Why Executive Retirement Planning Starts 10 Years Before Retirement

If you’re a parent with kids, you know how quickly time flies as kids go from cute toddler to a teenager saying “Bruh” every time you ask them to do the dishes. Time flies because those years are full of activity, pulling you in different directions at the same time. Executive retirement planning becomes challenging as you enter the prime stage of your careers. Responsibilities at work pile up and before you know it, retirement is right around the corner and you’re not sure whether you’re ready financially or emotionally.

At Financial Design Studio, we specialize in helping executives make the transition into retirement 10 years before they actually do. But why 10 years before retirement? Why not 5 years, or 3 years? Here, we will explain why executives need to start retirement planning 10 years ahead of retirement, so you can optimize and stretch the value of your retirement savings. The goal: that you feel confident in your future on that first Monday morning of retirement.

Key Takeaways:

• The first and most important step towards executive retirement planning is organizing your finances, including the consolidation of old 401(k)s.
• The scope of your financial situation extends beyond bank and investment accounts, and includes preparing for the unexpected with insurance and estate planning.
• There are complex planning issues that are distinct to corporate executives, including stock-based compensation and deferred compensation plans. 
• Retirement goals are not set in stone; you can always change your mind. But we help you set goals so you have a “beacon” to reach for while you’re still working.
• Retirement planning doesn’t end when you retire. Post-retirement tax planning is just as important as tax planning while you’re working.

The Three Stages of Retirement Planning

The scope of executive retirement planning goes beyond basic dollars and cents strategies. The goal is to turn apprehension about retirement into hopeful anticipation. Emotion is as big an issue as the math. Don’t underestimate the anxiety that comes from earning a steady paycheck every two weeks to having to live off of savings you squirreled away during those working years. It takes years of preparation both financially and emotionally to manage this transition well.

We believe there are three distinct stages to retirement planning, covering a span of 10 years prior to actual retirement. Each of these stages serves an important purpose, but they work together in shepherding an executive into retirement.

We developed this three-stage process based on our experience working with executives over the years. In the following sections we will go into these stages in more detail. 

Stage 1: Organize, Strategies, and Implement

The typical executive we work with is mid-career and mid-life. Up to this point, they may have switched jobs a few times. Their family is growing and attention is now turning towards paying for college. And as part of this, retirement is moving from something that’s “out there” to “going to happen.” 

Some attributes we see from these new clients is:

• They have orphaned 401(k) savings plans from employers they no longer work for.
• They’re good savers, whether it’s for retirement or college, but don’t know whether the savings they’ve accumulated will be enough to cover those goals.
• By moving up the executive ranks, they’re receiving larger amounts of stock-based compensation and are offered complex tax-savings plans such as deferred compensation.
• Surprisingly high tax bills have become more common, and they’re wondering if there’s anything they can do about it.

The first three years of executive retirement planning are critical to creating a lasting long-term retirement strategy. Here, we are working with you to organize your finances. This would include merging 401(k)s and other duplicate investment accounts. But we also look at all aspects of your financial picture, such as:

• Aligning your investment strategy with your age and years until retirement. 
• Analyzing your life, health, auto, and home insurance coverages to make sure you have sufficient insurance in place to cover the unexpected.
• Evaluating your estate plan (if you have one) to ensure that you clearly spell out your finances, medical, and child care decisions.

We organize all aspects of your financial life into a mind map so you see everything in one place. This sample chart is extremely busy, but goes to show how many things you need to be thinking about!

Once we have a good handle on your financial picture, we then go through each area and create strategies and recommendations to fill in any gaps. Most importantly, we help you implement these recommendations in a timely manner, doing as much of the legwork for you as possible so you can stay focused on family and career. 

We find clients get a ton of value from Stage 1 alone. Knowledge is power, and knowing you’re organized and doing all the things you need to do to protect yourself and your family provides a sense of relief. 

Stage 2: Minimize Taxes, De-risk Investments, Set Future Retirement Date

As clients get organized and implement our initial recommendations, we move into Stage 2 of their executive retirement planning. This occurs in Years 4 through 6 and is where we do more intentional planning for future retirement. It’s also the stage where the executive is grappling with more complex financial issues.

Challenge	Possible Planning Response
High salary & bonus levels push client into high income tax brackets	– Maximize pre-tax savings plans – Strategically “lump” annual charitable giving into a single tax year – Deferred Compensation
Save more for retirement above the 401(k) maximum contribution	– Mega Backdoor Roth Strategy – Health Savings Accounts – Employee Stock Purchase Plans – Taxable Investment Accounts
Stock-based Compensation Vesting: How to diversify stock exposure and withhold for taxes	– Annual tax planning, setting aside funds to cover additional taxes – Sale and diversification of employer stock – Stock options exercise strategies

Getting each of these areas “right” can have a meaningful impact on current and future taxes. Beyond these complexities, we also talk about potential retirement dates, including early retirement. We remind clients that coming up with a possible retirement date isn’t set in stone. Things can always change. But the more the client gets a sense for when retirement will happen, it helps sharpen the recommendations we make for them to achieve that.

A good example is this: “We’d like to retire at Age 62, but if we can retire at Age 60, that would be great!” For this client, we would set a Base Case plan to retire at Age 62, but then show them the things they would need to do to retire at Age 60. It empowers the client with knowledge to make solid decisions on. 

The last major component of Stage 2 is talking about investment strategy. Early in our careers, the message is the same: “Save early, save often, and invest aggressively.” This is sound advice. But as retirement comes into view, it may be advisable to de-risk investments somewhat. Instead of allocating 80%+ to stocks, for example, we might suggest something closer to 70%. Remember, retiring means living off the savings you’ve accumulated, and de-risking investments ahead of retirement can increase certainty that funds will be there when you need them.

Stage 3: Retirement goals, Cash Flow, and Post-retirement Tax Savings Strategies

The third stage of retirement planning, which usually happens in Years 7 to 10, is where we sharpen pencils for an impending retirement transition. While cash flow planning takes center stage, we also want to help you mentally prepare for retirement. Here are some of the key things we work on with you in Stage 3.

Setting Goals: Beyond the challenge of matching cash flow to cash needs in retirement is having a plan for what you want to do while retired. While we’re not life coaches, we have intentional conversations about things you want to do when you retire. This accomplishes two things. First, it gives you something to look forward to as you near retirement. Knowing that you have some exciting plans for retirement helps ease the transition. Second, we don’t want you to get bored after one week of retirement. High-performing executives are susceptible to having this happen. These goals can include setting an annual travel budget so you know you can afford to travel.

Cash Flow Planning: Once you retire, you’ve “made it.” Those 30-40 years of socking cash away in a 401(k) are now going to be used to fund your living expense needs. But how? This is where we get specific on your cash flow needs in retirement. For example, we come up with a 5-year cash flow plan, showing any remaining income sources you have post-retirement and matching that with your spending goals. It’s often the case that expense needs are higher than income in retirement. So we map out which accounts money will come from and can even set your accounts to “pay” you regularly, just like when you were working. 

Health Insurance: For people who are retiring early or retiring before Age 65, this stage is even more important. One of the biggest benefits you receive from work that you only realize when you retire is health insurance. If you’re retiring early, solving the question of how to pay for health insurance before you’re eligible for Medicare is critical, as this can cost $20,000 per year or more. If you’re not retiring before Age 65, we help you navigate the complexities of signing up for Medicare and selecting the right policies to cover your health needs.

Post-retirement Tax Saving Strategies: Just because you’re transitioning into retirement doesn’t mean our work stops there. During these three stages of pre-retirement, we’re also monitoring your future retirement projections to see if you’re going to run into tax issues. Executives with large pre-tax 401(k) balances will run into these tax issues when they have to take Required Minimum Distributions (“RMDs”). For many retired executives, there are what we call “income gap years” for the first several years. Income gap years happen when you’re no longer getting a salary and haven’t yet started Social Security benefits. This can be an ideal time to do Roth Conversions, front-loading tax bills at lower income tax rates so RMDs don’t push you into high tax brackets in the future.

Stage 3 strategies only happen if we already did future-based planning for them in Stage 1 and Stage 2. 

Why Executives Need to Start Retirement Planning 10 Years Ahead of Retirement

We’ve seen that there are distinct strategies in each of the three stages we’ve gone over. But don’t be mistaken, we incorporate ALL strategies into ALL stages. For example, we help you minimize taxes in all stages, not just Stage 2. The three stages of retirement planning shown here are to help you visualize HOW the executive retirement planning process works at FDS.

We have developed this process over the years as we’ve worked with executives. When you work with FDS, you’re getting access to that experience and our process for helping you through the retirement transition. And we would love to help you retire right, the first time!

Let’s be clear: We customize every retirement plan for each client’s unique situation. There are no “cookie-cutter” plans at FDS. You deserve personalized retirement planning solutions, and that’s exactly what you get at FDS. We do personalized tax analysis and planning in-house to help you avoid tax surprises when you file your taxes. 

It’s not hyperbole to say that the transition into retirement is one of the biggest life changes people experience. Why not get some guidance to make sure you’re doing it right? At the executive level, you’re used to delegating tasks to get big picture strategies implemented. You can do the same with your personal finances by working with Financial Design Studio on your plan.

If you are interested in working with us, click “get started,” where we have a couple of questions to learn about you. From there, our team will email you to schedule a Zoom meeting, where we will talk about your finances and how we might partner with you! Learn more about our process here.