The Launching Pad to Comprehensive Retirement Planning
MARTHA SHEDDEN
What influenced you to become a CPA and help people with retirement planning?
KATHY INDIANO
I was very blessed to be raised with two wonderful parents and I had a father who worked about 25 years as a shift worker, and then a few more years after that. My mom was a secretary in a school system. I was the youngest of four. When they got married, they set very specific goals of how they wanted to raise their children. They wanted to instill quality values in the areas of education, music, and athletics. They wanted their children to lead with integrity and have a genuine heart of compassion for others. They stuck fiercely to these goals they set early in their marriage. I remember there was sometimes tension because every decision they made was relative to the achievement for those things in their children’s lives and they each had a financial element to it. Often, young parents who are trying to raise a family only have so much money to go around.
In high school, I loved math. I took two years of accounting in high school and continued to follow that path into college. I got my CPA, worked for a very large firm for a period, and then became a controller of a property management company. After having children, I wanted to be a stay-at-home mom for a period, but I needed to help put food on the table, which is common in those early years of marriage. I started my own business from scratch and did individual and corporate tax returns, bookkeeping, and payroll. I did whatever I could do, particularly when my kids were sleeping. I named my business Home-Run Accounting.
I did that for a while, and within a year or two, I realized people who were getting closer to retirement or in their 50s had a concern about what retirement was going to look for them. They had a hard time visualizing and quantifying what retirement meant. They were very secure in the fact that they had jobs, and they were getting regular paychecks, but they didn’t know what their financial future looked like. I was younger when I realized this and didn’t think it should be a dilemma because we should be working hard to get to that point. I wanted to help people walk through retirement planning. I realized Social Security planning is the launching pad to people’s comprehensive retirement plan and that they needed to plan for the uncertainties of life. Social Security is very complex. There are over 2,700 rules on how to file. It’s daunting for a professional, let alone a nonprofessional.
MARTHA SHEDDEN
What was it that prompted you to emphasize Social Security planning in retirement? What are the most common misunderstandings your clients have about Social Security?
KATHY INDIANO
Social Security planning is what I consider the hinge pin to the planning process. When you do that first, the client becomes aware of all the different filing strategies they have available to them. It allows us to open the door for other conversations, like what happens before you start taking Social Security, the uncertainties of life, and then look beyond that. You need to consider what will happen if you’re forced into early retirement because you become disabled or have another change in your health. You need to consider premature death and how that impacts your planning.
The advisor who does your comprehensive plan should know if you have enough life insurance or if you should have disability insurance. Beyond that there are many things advisors can investigate such as long-term care strategies. It all starts with Social Security planning. Once that planning is done, it opens the door for the advisor to pivot one way or the other and put together a comprehensive plan.
MARTHA SHEDDEN
The United States is lacking when it comes to general financial and economic literacy. What can we do to address this?
KATHY INDIANO
It starts in our school systems as well as within the home. These are conversations we need to have with our children when they start to get older. We need to talk to them about how to plan and handle money. It begins with communication. I hope people find an advisor that can speak to them and discuss these things with them. They need to have that advisor that's interested in their well-being, who takes in all the information and tells them how to apply it to their own personal circumstances. When that’s done properly it gives people a peace of mind.
Beginning this education in the home is important. It's okay to let your children hear, hey, we're going to go work together. Children can hear their parents talking about finances and what needs to be worked on. Let your kids have little tidbits into that. Explain to them how to handle extra cash they earned cutting the neighbor’s grass. Give them those tools early and hope they are getting an education at school about how to handle money.
MARTHA SHEDDEN
How do you define success when it comes to your client's retirement planning? What are people looking for to feel successful and prepared for retirement?
KATHY INDIANO
The people who are the most successful are the ones who have done the planning that gives them peace of mind moving forward. When they have concerns, they can call, and we can discuss them. They also have the freedom and the ability to call when life's uncertainties arise. There are things that change. For example, we worked on a case a few years ago with a woman who was a single taxpayer a few years from retirement. Her employment field allowed her to opt out of the Social Security system. Even though she had a job in their early years, and paid some money into Social Security, when she received the bulk of her earnings, she wasn’t paying into Social Security.
We looked at how that would work and where her retirement resources would come from. A year before retirement, she called me and said she was getting married. That was great, but I wanted to know the negative or positives relative to the financial plan we had in place. After asking a few questions, I discovered that her soon-to-be spouse was already retired and collecting Social Security. Alarms went off in my head because that is another planning opportunity. After getting all the information, my client who didn’t pay a lot into Social Security is receiving a nice benefit from Social Security because of the earning record of the spouse. That proved to be beneficial for her. I encourage my clients to be prepared while having flexibility, and to call me when things change to see how we can work with those changes.
I have another example of how Social Security allows people to pivot and provides this peace of mind. I had a client who came to me in their late 40s, early 50s and wanted to do Social Security planning, which is unusual, but it’s never too early to get some basic information about retirement planning. We made a few assumptions of how long they wanted to work and what their income range might be and then did the planning. A year later, the spouse called me to say that her husband developed a disease that would affect the quality of life and life expectancy. After the shock of getting the news, they began to think about the loss of a job and the loss of an income. They wondered what would happen if the spouse passed away.
Because we had set a comprehensive plan, they were able to pivot. They know that if they are going to start on a new journey, they have financial peace of mind because they saw the flexibility and planning that helped them solve the what-if scenario that happened. Life insurance and the ability to collect Social Security disability and apply for that are important. With minor kids, they would be able to collect. You can't quantify life or death. You can't put a value on that. But you can help provide peace of mind allowing people to have the best journey possible when those unforeseen circumstances arise. We already had a plan in place if something like this were to occur. I recommend our clients and people who are getting ready to retire to do their homework and get a head start.
MARTHA SHEDDEN
Many people are afraid to talk about retirement, so your clients who had the foresight to come see you in their 40s are exceptional.
KATHY INDIANO
You mentioned the word afraid. A lot of people are uncomfortable talking with their spouses about money and money matters. Communication is critical. When you are unwilling to communicate, it closes doors. I want the opposite for my clients. I want them to communicate and address these difficult areas so we open the doors of communication. When they do that, their personal lives and their relationships are enhanced.
MARTHA SHEDDEN
Talk about how you help your clients with their retirement and personal account withdrawal strategies to make the most of their Social Security benefits and minimize their taxes in retirement.
KATHY INDIANO
In most situations there will be a drop in taxable income when somebody retires. We lay out where the money is coming from the first couple of years when they retire. Are we going to hold off on Social Security so it can grow by that 8% or are we going to claim it right away? We look at all the areas – their IRAs that are taxable, their Roth IRAs, their non-qualified investments, and we look at the cash flow that can come from all of these. We look at how they're positioned from a risk tolerance standpoint, and then develop a plan. We look at the taxes, and what they're going to be because tax rates are the lowest that they’ve ever been today and they're only going to go up in the future. I develop a strategy and show them where we're going to pull the money from.
That strategy needs to be flexible just in case there's something that significantly affects their lives. We go over that more during their first year of retirement because that’s when people are most nervous. We make tweaks and changes depending on how their portfolios perform. Sometimes we look at Roth conversions to take advantage of the low tax rate. There are many things we can do to enhance a portfolio in the long run and make sure they don't outlive their assets and have a legacy transfer to their children if that’s their goal.
For example, I had clients who came to me after they were retired. The wife had a pension, which she took out under a single life annuity strategy versus a joint annuity strategy. That gave her a higher payout. They were receiving that but hadn’t thought about who was going to pass away first because nobody knows that. The spouse had been taking quite a bit of money out of his IRA because they were used to saving his wife’s paycheck and putting it in the savings. If your spouse has a pension that is going to go away when they pass away and if you’re taking more money than necessary out of the IRA, you’re increasing your taxable income.
I told them since they had the pension, now was the time to use that money in their retirement. I told them to take out what they must from the IRA so they meet their income needs, but not to over withdraw because that will only increase their tax liability, which will affect how much money you have in the long run. When I showed them that on paper, it opened their eyes to how their money could last longer and new assets could be brought in.
MARTHA SHEDDEN
Inflation is on everyone’s minds right now. Is there anything retirees and soon-to-be retirees can do to insulate themselves from inflation?
KATHY INDIANO
People need to look at where they’re pooling their money during this high inflationary period. They need to look at how they’re positioning their assets considering inflation. There's a lot of risk in the market right now, and that's concerning to everybody. If you think of their retirement pots, however, rarely are they going to distribute all those assets within a couple of years. We need to let the client know these assets are going to be used way out in the future. Therefore, to help offset the rising inflation and allow for more growth and more yield, we need to position in this manner or that manner. You need to show them their timeline of money and how to position those specific assets.
MARTHA SHEDDEN
When you first meet with clients or prospective clients, what should they ask you that many are not asking? What are people unaware of?
KATHY INDIANO
The rising costs in the future, particularly in the areas of healthcare. People are living longer in general, so they need to be aware of that and how much they're spending. Nobody likes to live paycheck to paycheck or be short in retirement, so they need to understand what it's going to cost in retirement. People need a budget and a grasp on what their monthly costs in retirement will be. The last thing we want to do is tell people that they can't go on this vacation or do their hobbies after they've worked so many years to get to that point. We want to drill down into how much they think they're going to need with those other components and then we figure out how to get them there.
MARTHA SHEDDEN
If you had the power to make any changes to the Social Security program, what changes would you make and why?
KATHY INDIANO
The Social Security system has been around for a long time.
It's had a couple major changes. We must go back and look at the core purpose of the program, redefine that, and what it is really meant to do. Some of the extra programs might need to be capped at a certain point or shortened. It's a very sensitive conversation, but we do have to bring some type of balance back into that program to make sure it's there for the main purpose. The main purpose is not to make sure people have full coverage during retirement, it's to supplement what they have in addition to their other savings. We must reexamine the main purpose of that program, put some parameters around certain areas, and hopefully it can come back into a balanced program.
MARTHA SHEDDEN
I've worked with couples who have minor children. One of the parents is retiring, perhaps the other spouse is younger. The family benefits are there for them. When one person retires there's a focus on getting all they can for their children and it's out of sync with what the original purpose of Social Security was. There are certain aspects of the program that are out of balance and many people don’t realize that. Claiming Social Security early so your younger spouse and children can get it often doesn’t turn out to be the most money anyway.
Based on your experience and knowledge, what are the top two or three most important takeaways for financial professionals who help their clients with retirement planning and Social Security?
KATHY INDIANO
You can't be an expert in all areas. If you want to be an expert in Social Security planning, you must do it full time. It's almost not feasible, but at the same time, it's critical to developing a comprehensive plan. It's instrumental in the growth of those assets under management. They need to have as much knowledge as they can, work with an organization like RSSA, which I've done for several years now, and make sure that is an important part of their planning process. The most successful advisors are the ones who recognize that Social Security is the hinge pin in the door that opens and allows them to talk to all the retirement areas, both before and after Social Security claiming, when it's done accurately. That will allow your clients to live longer and bring in new assets. The advisors who are most successful are compassionate about their clients and they incorporate that into their practice.