Marcia Tillotson and Joy Kenefick aren’t your typical drill sergeants.
They run what they call a retirement boot camp, aimed at making sure their investment clients who are contemplating retirement know exactly what they’re getting into. The exercise focuses primarily on finances — after all, the two women are partners in a financial advisory practice that is part of Wells Fargo Advisors in Charlotte, N.C.
But the women also make sure their clients understand what retirement feels like. They point out that retirees suddenly have no place to be each day, which may not be as blissful as it seemed beforehand. The paychecks stop coming. And after years of dutifully putting money into savings, retirees have to get used to watching their accounts dwindle.
The boot camp — an extended version of its military namesake — is generally aimed at people a year or two from retirement. While the exercises may be especially rigorous, they offer broad lessons for those who think they may be ready to stop working.
“It’s really a way to simulate retirement,” said Ms. Kenefick, who, with Ms. Tillotson, has been using the boot camp for about a decade. “It’s a way for people to really wrap their arms around something that is so abstract, and scary and permanent.”
The two advisers require pre-retirees to complete a checklist of exercises, including taking a hard look at where their money is going and making sure they’re on track, for instance, to pay off the mortgage. (That’s a nonnegotiable must-do before retirement, the two women say.)
Naturally, participants can’t quit their day jobs. But they’re required to save a disproportionate amount of money in tax-deferred accounts like 401(k)’s. That helps mimic what retirement will feel like: the increased savings lowers the amount of money the pre-retirees have to live on, while also reducing the taxes they pay (retirees generally tend to fall into lower tax brackets). Since they’re saving so much, the participants need to draw on their regular cash savings accounts to supplement their living expenses.
“We’ve become so ingrained to save, it becomes hard to live on those savings,” Ms. Tillotson said. “It’s a scary thing to do.”
The exercise also gives pre-retirees a convenient excuse to turn down expensive obligations. “It allows you to beg off of things you may have had to participate in for one thing or another,” Ms. Kenefick said.
Boot camp usually lasts about a year, and about eight of 10 pre-retirees who go through the drill decide to work a little longer than they initially planned. “They either realize they aren’t ready for retirement,” Ms. Kenefick said, or they “realize they are ready, and it becomes a game.”
Here are the women’s eight drills, which you can use to help assess your retirement readiness. They are both registered investment advisers and portfolio managers and charge their clients 1.35 percent of assets annually, on average. They agreed to give the general outlines of their program.
SPENDING The most important exercise is arguably the first: a thorough cash-flow analysis. That includes taking stock of every expense for the past year, including insurance and vacations. “The purpose of it is to determine what your lifestyle costs,” Ms. Tillotson said.
Once you reach that number, it’s easier to determine how much in savings will be required to support that lifestyle and how close you are to that goal (factoring in expected Social Security income, pensions or other sources). At that point, the advisers determine whether pre-retirees are living within their means, and may recommend cutting back so they can save more. The analysis also lays the framework for creating a budget, which will help keep spending in check.
Many retirees mistakenly believe their costs will go down in retirement, but the two advisers say they have found that expenses usually increase, at least for the first two years, because people finally have time to travel or spend more time around the house and notice work that needs to be done.
NET WORTH STATEMENT This looks at your assets and liabilities. On the asset side, the advisers assess how much money is in tax-sheltered accounts versus taxable accounts and whether, say, cash accounts need beefing up. They also take a look at real estate and determine whether, say, a vacation home should be sold or perhaps rented.
And if your mortgage isn’t paid off, well, then, you probably shouldn’t retire, the advisers say.
INSURANCE AUDIT Most people’s life circumstances have changed by the time they reach retirement age. Once there is no mortgage, the children are out of the house and college tuition bills paid, they may not need as much life insurance (if any at all). Or maybe it’s time to consider a long-term care policy.
GOAL SETTING Not everyone makes it this far into the exercise, Ms. Tillotson said. If you do, it means you have a fair sense of what it costs you to live and you’re generally living within your means. Now, you get to visualize what retirement life will be like. Do you want to travel? Volunteer? Take a part-time job?
At this point, you need to consider whether it’s more important to retire by a specific date or whether you should wait, save more and live more comfortably later. “We are establishing their goals and putting price tags on them,” Ms. Tillotson said. Is spending on the grandchildren a priority? “It’s fine if that’s your entertainment, but it means you’re not going to Europe.”
INCREASE SAVINGS Ideally, the two advisers want their clients to save the maximum amount allowed in accounts like 401(k)’s. In 2009, individuals can save $16,500, and another $5,500 if they’re over 50 (or $22,000 total). That means couples could put in as much as $44,000 in 401(k)-type accounts. Of course, not everyone can afford to save that much. But you should stretch beyond your comfort zone and save more than you have been, the two advisers say, because it helps you assess your needs and priorities.
Because they are saving so much, pre-retirees will need to draw on their regular savings accounts, which are already in place because the advisers require their clients to keep at least three to six months of expenses in cash.
Let’s say you and your spouse earn a combined $150,000 a year and you’ve been saving about 10 percent, or $15,000, in your 401(k)’s. After taxes (federal, state and FICA), you have income of about $92,800 a year, or about $7,730 a month. During boot camp, you both would disproportionately save a total of $44,000. That leaves you with about $73,300, or $6,110 a month (after taxes). That means you need to withdraw an additional $1,620 from your cash savings to make up the difference, which models what you’ll need to do in retirement. You’ve also cut your tax bill by a third (from about $31,000 to $21,000). “What we are doing is essentially moving money from their nonqualified accounts to their qualified accounts,” Ms. Kenefick said.
If you can’t manage to increase your savings, it’s probably a sign that you’re not ready to retire, the two advisers said.
TAX PLANNING Many workers never worry about withholding taxes since they are automatically deducted from their paycheck. That all changes in retirement when the checks stop coming in.
The advisers suggest asking an accountant to perform a tax projection that includes whether it will make sense to pay taxes quarterly or annually (and whether you should have taxes withheld when you withdraw money from your I.R.A.). You also need to figure out what else may be taxable, like Social Security. That way, you can work these numbers into your budget and figure out how much tax money to set aside.
CHARITABLE GIVING Retirees also need to consider how charitable giving fits into their financial life. While you’re working, you may have less time, but enough income, to donate. The two advisers suggest that some people consider donating more of their time in retirement.
ESTATE PLANNING Updating your estate plan is important. Earlier in life, you probably had fewer assets and, if you’re a parent, you were probably more concerned about the guardianship of your children. Now, you may want to name one of those children as the executor of your estate (or perhaps set up a trust for a fiscally irresponsible child).
PSEUDORETIREMENT Once you’ve reached this far into the boot camp drill, you’re ready to start your pseudoretirement. “We are not going to tell you what to spend,” Ms. Kenefick said. “All we are going to tell you is where you fall, which may be dangerously close to running out of money if you continue at this pace.”