December 8, 2017
Many of us look forward to retirement almost from the day we start working. But that feeling doesn’t always apply to people who have spent decades building a successful career to leadership positions.
I’ve worked with a number of executives who, although looking forward to enjoying a slower pace, aren’t emotionally ready to retire. With their generous salaries and benefits, they don’t worry about living comfortably; they’re more concerned about leading a fulfilling life. C-level executives tend to be ambitious and driven. They often want to remain productive and feel like they still have more to contribute to society than simply a lower golf score.
“You instantly go from 100 mph to five or 10 mph, when you might rather go 50 mph,” expressed a long-time client, Larry Peiros, the former chief operating officer at Clorox who retired a few years ago.
As Larry realized, thinking about what you will do for the next decade, or two or three, is an essential component to having a sound financial plan for retirement. In addition, it’s important to check on the financial changes that are coming, such as taxes and health insurance, and plan ahead for them.
If you’re an executive who sees retirement on the near horizon, here are four areas I suggest you review with your wealth manager at least six months before you hand over the keys to the corner office:
Most likely, you’ve been working for years with a financial advisor and are financially secure. But retirement isn’t what it used to be as people live longer, more active lives. Now is the time to sit down with your wealth manager and discuss how you envision living in retirement.
“What boggles my mind is my retirement may be longer than my entire working career,” Larry noted.
Therefore, you should make sure your portfolio is well-positioned to take care of you, your family and your goals for decades to come.
Consider your health needs, your desire and ability to travel, whether you want to provide for your children and future generations, and what kind of legacy you would like to leave through charitable giving.
In addition, think about what you want to do during those years. Larry parlayed his leadership skills to serving on boards of directors for companies that can benefit from his expertise. And he works as a consultant for a variety of industries.
“Board service and consulting is a great way to stay involved in the work environment, keep mentally stimulated and meet interesting people,” Larry added. “It was a pretty important factor for me in making retirement palatable.”
Larry also works hard at maintaining social connections. “You can no longer just walk down the hall and instantly connect with a dozen of your colleagues.”
Carefully review your compensation plans before you leave. If your deferred compensation payments start or pay out all at once at retirement, in addition to your severance, bonus, pension and stock option exercises, you could end up with several years of very large tax liabilities. But those liabilities could be reduced with certain tax strategies. Consider, for example, donating low-basis stock to fund charitable gifts during these high-tax years.
Also, know when your stock option grants expire. Will they expire at the end of their natural lifespan, when you leave the company, or several months afterward? And make sure you have a strategy in place for exercising them, including filing 10b5-1 plans before you retire and 83(b) elections at exercise of your options. Remember, once you are no longer employed, the company often will not withhold taxes on your stock option exercise.
If you intend to continue earning income from board or consultancy work, take that into consideration for tax planning purposes. Larry hadn’t initially anticipated getting significant self-employment income. But now he can deduct business expenses and defer taxable income with a sole proprietor 401(k). Another tax-advantaged option, depending on your situation, could be a SEP-IRA.
How long will your existing employer-based health insurance cover you and your family? You should have an alternative ready at least six months before your employer-sponsored coverage expires. If you’re offered retirement coverage through your employer, review the medical plan and make sure you know of any deadlines or requirements. And compare the work plan with other insurance policies.
Even if you’re offered great coverage through your employer, I recommend that you also file for Medicare by the appropriate deadlines, otherwise you may be subject to stiff penalties if you find that you need it later. And determine if you should get Medicare supplemental coverage, especially if you don’t receive employer-sponsored health insurance. If the transition is sudden, and you’re not yet eligible for Medicare, you might need to consider COBRA until you can find new coverage.
Also, review your property insurance. Is your umbrella liability coverage adequate? Be sure it accounts for future stock awards from board positions. If you’re serving on a non-profit board, you might want to consider specialty coverage for directors.
What’s more, if you’re losing employer-sponsored life insurance, ask your wealth manager whether you need to get new policies. Perhaps self-insured coverage is a better option.
Larry started estate planning years ago, therefore he felt he had “all my ducks in a row” and was set to provide for his family when he retired. By planning ahead on what to do with his retirement compensation, he said he realized “immense” tax savings by using special tax strategies for his heirs and philanthropy.
“I put in place estate planning strategies which will greatly reduce my estate taxes. I also stepped up my giving. I set up two donor advised funds, which are tools for me to donate appreciated stock,” said Larry.
Donor advised funds and family foundations allow you to support charitable causes most important to you and your family, while also providing tax advantages. Talk to your estate planner about which method would work best for your financial situation, giving goals, and level of involvement you’d like to have with the charity.
Also, if you haven’t been doing so already, consider making financial gifts or transferring wealth to your children and grandchildren. A wealth management team that is experienced with tax and estate planning should be able to suggest various solutions — such as establishing particular trusts or paying for college tuition directly — to avoid or minimize gift taxes.
As he looks back, Larry recommends executives start retirement planning as early as possible because, “You never know when retirement is going to happen.”
In the corporate world, change occurs all the time. New leadership, mergers, an IPO, market declines or tough new competitors are just some of the things that can change your professional trajectory. Not only is it important to create a financial plan for retirement, but you should also think seriously about how you will spend your time so that you continue to lead a fulfilling life.
“People in big companies are used to implementing change. They know how hard it is,” Larry said. “Retirement is about as big a personal change as you will ever go through. You need to be both financially and emotionally prepared for it.”
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