Financial Planning for your Second Half

Did you know the ratio of assets to spend rate in retirement should be no more than 5%? What, exactly, does that mean for you? And are you prepared for the high cost that healthcare might be in retirement?Today I’m having an enlightening conversation with Michelle Scarcelli, financial advisor since 1997 and current president of the Merrill Lynch Women’s Exchange Chapter in Orange County, California. Michelle dedicates her time and talent to helping women become more educated about their finances. If you’ve let your spouse handle this area, be aware that statistically, women outlive the men in their lives. It’s important that you have a comprehensive understanding of your financial health and a team that will be there for you. Michelle explains why you should spend more time right now planning for your future financial well-being and important aspects you shouldn’t leave out.

N: You have so much experience helping women plan their financial futures. To start off with, can you tell us what are the three questions you get asked most often?

M: Typically, the number one question people have is, what age can I retire? That has changed a lot throughout the years because people are living so much longer that we require a lot more money to fully retire, and many people are choosing to work longer for that reason. Secondly, they want to know if they have enough money to retire. That's tied again to the first question, because living longer requires a lot more money. Third, if I'm dealing with women, often they want to know what if something happens to their spouse, how will they handle the investments? Will they have enough money? What do they do? It's a multifaceted question that many women are concerned about.

N: So basically, it's about their financial health going forward as they're planning their second half. When they're talking about retiring, are they talking about it in a traditional way, like our parents retired, or in a different way?

M: It's changed a lot because, first of all, we're much healthier at younger ages and people are traveling far longer. They often want to have a very active retirement. The people that have worked often times are not fully retiring because they want to stay engaged. They want to work on their own terms. They may want to do some consulting and work part-time. Many of them will go on a part-time consulting basis with their current company. Many of them start a different career but without the pressures of a full-time, fully engaged job. But it keeps them engaged and keeps them feeling stimulated, so that's a very common process. Now of course, having a more active retirement requires you to have more money available to travel and to do things.

N: What do you tell them in that instance, in terms of, do I have enough money? Is there a magic formula?

M: The first thing I do is run a comprehensive plan for them, a financial plan. It takes into account their goals, what age they want to retire, what income they want in retirement, what assets they have currently, what liabilities they have, and I map everything out for them so they've got a roadmap to reaching their financial goals. It's best if people start doing this when they're in their 40's so they can start seeing if they're on the right path, and make any adjustments they need to start reaching that goal.

N: It sounds like it's almost like going to the doctor and getting a check-up and that you should be doing this all along, not waiting until the moment you want to retire.

M: Yes, it is very true. Some people like to focus on their investments but more people just want to ignore it all. They don't enjoy dealing with it and they don't want to talk about it or think about it, but no magic is gonna occur when you turn 50 years old, that all of a sudden the money and the plan's gonna appear in place without you putting a little time and attention into it. The sooner a person starts, the better off they'll be.

N: What are the common things you tell people? Let's just say a scenario where things are a little tight. Maybe they haven't saved as much. What are the steps?

M: First of all, we do the analysis that looks at what they have actually saved, and also looks at any liabilities they may have. The mortgage is a common one, but most people will have a mortgage today. And with interest rates as low as they've been, it's not necessarily a bad thing to be carrying a mortgage as you enter retirement. That's something we analyze for everyone. We look at what they've been saving and what their priorities are. They may need to adjust the time that they work and work a few more years, or they may need to adjust their goals in terms of how much income they want in retirement.

Another thing I look at is insurance coverage. Do you have long-term care insurance? I want to make them aware of the fact that healthcare costs in retirement are pretty substantial, particularly if you need long-term care. There are ways to protect yourself in that area if you don't want to self-insure.

N: You help them realize they need a more comprehensive plan for all of these different aspects of financial health.

M: Yes, because I start by looking at all their life priorities. There are seven life priorities that we discuss. Health is one of them along with family, giving, work, home, leisure, and of course that all rolls into your finances. Those are the key areas that we discuss and try to hone in to find out what matters to the individuals, because it's all based on someone's goals.Some people want to give back to their families or give back to their communities. They may even want an investment portfolio that's socially responsible, and we have that available too. Others are more focused on travel, and they want to focus so that they've got the independence to travel a lot. Others may just want to care for their family and be more concerned about passing down assets to their family. It all depends on what's important to you, and that's how we base the portfolio and base the recommendations that are made to an individual or a family.

N: Do you have any success stories you can share without naming names, just to give people a little insight into how this might play out?

M: I focus on working with independent women. I got married later in life and was responsible for my own investments for most of my adulthood. I felt like it was very important for women to take control of that, because 90% of all women at some point in their life will be responsible for their own investments. That's something that I really focused on. I work with a lot of women that are going through a divorce, and I've had women come to me when their husband suddenly dies at 50 year old, and they've never worked before. At 50 it's gonna be hard for them to go out and find a very high paying job, so it's very important that the assets are structured so that they will provide income for them for the rest of their life.

Also what's important to me is to educate them about their investment and about how everything works, so that they have a good understanding. I help them through the estate planning process by making sure they see a good trust attorney. Making sure they understand any insurance needs that they have. Understanding the cash flow, and how much they can spend. It's really critical that once you go from working or having income generated from you or your spouse to needing an income generated from your portfolio, that you understand how it works and what is the tolerable spending rate. That's typically around 4-5%. I have had to tell people before that you're spending too much money because you can outspend your assets and it is a critical discussion to have.

N: What does 4-5% mean?

M: Well, if someone has, let's say, a million dollars in assets, meaning stocks, bonds, mutual funds, and cash, each year they can take off approximately 5% of that, or $50,000, in income for living expenses and not deplete down the portfolio over time. We've done statistical surveys in our industry that show that with the varying returns that happen in the market that a 5% withdrawal rate is a sustainable number so that each year your earnings should hopefully make up the amount that you withdraw from the portfolio. If you take out 7, 8, or 9%, you can erode the portfolio down, and if you've got 25 or 30 years to live, you'll start running out of money.

N: Would this would apply at the same percentage even if there were two of you, you and your spouse, and you were trying to get by on your investments? 

M: Yes. Right. It is per portfolio, not per person.

N:That brings me to the next question. Can you speak to paying off debt versus other investment strategies for the second half of your life?

M: First of all, credit card debt should definitely be paid down and paid off. I mean, the rates are so high it's just usury. That's the first thing that needs to be paid off. Some people are trying to help their kids pay off student loans. We look at those and analyze how it's best that those are handled, paying off the highest interest vehicles first. And then in regards to looking at the home, as I mentioned earlier, today's mortgage rates have been so low for so many years that most people have been able to refinance their homes to where they're in like a 3% interest rate type of loan. It's honestly made more sense to have a mortgage on the house at 3% and carry that so you've got cash flow and you haven't used all of your liquidity to pay off the house.

It also depends on where you live. Here in the state of California, where I am, the homes are very expensive. I've had many clients that have sold a home here and ended up moving to Florida or Texas because the cost of living is much lower and there's no state income tax. They were able to buy a house for cash and they still had another 3, 4, or $500,000 then to invest to help provide for their retirement income. That does work very well. That's a very good scenario, and we see a lot of that happening in the higher tax areas. What drives a lot of people to make that move is the fact that they want to be near their kids. Their kids have moved and so they follow them. It has to be for all the right reasons to do that.

Talking about paying off debt, the other issue that I tell all clients is that no matter what stage of life they're in, it's very important to have three to six months of living expenses just in pure cash, CDs, or money market that's available to you. Most people do not have enough in just cash savings. If someone gets sick or someone loses their job or something happens, they don't have the liquidity to ride it out. As you know, life gives us lots of interesting turns and if you've got the money available to you, you can ride those things out without having to disrupt your investment portfolio, and perhaps even having to sell something at a loss when it's not a good time to sell it. So that's critical.

N: I think in the scenario you put forth about maybe moving to Texas or Florida, you could also just downsize your living in whatever state you are. You could move from the big home in the suburbs to something that has a little smaller footprint and more economical. You could put some of the money you saved into paying down debt or into investments that way.

M: Most definitely. Also, they've had a big home that's multi-story with their kids and had a lot of maintenance.  They often want to downsize or need to downsize when they go into retirement. They also may want a single level home. They need to have the home designed ~ and that's your expertise ~ on how to make it feasible for them in the next stage of their life. We do see quite a bit of that happening. That's critical, and that also kind of rolls into when we start looking at the later stages of long-term care, and letting people understand that they can have care at their home, but the home needs to be accessible.

N: Right, yes. And a lot of us are going through this with our own parents at this stage, so we're starting to get it.

M: Yes. Almost all the inquiries I get about long-term care insurance come from clients that are taking care of their parents. They see the burden that it is. They see the anguish. They see the cost of it, and they want to make sure that they're protected in some form.

N: That makes a lot of sense. What do you tell people who do want to cut back on work, they want to maybe enjoy their lifestyle more? Perhaps they want to do some consulting or whatnot. How do you coach them on when to pull the trigger and make that shift? None of us has a crystal ball to really look at what the future's going to be.

M: So true. None of us know how long we're going to live, so we have no idea how long the money needs to last. I think the critical factor is to start with a good financial plan. It can easily extrapolate how the money you have today, invested in a portfolio that you're comfortable with in terms of risk, will perform over time to help you reach your goals. Otherwise you can't see if the money you have today will provide for you, and if you've saved enough yet to take that step back and downsize. A mistake people make is that they often wait too long to start the planning process, and then they're so frustrated and fed up with their job that they just don't care and they say, 'I can't take it, I'm gonna step back. I don't want to work any longer at this capacity.' That's very understandable, but you really have to assess where you are today and if you're on track that you can do that.

One of the biggest issues with women and investing is that because women are the primary caregivers in families, most women take off on average anywhere from three to ten years to care for their family. Which is terrific, but they are missing being in the workplace and contributing to a 401k plan. They've had reduced earnings, so even if they do come back, they're gonna have to enter at a lower pay scale than they would have had they stayed in that whole time.There's no easy solution to this. It's just that the financial community's really noticing this and women are very astute at investing. By 2020, women are going to control 22 trillion of wealth in the United States. We're eventually gonna control all of it because we're living longer, we're earning our own money, and we're inheriting it. Women are more concerned with, typically, what the money can do for their families and how they can provide for their families. Men get more concerned about the investing the money. There's no right or wrong answer.

We study the behavior of how women invest their money, and about 40% of women who have assets do not have a financial advisor. They often take less risk. Perhaps they're sitting in cash or CDs, whereas they could be sitting in a high quality portfolio of some stocks and bonds and getting a much better return with not that much risk. They're missing a lot of return, and it hurts their future prospects for retirement.

N: I can totally see that. I also could see a scenario where women are more likely to want to gift something to their children to help their kids in some way without maybe completely understanding their own financial scenario and whether they have the wherewithal to do it.

M: That's very true. That's where, one of the first things I do in the planning process with my clients is, find out if they have established an estate plan. Have they've established a living trust?  A living trust will define all of your plans for giving to your family in the future. It can also define giving now. A good estate planning attorney can walk you through that process.We work in conjunction with them to make sure that a client has thought through this and understands the level at which they can give, the current tax laws and gifting laws, and what can be done for their family members while keeping in mind, are they able to actually do that and how much money do they need to live on.

N: There's certainly big gifts, but then there's also the child who wants to go back to graduate school, or the young couple that wants a down payment for the house, that you weren't considering. You hadn't really planned on it, but your heart goes out and you want to do it. Women are probably a little more susceptible to that.

M: Every situation is unique, so we talk through every one of them and see what the pros and the cons are. At the time we’re talking, each individual can gift 14,000 a year to another person without triggering any gift tax. A married couple can contribute 28,000 a year to their child without any gift tax consequences. So there are ways to do these things defined by the tax law.529 plans, which are to set up for college education, are very popular with people with young children, but they're also popular for grandparents to set up for their grandkids so that they can gift toward their future education. With the cost of college rising so rapidly, it's really one of the greatest gifts you can give someone.

N: Michelle, tell me what sets you apart from other financial advisors?

M: My practice is focused on helping independent women. I'm very committed to educating and empowering them about their investments and their financial future. To do that, I host financial events and luncheons. They're all educational in nature. Everything from long-term care, housing in retirement, health and longevity, Social Security ~ a wide variety of topics ~ to empower them about their future.

Women are very capable of doing their own investing, however many women have just not taken the time to do so. We're often so caught up in raising our kids and then taking care of our parents that it's something that we don't naturally embrace. But yet every woman is just as capable of handling it. And because we live on average five years longer than men, and we usually will outlive our husbands and need to take the reigns of the financial picture, or we never married, or we're divorced, it's very important that we understand the financial impact and looking at Social Security, the financial plans, long-term care, all the other issues. I'm very committed to working with women for the whole picture and helping them address all the issues that come at every stage of their life.

N: I love that you do that because the financial area can be daunting. It can feel overwhelming and it sounds like you take the overwhelm out of it. You walk people through, very systematically, all the different aspects of their financial health, and you help them see the whole picture and figure out where to go with that. It's so true that when you have a plan, when you're working with someone, it really helps you to sleep better at night and not worry about things that you shouldn't be worrying about.

M: Exactly. I find that through educating women that they feel more comfortable and they have more confidence to move forward. Where I really see a lack of confidence is when I work with women going through a divorce. They are going though so much on the emotional side and they're having to deal with the financial side as well. It's important to try to give them some comfort on the financial side and explain things to let them know that they will be okay, and explain why and explain what they need to look at, what they need to address, because they're so overwhelmed while they're going through this process.

N: That's wonderful that you provide that education and coaching. One last thing. Give us a few takeaways for listeners.

M: Number one, ensure that your financial plans are counting for longer life expectancy and higher medical costs in retirement. Develop a strategy for Social Security and your retirement savings.And then create or update your estate plans. Make sure you've got your will, your power of attorney, your healthcare proxy and also your medical directives all up to date and current. Also tell your family members where all these documents are so they know what to do in case anything happens to you. And most importantly, get a plan.

Contact michelle.scarcelli@ml.com.