The Fruitful 50s: 7 Planning Opportunities for the Decade Before Retirement

Journal of Financial Planning: January 2018


Jonathan Guyton, CFP®, is principal of Cornerstone Wealth Advisors Inc., a holistic financial planning and wealth management firm in Edina, Minnesota. He is a researcher, mentor, author, and frequent national speaker on retirement planning and asset distribution strategies.

Most retirement planning topics focus on decisions and issues important just before, right as, or shortly after an individual or couple retires. This seems true in both professional journals and financial services trade publications, as well as in the consumer press. But a number of planning steps and strategies arise in the decade or so before retirement—that is, in one’s 50s usually—that can have a big impact before the start of a retirement transition.

To be clear, retirement transitions often take five to 10 years. Frequently, these transitions begin at the first “downshift” in employment income and typically continue until employment income has completely ended. Of course, such transitions involve the strategic and planful turning-on of various retirement income sources. In this column, however, I want to explore seven planning opportunities that are potentially available in the years before these cash flow transitions begin. If it helps, think of this time as the fourth quarter of one’s planning for retirement.

Cash Flow: Building the Nest Egg

We all know that the most powerful dollars one can save for retirement are those put away the earliest. Similarly, dollars saved in the final year or two before retiring are much less valuable. But dollars saved in the final decade of the accumulation period can still make a real difference in a client’s eventual retirement resources, whether in terms of a higher sustainable income or more assets for discretionary or one-time spending. This is especially true if annual savings increase by 50 percent or more in the final five to 10 years before an employment income downshift begins.

Cash Flow: Income

Whether it’s from consulting, transitioning to part-time, or monetizing a long-time passion, being in a position to earn some income after full-time employment ends can make it much easier to wait for that bigger Social Security check closer to age 70 or avoid drawing so much from retirement assets for higher discretionary or bucket-list expenditures. Clients who have done this successfully have usually laid the groundwork in one way or another several years in advance, so one’s 50s is the time to start figuring out how this can happen.

If the goal is to consult for their current (and eventual former) employer, paying attention to precedent and near-time needs for expertise and wisdom is a good start. So is networking with professional peers who may need valuable, but part-time, consulting help for a start-up venture. One of our clients used this approach to transition from a leadership role at a major medical device maker to a similar 30-hour-weekly position with a related start-up, allowing this couple to fund additional travel as they wait to claim defined benefit income in their mid-60s.

Cash Flow: Housing Expenses

For various reasons, a client may have a mortgage that won’t be paid off until after today’s full-time employment income ends. One option is to incorporate this principal-and-interest payment into the sustainable income that a retirement plan must generate. Though this can certainly work, some clients have another option should they wish to be mortgage-free at retirement. This involves amortizing the current mortgage balance over the remaining years of full-time employment, perhaps by refinancing to a shorter-term loan and/or accelerating the payments.

Obviously, clients would need to balance this use of current income with any tax benefits they would lose by having to reduce deposits to defined contribution plans. Sometimes, though, clients can have their cake and eat it, too, in this area.

Insurance: What’s No Longer Needed

The amount of life insurance still needed in one’s 50s is likely much less than 15 or even five years earlier. If so, coverage amounts that are no longer necessary can be reduced or eliminated, with premium savings available for other saving and spending priorities. Because group term premiums become quite expensive at age 50 (and especially at age 55), any paring back of death benefit amounts should start here. However, level-premium term policy death benefits can also be reduced while what’s still needed stays in force until the term ends. 

Insurance: What May Be Needed Now

If they have not already done so, we advise clients who will need long-term care (LTC) insurance to purchase it by their mid-50s before increases in issue-age premiums accelerate beyond the point where waiting another year makes financial sense. But which clients should make this purchase and, if so, with what policy design?

Clients often do not realize that when LTC is needed in their life, they still receive all of their long-term retirement income. For clients who have planned and saved well, this usually means that at least some LTC expenses can be covered by this income—especially because other expenses and income taxes (due to the deductibility of these new out-of-pocket medical expenses) will fall. Thus, enough LTC insurance should be purchased to cover those LTC expenses that couldn’t reasonably be covered by regular income. Such a gap will almost always exist for couples whose ongoing retirement income finds their withdrawal rate at the very top of what they and their financial planner consider safe and sustainable. This is because additional portfolio withdrawals to cover LTC expenses could compromise a surviving spouse’s financial security from this point on. For couples in this situation, a policy where benefits can be shared between spouses can be an efficient solution.

Portfolio Allocation

Clients who are five to 10 years away from starting their retirement transition likely have an asset allocation more aggressive than would be recommended at the point when it’s time to “turn on the faucet.” Of course, there are three options for getting from here to there: changing the allocation of existing assets, future contributions, or both. The math on this reveals that relying solely on future contributions comes up short.

Consider a situation with $1 million of retirement assets invested 80/20 between equities and fixed income, $50,000 of combined annual employee and employer contributions, and a goal to have a 60/40 allocation in five years. At an 8 percent annual return, the $800,000 now in equities grows to $1.175 million in five years. To be only 60 percent of the total, today’s $200,000 bond portion needs to be $780,000. At a 2 percent annual return, this becomes $480,000 if all $250,000 of future deposits are allocated here—still, just 29 percent of a $1.655 million portfolio five years hence. At some point, some equities will need to be re-allocated to fixed income. But when?

Obviously, the choices are now, later, right at retirement, and in stages. Rather than recommending a single approach explicitly, I’ll share my firm’s big learning on this question during the Great Recession. In short, don’t assume that addressing this question three years before retirement withdrawals is enough lead time to avoid compromising a client’s retirement plan. If you’re still waiting to do this when markets drop significantly, you may well need another five years (rather than just three) to be able to wait for the eventual recovery.

Almost-retired clients who are too heavy in equities will likely be uncomfortable sticking to their target retirement date. If recent equity gains have lowered the need for future appreciation, it’s just not necessary to put hard-won retirement security at the risk of “Mr. Market.”

Estate Planning: It May Not Be So Complicated Anymore

Years earlier, clients with young children were definitely well-served by establishing revocable trusts and/or by testamentary trust language in their wills when planning for both their families’ well-being as well as minimizing estate taxes. So much has changed.

Estate tax exemption equivalents have risen dramatically at the federal level and in most states, its portability between spouses increases its value even more and, of course, thoughtful beneficiary designations can be placed on non-qualified accounts and even on most real estate via the filing of a payable-on-death deed.

Taken together, estate taxes are eliminated and probate avoided on many assets for many clients—all without the need for a single legal document. For many 50-something clients, estate planning becomes all about whether—and what kind of—kids have emptied the nest. And, making sure their financial and health care powers are in the hands of those they’d like.

For these clients, if any children are now grown up and would be trusted to receive their inheritance(s) with no strings attached, (most) everything, including charitable bequests, can be accomplished via (contingent) beneficiary designations. Now outdated wills and trusts may not need to be updated and can be discarded, thankfully not having been needed.

Further, not having traditional and Roth retirement plan assets flow through an outdated estate plan preserves valuable income tax benefits for heirs. Taxes on both deferred and tax-free accounts are minimized by keeping assets from being forced out sooner than the RMD table requires.

It’s hard to imagine a decade in one’s life that wouldn’t be enhanced by financial planning done well.

Retirement Savings and Income Planning