The Perils and Opportunities of Unretiring With Tom West & Suzanne Schmitt

So much of what financial advisors are focusing on during the working years of their clients is how to prepare for an independent, financially secure lifestyle that takes care of required and discretionary expenses. We try to anticipate, you know, things like taxes and health care. But sometimes our clients find that things aren't going according to plan, and their perceptions of retirement aren't what they thought they were going to be on the other side, and then they reverse course. So today's podcast the the opportunities and perils of on retirement. So hopefully that sets us up pretty good. Suzanne, on retirement as a topic, was your idea? Why don't you talk a little bit about some of the research that you've done to sort of get us straight on how a good place to begin?

Suzanne Schmitt 01:18

Yeah, absolutely. And it's good to see you. Tom I think on retirement is really interesting, particularly as we are now knock wood well out of the height of covid, where a lot of folks, especially young folks, retired early, and we're seeing a trend where they're having to come back into the workforce. So I think it's important to define what is on retirement. It sounds, sounds kind of like what we think it is, but there are two key criteria that experts agree have to be met. One, an individual acknowledges they are no longer working for income, and two, they self declare that they are retired. So if we start with that definition, and we kind of connect back to what happened during covid, what we are seeing on mass. And this is not a flash in the pan. Research finds that 26% of all people retired are or intend to return back to work. And what's interesting is 35% of those who are considered younger retirees. So these are those folks that likely went out early during covid in their 50s, are all back at work. So this is by no means a small percentage of the population, but what we find when we look at on retirement is it's really happening for three primary reasons. One, people financially just are not comfortable with where they are without that consistent income. And that can be a combination of income itself or the benefits that come with full time or part time employment, which is not insignificant. So folks are kind of staring down the barrel of the cost of healthcare as an example, and they are coming back to work. So we've got people looking for income, we've got people looking for some benefit supplementation, and then we've got a group of people, and this is particularly true of those who are very well schooled and well skilled to think about your professors, your doctors, your healthcare workers, those people just miss their social network. They really saw a lot and see a lot of their sense of self and sense of being as being derived from their work. And when they leave work, they miss it. They do not have friends outside of work, and so frankly, they go back to work because they miss the social contact.

Thomas West 03:24

Well, when I was reflecting back on my own practice and the hundreds of clients that we've served over the last 2025, years, I'd probably say that that number 25% of folks on retiring, that that that seems a little high relative to my experience as a planner, and it probably should be. I would imagine that if we did our job right as a financial advisor, maybe on that first one people that needing to come back because of income, I think I'd like to think that as a financial advisor, maybe I did a better job of of level setting some of our clients about the realities of what income and expenses might look like on the other side. So, you know, for financial advisors that are listening, you know, when we're trying to think of that 25% that might be unretiring, how many of your clients you know, really just don't have a realistic look at the financial aspects of what life looks like on the other side. But as we're talking about this income thing, because we're going to be speaking about each of these things, in turn, income and benefits and the sort of the psychosocial side of things, what I can say is, of my clients that have unretired based on, you know, the financial situation wasn't what they thought it was going to be. Sort of two ways that I would reflect on it. The first one is, there's a new variable that presents itself that maybe wasn't fully appreciated as a possibility. And in my experience. It usually falls into two categories. There's a healthcare event, you know, and it isn't necessarily the healthcare event on my client directly. A lot of times it's a spouse or a parent that they all of a sudden have to start financing or, you know, we certainly saw this. A lot of covid adult children who, you know, have aged into a place where there's a realization on my clients, the parents, that this is not tracking, that my child is going to be financially independent in the way that I was thinking or I was hoping for. So some of the clients that are coming back from an income standpoint, I'd probably say there was a circumstance that sort of changed, and I'd be interested in your thoughts on that. And then the second one is, when we're certainly we spend a lot of time on the family financial conversation about, you know, longevity and the cost of getting old and senior housing and healthcare. The other one is, I see some of my clients anticipating a legacy, either in a spoken or an unspoken way, that they see some attrition on the part of that, that older generation, of the attrition of an estate dealing with, you know, the costs of care and whatnot. And that second one is sort of a tricky one. Let's start on the first one. Let's talk a little bit about, Suzanne, research and what you think about the idea of folks coming back after an event that changes the perceptions, changes the assumptions on how they were going to build their retirement. What does your research say about that?

Suzanne Schmitt 06:34

I think that's a really good place to start. So studies find that the average age of retirement is getting younger and younger, and right now it is currently pegged at 62 and the majority of people who are going out at 62 are going out because of a health issue themselves, or because they are caring for somebody with a health issue. So starting there, and we see a couple of things happen when people are going out anywhere between five on average and seven to 10 years earlier than they planned. So there's immediately a gap in their retirement planning portfolio, but they are also drawing down funds while in those early years, because healthcare is expensive, we know fidelity pegs the average amount retirees spend at $315,000 and that's exclusive of major events, unforeseen things, and even long term care. So people that go out that early, especially if you're the caregiver, and you are generally healthy, oftentimes have to go back because you are experiencing events that you have not financially prepared for. Point 1.2, I think, is really interesting, and that is, the majority of retirement plans really don't look at the family dynamic. So to your point, whether it's a child's failure to thrive or it's an older person's financial or social or emotional dependency on that, let's say adult child, those are all very real, real variables that are forcing people to go back. And the third thing that you raise, which is also really interesting. Some additional research by the Center for Retirement Research at Boston College finds that there's a bit of a wealth illusion among even the highest earners in your book. So they peg high earners at $248,000 annually, which is a pretty healthy income. They find that 32% of those people in that high income bracket are not financially prepared for retirement because of failure to save and reliance on things that could include expectation of wealth transfer that simply isn't going to happen. Their parents, their older loved ones, are having to tap into funds that they might have anticipated passing because they simply can't afford to fund their lifestyle, or they're facing down the barrel of a health event or a long term care event themselves. So it's a complicated scenario.

Thomas West 08:49

Okay so those are three things in a lot of numbers. Let's talk about the first one. When you said, you know, average retirement age at 62 like Not, not with my clients, and I think that there's probably a little bit of parsing to do on that. I would imagine that's a global number. It's including a lot of blue collar work. You know, I would probably, I would probably say, broadly speaking, you know, my my clients, and the clients of many financial advisors that have sufficient investments to be able to afford financial advice on a regular basis. That's got to be skewing more white collar and older. Is there anything in there that the data that you're looking at sort of pulls that direction? Because my experience is 62 is not an average. It's probably closer to mid 60s to late 60s, but that's anecdotal,

Suzanne Schmitt 09:37

Yeah so we know your book is not average. You provide a very full range of services, but that 62 number is actually domestic, and you will see even among, again, highly skilled, high income workers, there are people like doctors, in some cases, surgeons, specifically dentists, who may have repetitive use injuries. So it is not a. As much as we might want to say it's niche to a certain class or a certain form of work, it isn't that really does cut across a lot. And again, I go back to a number of those folks are not going out because they want to. They're going out because they have to, because they have care needs in the household that require them to be there full time. They can't make it work, both working and having people come in to help their spouse or partner.

Thomas West 10:25

Yeah, no, I'm glad you pushed back on that. I think that that's that's appropriate for me and for advisors that are listening to sort of re examine their book, and not necessarily make the assumption that you know 65 to 70. And when do I take Social Security and Can I kick it out to my 70s? That's not where the averages are. So that's something that's helpful. The second thing that you talked about with folks that had unexpected, unanticipated needs that's forcing them to unretire, you mentioned something that a lot of retirement planning doesn't take account broader family, where I think our financial advisor audience can really benefit from this. When you're doing your retirement plan, I have always found that a really simple technique of tracking everybody's age, like on a spreadsheet at the same time, is really helpful about giving our clients sort of a pause to consider what's going on around them. So for example, you know, if I've got a client that's planning for retirement and they're 60 Well, you know, if you're going to be retiring at age 65 How old is your spouse? How old is your adult kids? How old are your parents at that point? One of the most interesting things that I see across my whole client base is, you know, their parents, one or both of them, being alive when they retire was not baked into their financial assumptions when they started to retire. So just some longevity tracking, how old will other people in the family be at different inflection points. And you know, Mrs. Client, like when you're 60, when you're 70, when you're 80, how old are your kids going to be, 30 and 40 and 50 and whatnot? Where might they be in their life? Are there any things that we need to consider, you know, in terms of that broader family implication, of what responsibilities of our money might be, and does that influence at all our perceptions of security in terms of a particular retirement date? So I'm glad you pulled that one out. I think the interesting one, in my opinion, is this illusion of wealth. And you mentioned that, would we say 30 something percent of people earning 250 or more? Yeah, have have unrealistically sanguine and happy perceptions of how financially secure there are like that. One hit the bullseye for me, my experience with a number of different clients, some of which I've had to exit from my practice. They show symptoms of this. You know, my lifestyle requires me to need a 12% net rate of return in order for me to retire at the time of my choosing. So even though I understand that's riskier, that's what I'm hiring you to do. These are not clients that you really want to necessarily have in your practice. You know, the idea of like, I certainly understand the psychology, and I've talked to a lot of my peers in the industry, that there's sort of two different perceptions about projecting retirement in in retirement expenses. One of them is, you know, you solve for all of the required expenses. First, you know, housing, healthcare, groceries, that sort of stuff. And then on top of that, you solve for discretionary the fun stuff, like, well, you know, the cruises, the the gifts, the charity, all those sorts of pieces. And there's nothing wrong with doing that, but I think that it's also useful to think of the second way that is just as appropriate, which is, if I had one client explain it to me this way, Tom, the reason I'm hiring you is because my discretionary expenses are my required expenses. And I'm not making the distinction because I'm not sort of a hand to mouth investor, like I want it all, and I need you as an advisor to maximize the probability that I'm able to do that. And you know, in each of those cases, whether you're doing required and discretionary expenses separately, or you're putting them all together, you know, a good advisor. I'm, you know, I'm enlisting my the rest of my professionals. We should know the ways that we can talk about cost benefit of each of the different sub components of this. But I really agree with the idea that these $250,000 plus earners, there is a significant percentage of them that dramatically underestimate two things, health. Care and their perceptions of legacies that might be coming to them. And why don't you just spend a little bit of time on that wealth illusion thing? Because I think that from a professional class that's a little underappreciated.

Suzanne Schmitt 15:11

Yeah, I think it's a really interesting concept, and I had not come across it framed as such until taking a look at this research. So the notion is really that there's been mental accounting, future casted. Mental accounting done such that those expected inheritances become an offset to things like lifestyle creep and that lifestyle expectation. Oftentimes it will involve deferred funding for children's college and school, it will involve deferred funding for paying off mortgages, or an assumption that monies that were loaned for small business startups and homes will not be required to be repaid. So that's another place that this wealth illusion can come up. But I think the key takeaway is really and I'm going to put it back to you in the form of a question, how do you feel as an advisor about your need or requirement to get into that sort of, you know, kind of psychosocial, almost behavioral economics view of your client's wealth sources that might include expected inheritance? How's that work in the day to day practice for you?

Thomas West 16:23

Well, I think sort of, I've got two thoughts hitting me at the same time. I think that that, I think that my job is to advise my clients and hopefully influence, you know, small decisions that, in aggregate, drive better outcomes for the clients according to their hierarchy of priorities. Like that. That's what I think my job is. And when there's an there's a there's a an alignment problem, which is the choices that they're making don't line up with the priorities that they express. Sometimes this just has to this is an education component. If these are the things that are important to you, this is what the important things cost, and these are the things that might go wrong, let's go back and revisit the choices that we've got. The choices could be savings rates or current discretionary expenses or gifting or retirement dates, or unretirement, those sorts of pieces. And I think that that sometimes, you know, I believe it's my job, it's part of what they're paying for to be giving that advice. Now there's another element, like, how much of it is your job? Like, everything that we know in our industry all boils down to net flows, right? So, so in my mind, I've got sort of two different sets of clients that I'm thinking about. What we're talking about today is this I was thinking about, I've got older clients well into retirement, that are navigating stuff we touch on that a lot on Family Financial conversation, but right now we're talking about on either side of this retirement threshold for those clients right there, coming back on this wealth illusion and lifestyle creep, and what are the implications of mentally accounting for a legacy that may or may not come? I think that this is an under addressed area for our profession. There's a few things that are going on. The first one is, I think it's a little it feels unnatural on the part of a lot of adult children who hire financial advisors to express, out loud, mental accounting for for legacies like, it feels creepy that, like, Listen, you know the I'm counting the $2 million or the $500,000 that mom's gonna leave me when, whenever she passes away, and I've sort of pre spent that on this stuff, so I don't have to save for it. You're not gonna have a whole lot of clients like volunteering that information. So I'll give you a technique advisor audience. I think that the idea of a lot of the mental accounting that people do have to do with money that isn't theirs, that is currently aimed at somebody else's priorities, like mom might want to stay home under all circumstances, for example, I think that there's always some utility at doing, at a minimum, a back of the napkin swag at what mom or dad's financial situation might look like. Just to set a tone of I'm trying to think ahead with you about maybe your own financial responsibilities for that older generation. And let's just make sure that if you have to step into a role as a successor decision maker or supporting a successor decision maker, these are the smart and the Dumb ways to make decisions on behalf of that that parent, whose legacy you might be mentally accounting for. And then what I'll do is I'll sort of ask questions about, you know, it seems that. That you know, does that seem safe to you? Does that make you anxious? Is there any any other thoughts that we've got to consider on that? I'll look for opportunities, particularly if I feel some confidence that, listen, mom and dad are probably going to be able to pay their own way, and even if they have significant expenses, there's probably some realistic amount left over I will, I will offer as an advisor in terms of anticipated windfalls down the road that there might be something coming your way. The biggest issue that I try to bring to my clients is what the timing of that might be. Because, you know, if, if most investors that have means to hire advisors, that have a full service suite, like like we do, they tend to skew white collar, more educated, go to the doctor, take their medicine. That that skews with life expectancy. That skews with they're probably not, they're not they're not dying on schedule. They live a whole lot longer than anticipated. This is the same group that buys long term care insurance. It's the same group that move into life plan communities and so on. And for those parents, I want to temper expectations on but on behind. On behalf of my clients that are thinking of retirement on retirement of money might be coming, but it might be coming when you're 70, like it might not be coming when you're 50 or 60, something along those lines. So that's kind of some of the psychology that I use talking to my clients about that.

Suzanne Schmitt 21:33

Got it. So I'm hearing temporary expectations, and you're helping your clients really avoid some magical thinking about resources that not only might not show up, but might show up significantly later than they're anticipating.

Thomas West 21:44

Right.

Suzanne Schmitt 21:45

That really cares for, you know, perhaps the people that end up unretiring because there's, there's a financial reason, they really need to rethink their their strategy for the The Final Chapter, if you would, of their lives. What do you think, though, about the people that are unretiring because they just miss the social connection. How do you care for that in your planning process?

Thomas West 22:05

Well I mean, in some ways, you remember the title of our things is the perils and the opportunities of unretiring. To some degree, you know, I don't necessarily think it's a bad thing, meaning, you know, if, if you're financial, financially secure, whether or not you go back to work, you know, I don't think that there's any, I don't have any big heartburn about, like, Do what makes you happy? If you thought you you would be fully occupied and socialized, and you're not well, you know, well, then get back and be socialized and do the thing that makes you happy. Where I think that that the challenge is, is when unretiring due to psychosocial issues costs a lot of money and has a lot of financial implications. Like advice that I will give is, you know, before moving out of the area like, I live in a relatively expensive sort of urban area, and that's where a lot of, not, not all, but many of my clients are. And, you know, there's, there's, there's expressions of, I'm going to move to, you know, somewhere warm, somewhere less expensive, the rest of it, it's, it's hugely important for me to say, like, how about, how about maybe you rent before you buy, just to be able to make this decision of moving somewhere else as part of this psychosocial thing like revocable remember, optimized decisions, you know, race to make a revocable decision. So I would offer that for folks that I believe there might be a risk of some of the psychosocial unretirement stuff. I'm trying to figure out ways to mitigate the financial risks of changing your mind so for my clients that can afford making that particular mistake in unretiring, like, what are the smart things to do to keep your sort of options open? And that's a lot of the language that I use, what happens if you don't like it? I think we should have that have that discussion. What happens if you don't like it? I think the other piece too, and we were talking about this before retirement, doesn't exist in a vacuum. Many times. Just because I might want to retire doesn't mean my wife wants to retire at the same time. What happens if we have a gap in ages? And you know, my perception of retirement is I would hang out a lot with my spouse who has no intention of retiring. Well, I'm drumming my fingers quite a bit, waiting for a playmate. And you know, I always like to think, what is everybody else that's material to your psychosocial well being. Where will they be on both sides of your retirement decision?

Suzanne Schmitt 24:47

Good counsel. Is there anything that you think is really important for people that are contemplating, I'm going to switch gears a little bit, and maybe they're on the they're still on the work side of retirement. But. They're thinking about more of a phased retirement. You know this, this notion of phased retirement is taking on a lot of popularity, seeing very different responses from a workplace perspective. But as you look at your clients, who might be, let's say, five to 10 years in striking distance of retirement, how are you thinking about phased retirement considerations in your practice?

Thomas West 25:21

Well, I, I'll start by saying, phased- my first impression of phased retirement. I mean, I hate to be a consistent cynic, but it's, it's the same as sort of like holistic financial wellness, like, there's a lot of there's a lot of Peter Pan thinking in some of this phased retirement like, exactly which professions do you phase retirement out of? You know, Italy, you're talking about, it's not a surgeon. There's certainly plenty of industries that have mandatory retirement ages. All this healthcare stuff that we're talking about. Well, you don't get to phase, you know, on intentionally as much, I think that there's, there's entire professions that, you know, their their whole professional discipline is changing. You know, I'm not, I'm not going to pick on any of my other professionals right now, but, like AI, is a thing. And there's a lot of jobs that you're not going to be able to go back to and there's no phasing. You know, you're just out because your productivity has been replaced, you know, with a computer program in the next two years. I also think that, you know, from a from a benefits management standpoint, like, we know when somebody leaves, like, we've got an industry that is very adept at exiting folks off of benefits, off of retirement, the rest of it. And you don't see those kinds of programs that large employers have for for benefits. For example, there's not like an easy button to come back in on a phased retirement side of things. So a lot of times, maybe you're talking about 1099, income on the side, if you're lucky enough to have a profession that your work product, your content, your intellectual property, your experience, retains some value. But phased retirement, that I've seen most successfully done, I'm not saying it's never done. I see it done relatively frequently, but you usually want to start thinking about you're in business for yourself now, phased retirement doesn't mean you're working for your old employer the same way, but less like. That's not what it looks like for most of my clients. It's 1090 nines. There aren't any benefits. You have to backfill all of your you know, your Medicare, Social Security, health insurance. You've got to do your retirement savings differently, those sorts of pieces, and I think that the other two factors that we started with with phased retirement, that's a lot of the guidance that I give my team and the guidance that I give my clients, is the reason for phased retirement because you need the income. Is the reason for phased retirement because you're bored. Is the reason for phased retirement because there's there's an unexpected health event or a perception, like wishful thinking on legacy and whatnot. I think that the root cause of planned phase retirement is material and the kind of advice you're giving, but I think that that phased retirement, in some ways, is is wishful thinking for a lot of folks that just expect that I might be able to dial it down. That is, I will say this, though most of my clients, when they're thinking of retirement, will proactively bring up the idea of phased retirement, because really, from a psychological standpoint, this is an opportunity in the moment to kick the can on a decision like fight. If it's phased retirement, that means that I don't really have to necessarily Zig or zag right now. I can kind of wing it for a little bit longer. I always think it's important to hold your clients accountable for decisions that need to be made and think carefully advisors that are listening about whether phased retirement, what are the root causes behind it? Are they psychosocial? Are there new information? Is it benefits, chasing that sort of stuff? Let that be your guide. In terms of helping to set your client's expectations about what's coming,

Suzanne Schmitt 29:17

Good stuff, and in terms of, you know, we talked, like you said at the top of the podcast about the rewards and the perils, or the risks and the perils. What are your thoughts about Social Security and considerations there specifically to either a phased retirement or somebody coming out of retirement and doing the unretirement thing?

Thomas West 29:38

Well, I mean, I think, I think, practically speaking, in terms of how much income you're able to make, what's the tax implications of that at the different ages and whatnot? To some degree, I think that that's part of the cash flow projections that advisors should be making to help level set your clients in terms of. Anticipating what's coming in terms of the timing of the social I would probably say mostly it I have it has to do with timing, you know, when do I When do I take Social Security? You know, do I continue to defer to the max age possible and get the five eighths of 1% every year and so on, then you're talking about sort of gap funding between, you know, when somebody retires, and, you know, making up for the Social Security and whatnot. In my mind, I have found that the Social Security calculus is secondary to this concept of retiring and unretiring for those big three things like, let's plan for the unexpected. Let's figure out the psychosocial stuff. Let's zero in a little bit more on what a phased retirement might re realistically or not realistically look, and then use the Social Security calculus as as a way to sort of throughput. You know, your advice and best decisions. But I typically like let those bigger things be the dog, and Social Security is the tail. The decision on the Social Security, you know, is begat by those other priorities. So that's basically the way that I would do it.

Suzanne Schmitt 31:16

Got it. And I've got one more question for you, and that is, I'll go back to some recent research from T Rowe, and they find that about 48% of people who are going back for financial reasons. That's inclusive of healthcare issues. I'm curious you know, given that healthcare and both access to care, access to insurance, more specifically, and also having a health event, are driving so much activity about people coming in and out of the workforce as they're in their retirement years. What are your thoughts about the role not just of healthcare planning, but really understanding your client's current situation and then branching into that next generation? How do you think about all of those complex variables, particularly for the folks in your book that are approaching retirement? How do you help them think through all those trade offs and, you know, different scenario plans that they really need to work through to hopefully have this be a smooth and happy transition for them?

Thomas West 32:10

Well, that's a great question, and I'll start by saying it's really important, I think, for financial advisors to start incorporating healthcare and health care expectations in their planning. We know that study last year alliance for lifetime income, it's basically shown that financing health care is now American's number one retirement fear more than running out of money. So the your the consumer market is telling us, as advisors that this healthcare stuff matters materially. How I'm looking at my book, I think healthcare and changes in healthcare are the most predictable bringer of chaos in somebody's retirement. On retirement life. If I was going to be taking a look at what's the single thing. It's not the psychosocial, it's not the benefits thing, like it's there's usually a healthcare issue that cascades into decisions and feelings of anxiety that I can't stop working because I'm worried about the thing. I think bringing this up, like, I'm glad that you dropped in access to healthcare in addition to paying for health care, it remains a surprise to too many Americans and too many financial advisors, frankly, that we live in a world where knowing where to get the health care and get the quality health care and have access to the Health care is in and of itself, an expense most of the time, discrete from actually paying for the care. Whether you're talking about physicians that are no longer taking Medicare directly. I just had you and I were laughing about this earlier. I just had a bunch of dental work. Well, my dental insurance isn't paying for any of that. I still have to have access to different stuff. I think that the idea of access to health care, access to long term care, access to senior housing, I always want to level set with my clients that this is the most predictable thing that's going to go left. Let's make sure that we scenario build around that. Let's make sure that we consider all of the other family members around, hypothetically, you in this retirement on retirement scenario, so we can at least get a running start on how decisions might be made when things don't turn up as as confidently as as we were hoping. And my last thought on that we'll close on this. Remember advisors, when you address the unspoken anxiety in the room, whether it's I was expecting this inheritance and it's not coming. I'm worried about healthcare. When you address these things, that's when you're impacting the relationship so positive. That's when your stick rate for being able to remain the advisor of choice at the death or disability of a first spouse, if you're able to comment on the financial implications of health care transitions for an older generation and everything about our businesses, net flows, everything is leaky bucket. How can we make an impact in the course of our regular advice for our clients to be able to really find some value and to stick around and maybe have their kids stick around too. So that's a great question to close on. Thank you, Suzanne for this article. It's been an interesting topic, retirement and unretirement, so I appreciate that. Any other last thoughts before we sign off.

Suzanne Schmitt 35:43

I think my last thought should really be the notion that by solving for this uncertainty, particularly around healthcare, it's also a bridge for that advisor to connect with generations on either side of the client. So even though it's uncomfortable, I think ultimately it's a win for the advisor. It's a win for the client and the entire family. To your point around stickiness.

Thomas West 36:03

Sure. Well, the perils and the opportunities of unretirement, we're all looking for wins, and hopefully this was a win podcast for everybody. Thanks very much for joining us. Find this link on Advisorpedia.com and appreciate it, talk to you soon, bye, bye.