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A Retirement Prequel: Get Your Clients Off to the Right Start

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The financial quality of life your client will have in retirement depends on decisions that they will make a year or two before leaving the workforce. Here are some issues you and your client will need to consider as their retirement approaches.
 
One of the first issues is selecting a retirement date. In deciding on a date, your client will need to consider how many years they have been working for their employer. They also will need to consider whether they are eligible for longevity payments from their employer, and how to continue health insurance and other coverage for a spouse or dependent after leaving the workplace. Your client will need to consider the income difference incurred by taking early retirement as opposed to waiting until full retirement age. In addition, they should consider whether they will qualify for an annual cost of living adjustment (COLA) from their retirement plan, if a COLA is provided.
 
The decision to choose early retirement versus waiting to reach full retirement age can be influenced by a number of factors. Those who take early retirement often will take a permanent reduction in their retirement benefit. Your client’s employer will have its own set of rules surrounding when retirement may be taken, so you and your client must become familiar with them. In some companies, if COLAs are offered, they frequently require the employee to retire by a certain date in any given year in order to qualify for any COLA that may be given in a specific month of the following year.
 
Your client may be required to be in active pay status the day before the last day of the month directly prior to the month of their longevity eligibility in order to receive the payment. If they are not in active pay status on this date, they could forfeit their entire longevity payment.
 
For example: If your client was hired June 17, their longevity date is June 1. They must be in active pay status as of May 30 in order to qualify for their longevity in July.
 
Retirees often are paid for unused annual leave not to exceed the maximum allowable accumulation. In many cases, any amount in excess of the number of hours listed for any retiree is rolled into their sick leave balance.
 
The sick leave balance frequently is creditable for retirement service. For some employees, sick leave is only applicable toward total years of service for retiree insurance eligibility.
 
Money matters — understanding their income in retirement
 
Optional Retirement Program (ORP) is usually a market-driven defined contribution plan. The amount of your client’s income at retirement is based on the value of their account and their age. Employees in this ORP usually work with their individual provider to begin distribution of their funds. Their individual provider will provide payout options to the employee at the time of retirement.
 
Some employees may participate in an ORP and may not be required to begin drawing a benefit at age 70 but may do so at any time after they separate from their employment. There could be requirements for personal retirement plans.
 
Some options your clients could be offered may be a monthly benefit after their retirement for the remainder of their lives. This could lead to a number of decisions for your client. 
 
Your client may have the option to provide a monthly annuity for a beneficiary in the event of the client’s death. If they take this option, they could see their benefit reduced because the plan now must provide for their beneficiary for the remainder of the beneficiary’s life. For this reason, the age of the beneficiary most likely will affect the reduction of their benefit.
 
Your client also could choose to receive the regular maximum monthly benefit payable to them for a lifetime, and have all benefits cease at death.
 
Another issue to consider is Social Security leveling. This provides the retiree with an increased benefit until they reach age 62, at which time their retirement benefit may be reduced, and they may be eligible to begin receiving their Social Security benefit. 
 
Usually, retirement benefits are paid on the last working day of the calendar month. Your client may be offered the option to provide bank account information for direct deposit of their benefit. The benefit is subject to federal income tax, so you may want to work along with their tax advisor to help them decide the best option for taxation of their benefit.
 
Employees making contributions to 401(k), 457 and 403(b) plans usually are provided with the provider’s contact information. Employees must work directly with the provider to begin any form of distribution or rollover of the funds in these plans. That is because there are tax implications involved, based on the employee’s age at retirement.
 
Clients who are interested in drawing their Social Security benefits should contact the Social Security Administration directly or go online to www.ssa.gov. Application for Social Security may be processed online or at the local Social Security office.
 
Upon retirement, your client will be asked to list one beneficiary. Usually, this beneficiary can be changed only if the regular maximum option is selected. The beneficiary is eligible for the last retirement payment in the event of the retiree’s death. If a survivor option is selected, the beneficiary cannot be changed after retirement. Provisions may be made in the event of the beneficiary’s death or divorce.

Employee benefits — when they end and continuation issues

Employee health and dental insurance usually are paid for a month in advance. Your client should have coverage through the end of the month following their date of retirement. 
 
This coverage usually is payroll deducted. Employees who work partial months must consider whether their hours worked will yield enough compensation to cover their health premium.
 
After retirement, employees are required to contact the benefits administrator for changes and administrative or coverage issues.
 
Retirees usually are subject to state rules for insurance changes.  If a retiree does not elect coverage at retirement, there is often a five-year window for enrollment, subject to health questions. Rates usually are based on some formula relative to years of creditable service.
 
If your client and/or their dependents are age 65 or older, they will need to sign up for Medicare and purchase a supplement if their employer does not offer one through their group plan.
 
Many flexible spending plans require employees to incur the expenses in their plans prior to their retirement. Employees usually have 90 days to submit documentation for reimbursement, or they may use their final paycheck to pay the entire amount and continue to make claims for the remainder of the year. Any unused funds typically are forfeited. 
 
Employee coverage in basic life insurance typically ends on the last day of the month following the separation of employment.
 
Employees usually are entitled to an individual policy by the employer’s carrier. No evidence of insurability will be required. This coverage will not be the same as that provided to them as an employee, and the premium is affected by the amount of the policy and their age. The retired employee should receive a notice from the carrier concerning their eligibility to continue coverage. Payment of premium is made directly to the carrier.

When to begin the process

It is advisable for your client to begin the retirement process 12 months prior to their expected retirement date. During that time, they should prepare to lower their debt, make large purchases (car, appliances, home renovations) while they are still employed, consider the impact of retirement on their income and taxes, decide what types of activities will keep them occupied in retirement, and review their wills, trust and insurance needs.
 
Retirement paperwork must be completed three to five months prior to retirement. Forms that typically need to be completed include but are not limited toemployer retirement application, health insurance continuation and Medicare Supplement.

What to do now?

Help your clients know where they stand. Creditable service is not the same as the amount of years that they have worked. This time is calculated based on their years worked and their percent of effort. Other factors, including unpaid leaves, will affect their creditable service. 
 
If your clients think they should have credit for previous employment or military service, do not wait until they plan to retire to verify or apply for this credit. This process takes several months, and it can affect their smooth transition into retirement. If your client is concerned that they are not being given credit for all eligible service, they should request correction of discrepancies immediately. 
 
As their advisor, complete a fact-finding interview to help them think of the things that will matter as they age.  Have the plans in place to help your clients have a successful retirement, regardless of changing circumstances. Remember that these times of their lives are predictable and you can help your clients plan for them. 
 
 

Lloyd Lofton is managing partner of 7 Figure Sales Tools, Marietta, Ga. Lloyd may be contacted at [email protected] [email protected].


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