income from equity awards vesting in early retirement, potentially reducing the immediate need for deferred compensation. This income should be modeled to determine the optimal timing for deferred comp distributions.
  • Tax Bracket Awareness: Changes in tax brackets due to Roth conversions, RMDs, and deferred compensation payouts need careful consideration.

3. Concentrated Stock Positions

• The Challenge: Many executives retire with significant holdings in company stock, leading to "single company risk" and an overweight in their asset allocation.
• Diversification Strategies:
  • Magnitude Assessment: Determine the materiality of the concentrated position to the individual's overall portfolio.
  • Post-Retirement Transition: SEC filing requirements and approval processes for stock transitions are lifted after a period of time post-retirement, offering more flexibility.
  • Tax-Deferred Liquidation: Explore options to defer tax consequences while diversifying.
  • Vehicles for Diversification:
    • Gifts to family members or charity.
    • Selling stock and utilizing an exchange fund to liquidate and diversify with other investors.
  • Rule of Thumb: A position exceeding 10-15% of the balance sheet is generally considered concentrated.
  • Sticking to a Plan: Establishing a clear plan and executing it, even when market fluctuations occur, is crucial. Avoid delaying action based on perceived future price increases.
  • Time Horizon: Acknowledging that significant diversification (e.g., 70-80% down to below 10%) can take years, not months.
  • Sophisticated Strategies: For very sizable positions, more complex strategies may be explored.
  • Tax Management: Aim to exit concentrated positions in a manner that manages tax consequences effectively.

4. Healthcare in Retirement

• Common Misconception: Executives often assume they have lifelong healthcare coverage through their employer, but companies can terminate these plans.
• Key Considerations:
  • Annual Re-evaluation: Healthcare decisions should be revisited annually to ensure they remain the best option based on health circumstances and location.
  • Pre-Medicare Coverage: Focus on making sound decisions for coverage until Medicare eligibility, utilizing marketplace tools and understanding differences beyond premiums.
  • Provider Access: Prioritize access to preferred doctors and medical professionals, even if it means a slightly more expensive policy.
  • Medicare Approach: Evaluate traditional Medicare with a GAP policy versus Medicare Advantage plans, considering company benefits that may integrate with Medicare Advantage.
  • Cost Shock: Executives may be surprised by the total cost of Medicare coverage, including premiums, income adjustments (IRMAA), Part D, and GAP policies, which can sometimes exceed active executive costs.

5. Longevity Planning

• Modeling for Extended Lifespans: Retirement modeling should account for living into the 90s, 95s, or even 100s.
• Long-Term Care (LTC):
  • Planning Horizon: Discuss LTC needs early (40s, 50s), as costs increase and availability decreases with age.
  • Self-Insurance vs. Insurance: Consider a combination of self-insuring for initial years and using LTC insurance for longer durations.
  • Innovative LTC Solutions: Explore life insurance with an LTC benefit or LTC policies with a life insurance component for economic risk mitigation and payment flexibility.
  • Individual Circumstances: Tailor LTC planning to individual situations, such as marital status and family support.

6. Balancing Lifestyle Needs and Wealth Transfer

• Defining Retirement Lifestyle: Executives must have realistic expectations about their spending needs, travel desires, and how these translate into daily life, acknowledging potential adjustments from corporate perks.
• Family Support: Consider the financial impact of supporting children or other family members.
• Legacy and Wealth Transfer:
  • Priorities: Identify specific desires for wealth transfer, such as education for grandchildren, seed money for children's businesses, or home purchases.
  • Charitable Giving: Integrate charitable bequests into the overall wealth plan, utilizing tools like Donor Advised Funds for lifetime and post-death giving.

7. Identity Transition

• The Shift: Moving from a high-powered executive role to retirement can be a significant identity shift.
• Redefining Purpose:
  • Envisioning Retirement: Encourage executives to envision their post-work life, including hobbies, volunteer work, or paid board positions.
  • Impact and Engagement: Many executives seek continued impact, whether through community involvement, church activities, or advisory roles.
  • Proactive Planning: This transition should be discussed and planned for well before retirement to avoid a sudden void.

Urgent Action Items for Executives

For executives procrastinating on retirement planning, Permentor recommends three urgent actions within the next 30 days:

1. Understand Your Benefits: Gain a comprehensive grasp of all available company benefits to avoid leaving potential resources behind.
2. Family Discussion: Engage in conversations with family (spouse, significant other) about retirement costs and vision.
3. Run the Numbers: Continuously model financial projections, refining them as retirement approaches and throughout retirement to ensure flexibility and the ability to adjust plans.

The Role of a Financial Advisor

A financial advisor serves as a crucial partner, sounding board, and challenger, helping executives:

• Ask pertinent questions about their benefits.
• Ensure accurate modeling of all financial aspects.
• Provide comfort and confidence in their retirement plans.

Disclaimer: The content is not intended as financial advice and should not substitute professional financial services.