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Michael Fitzgerald
Michael Fitzgerald
Make It Through Retirement

How you can help your retiring and retired clients focus on replacing 100 percent of their income.

January 22, 2009
Michael Fitzgerald, CPA, PFS

Every retiree's situation is different and the more ideas and advisors that the client comes into contact with, the more confused they get. From speaking with many pre-retirees and retirees, it appears that their primary concern is income replacement.

As advisors, we should focus on what we can control within our client's portfolios. Helping our clients maximize their retirement income replacement efforts is one area we in which we can provide guidance, targeting a sustainable paycheck over the client's life. We are able to utilize the client's overall net worth through total balance sheet optimization and not just focus on their net investible assets.

A business analogy fits well for both the retiree and the CPA planner. The goal of every retiree should be to think of themselves as being the self-employed owner of their own retirement income replacement company. This company should provide a systematic retirement check for the rest of their life. The goal is to construct a "pension fund" that is not trying to beat the market; but rather replacing 100 percent of their income using all eight of the investment asset classes — cash, fixed income, securities, private enterprise, income producing real estate, commodities, foreign currency and hedge funds — and both sides of the balance sheet. As advisors, we are now able to apply business principles to utilize leverage, tax minimization and re-occurring bi-monthly income to create a systematic retirement paycheck for our clients.

What Our Clients Really Want — Can I Really Retire?

Our clients have three concerns related to retirement:

  1. Can I maintain my current standard of living?
  2. What is inflation going to do to my retirement nest egg?
  3. Am I going to out live my money and if so, when will it happen?

They did not ask, "What rate of return do I need to get to beat the market?" or "At what distribution level can I de-accumulate my retirement nest egg?" The missing piece of the retirement puzzle for most pre-retirees is the uncertainty of cash-flow. They are haunted by the fear of running out of money in their post-working years. Addressing this issue goes to the heart of the client's need.

Getting Your Clients What They Want

One way to dodge this retirement pitfall is to create an income replacement retirement plan with business ownership and income producing real estate as a substitute pension plan to add stability and consistent cash-flow to the client's portfolio, not tied to the markets. The sooner your clients realize that as a retiree they will be self-employed, the sooner they can start building the necessary infrastructure to insure an increasing paycheck over their lives.

This infrastructure is initiated by the planning process as we show our clients how to build a plan around their goals and dreams and to determine the probability for success, given their current portfolio assumptions and constraints. We need to re-educate our clients into not chasing the market, but instead focus their resources on capital preservation and realistic above inflationary returns. Establishing this "retirement paycheck business" takes time. As CPAs we understand how to help companies make regular payrolls, through the use of cash-flow funding, business tax minimization and establishing credit worthiness. We know that one certainty in any business is that you have to learn to project the cash-flow timing to survive the growth phase.

The Problem

If your client's idea of asset allocation is fully invested in only three asset classes stocks, bonds and cash, you could be setting them up for a retirement meltdown. As advisors, our advice is based on a long-term stock market increases, yet most pre-retirees and post-retirees have historically had 100 percent turnover within their individual portfolios over their respective holding periods, while claiming high risk tolerance on questionnaires. It is not surprising that they have not been able to get the necessary returns to keep their future retirement paychecks funded. They never reach the statistical holding period necessary to reach the risk adjusted return they used developing their portfolio. Our clients are seeing their future income potential move up and down at the whim of the markets. They need to make up lost return, but do not want to commit to the long-term holding period necessary to reach the target return necessary to recover the losses sustained.

Win-Win Strategy

Your clients need to focus on creating a five-year income replacement platform, just like a business plan. This is long enough to be strategic, but short enough to be responsive to changes in their specific market conditions. Instead of committing to a 35-year financial plan and hoping that your clients will stay the course, it is much easier to project out over the next five years and build the plan around non-market correlated retirement income over the holding life of the asset classes. The government and most businesses can not realistically predict the assumptions needed to make accurate long-term projections and neither should your clients. By using long-term assumptions we cannot control, it is no wonder we cannot get our clients to commit to reducing unnecessary turn-over within their portfolios, which is derailing most pre-retirees into today's markets.

The key to their retirement pension paycheck is cash-flow management, leveraging up of their current asset base to purchase enough income producing assets to replace 100 percent of their income in a relatively short period of time.

You can provide stability by helping your clients focus on providing their future paycheck. Use the core income replacement portion of the assets to produce the monthly cash-flow, instead of the market. This allows the liquid part of the portfolio to be safely invested for the long-term, generating leveraged income through other non-market correlated assets, such as private enterprise and income producing real estate. Now your role has become a business wealth management developer and you can help your clients with the growth of their new retirement company and the acquisition of income producing real estate, while you use the other asset classes to outpace a more manageable number — inflation!

Benefits to Clients

  • Does not depend on the markets for income
  • Help alleviates the fear of running out of money
  • Can use a portion of their portfolio to produce greater income in a shorter period of time

Benefits to Advisor

  • Fulfill your fiduciary responsibility to properly diversify their portfolio using all asset classes available
  • Additional income generation will allow the client to accelerate the growth of their portfolio, until they are able to have enough liquid assets to replace 100 percent of their income adjusted for inflation
  • You can leave the investable assets in place and produce increasing income to your practice

Now is the time to rethink how you are planning for your client's future. CPA/PFS professionals can use all eight of the asset classes to help your client's reach their 100 percent income replacement goal.

Cash + Fixed Income + Securities + Private Entities + Income Producing Real Estate + Commodities + Foreign Currency + Hedge Funds = Properly Diversified Portfolio Targeted To Replace 100 percent Of Your Client's Income

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Michael J. Fitzgerald, CPA, PFS, CFP, MST, is President and founder of Fitzgerald Financial Partners, LLC, a company he founded to focus on helping his clients and advisors systematically replace 100 percent of their income over a five-year period, so that they can focus their net worth on reaching their own individual goals. The mission of Fitzgerald Financial Partners, LLC is to be the leader in the 100 percent income replacement model for financial advisors and to help advisors liquidate or transition their practice for retirement so that they may create a pension for themselves while still serving their client’s fiduciary loyalty. With his growing network of 3,200 nationally ranked #1 Google & Yahoo and AOL retirement and financial planning Web sites and his new online appointment-setting directory program, he is able to help advisors looking to transition into retirement and create their own retirement paychecks through his unique program of individual client transition.