America’s new empty-nesters find themselves in a position of having to rethink their financial situations in both the short and long terms. They still have the same amount of income coming in, but no longer having to provide for children typically means more disposable income. As a financial advisor, you can work with your empty-nester clients to put that disposable income to work for the future.
Every independent broker-dealer firm should have some policies in place for working with empty-nesters. As for financial advisors, adding empty-nester financial planning to the list of services offered allows individual advisors to establish another niche for themselves.
Advice tailored to empty-nesters would include things like:
- life insurance
- present and future tax liabilities
- mortgage debt and/or downsizing
- plans for social security
- strategies for accessing retirement plans
- estate planning and asset protection.
All the items in this list are equally important to younger investors not yet at the empty nest stage. The difference is that new empty-nesters need to start thinking about these things in different ways. For example, life insurance is important for protecting minor children. It is entirely different once the children are grown and gone. Insurance takes on a whole new meaning at that point.
Making the Best of Resources
Approaching new empty-nesters with financial planning advice begins with the understanding that making the best of one’s resources now will have a positive impact on the future. This is where having a full range of products and services becomes important, according to Pasadena-based Western International Securities.
The broader the scope of products and services, the more choices financial advisors have to help clients make the most of their resources. Choices matter to empty-nesters trying to plot a new course.
Having said all that, where is the best place to start with a new empty-nester? That depends on client circumstances. For example, let us say a financial advisor meets with a client who admits to having no life insurance in place. The advisor should not let that client assume that life insurance is no longer important now that the kids are grown. Life insurance is as important now as it ever was.
There may be another client with a very nice, but very large, house already fully paid for. Downsizing to something smaller and more manageable should give the client more money to put into key investments by virtue of having to spend less on housing and realizing a certain amount of profit through the sale of the property.
The Tax Liability Discussion
If financial planning for empty-nesters revolves around making the best use of resources, the tax liability discussion has to be part of developing a new strategy. Financial advisors know just how easily taxes can take a significant portion of what clients have tried so hard to save if the right strategies are not employed.
For example, is it better to leave a workplace retirement plan intact or transfer it to an IRA? How would such a transfer effect tax liabilities once the client begins to withdraw? The reality is that different kinds of retirement plans have different tax implications based on how people use and access them. These are things new empty-nesters need to know.
Your career as a financial planner has afforded you plenty of exposure to the concept of asset diversification. Every financial services company and dealer-broker talk about using multiple assets to protect against heavy losses. However, there is another form of diversification that does not get the attention it deserves: tax diversification.
Diversification is a concept most often framed around securities. Financial advisors caution clients against putting all their money into one stock or a single sector of the market. Rightfully so, they explain that diversifying spreads risk more evenly, thus protecting against heavy losses in one area.
The concept of tax diversification is similar. Tax diversification is the philosophy of spreading out investments in order to minimize tax liabilities without compromising maximum investment opportunity. The thing to note is that there is no single tax diversification strategy. Financial advisors and clients need to work together in an ongoing effort to minimize tax liabilities throughout every stage of life.
As a financial advisor, do you give tax diversity the attention it deserves? If not, here are three reasons to reconsider how you do things:
1. Investments Are Taxed Differently
At the top of the list is the reality that investments are taxed differently. There are three taxation models, the first being annual taxation. This model applies to any assets that produce either income or capital gains. Think of investment brokerage accounts, business income, capital gains distributions, etc.
Deferred taxation is the second model. It applies to things like 401(k) plans and deferred capital gains on real estate assets. Some deferred taxation holdings are subject to income tax while others are taxed as capital gains.
Finally, the third model applies to holdings that are rarely taxed at all. Municipal bond interest and certain kinds of life insurance policies are good examples. These kinds of holdings offer the most advantages by way of tax liabilities, but it still is unwise for investors to put all their assets into them.
2. Retirement Income Is Still Taxable
The second reason financial planning should include tax diversification is that retirement income is still taxable for the most part. The only question is how that income will be taxed. Consider the difference between a standard IRA and its Roth counterpart.
The standard IRA is a deferred taxation vehicle that allows investors to contribute now while deferring taxes until the time of withdrawal. All monies withdrawn are taxed as income in the year they are received. The Roth IRA is just the opposite. Monies contributed to a Roth IRA are taxed in the year they are earned. Withdrawals are not subject to income tax as a result. This could make a significant difference in future tax liabilities.
3. Personal Finances Evolve
The third and final reason for paying attention to tax diversification is the fact that personal finances evolve over time. Jobs change, families change, and future plans can be disrupted by health problems and other issues. There is just no way financial advisors and their clients can come up with a static financial plan that continues to maximize opportunities and reduce tax liabilities without ever changing.
Companies like Pasadena-based Western International Securities fully understand the evolving nature of personal finances, which is why they offer broker-dealer firms and their own financial advisors such a wide range of products and services. Those products and services can be used to create an effective tax diversification strategy.
Diversification is as important to limiting tax liabilities as it is to protecting assets. If you don’t currently pursue tax diversification with your clients, start doing so.
With the first wave of baby boomers set to enter retirement in the near future, there is a whole new niche of empty-nester financial planning waiting for financial advisors who want to pursue something new. New empty-nesters have unique needs that can, and should, be met with sound financial advice and strategic planning.