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Heading into the Home Stretch

Web Extra: Psst! Wanna Buy a Law Practice?

Kenneth Labowitz gives it about 10 more years. By that time, he’ll be 68, and he an­ticipates having paid for his three chil­dren’s educations as well as coming into some money through inheritances from his parents and in-laws.

It’ll be time, Labowitz says, to start doing “the other things I want to do in life besides work.” Other than not working, however, Labowitz isn’t so sure what retirement really looks like.

While he’s “reasonably confident” that he and his wife will be able to afford retirement—they’ve each funded individual retirement plans through their jobs, have investments in the stock market and have substantial equity in their home—he can’t shake the nagging question of whether he’s being realistic about the life­style he hopes his retirement planning will afford him.

“I read in lots of publications that maintaining the lifestyle that you want to have is going to cost far more money than what most people predict,” he says. “Can you retire without having a gazillion dollars put away? I don’t have a clue as to what is realistic.”

Labowitz also assumes his retirement nest egg will include proceeds from the sale of his law practice. (As a principal in Dingman Labowitz in Alexandria, Va., he serves as a court-appointed fiduciary for a Virginia hospital and several court systems.) But he admits he does not know how to evaluate the law firm’s worth, much less how to sell it.

PRIME TIME

Financial planning experts say Labowitz’s situation is not unique—and he’s not necessarily at a dis­advantage. While the best time to start saving for retirement is with your first paycheck, planning for retirement can wait a bit. But Labowitz is wise to start his planning right now.

“Unfortunately there is not a formulaic answer because everyone has different spending habits and different ideas about retirement,” says financial planner Sarah O’Neil, a principal in the Chicago office of Gem Asset Management.

But there are some common considerations that will help lawyers like Labowitz start to determine, as O’Neil says, “if you are at point A, now how do we get you to point B?”

Labowitz may even have time on his side, says Washington, D.C.-based financial adviser Jean Jacques Borno of Morgan Stanley. By doing some retirement planning closer to his actual retirement date, he will have a better vision of what he wants the next phase of his life to look like, Borno says.

Labowitz’s first step should be to firm up his vision of a retirement lifestyle, O’Neil says. Then he’ll be able to examine his assets to ensure that he can fund it.

And there’s no time like the present to start en­visioning the future. Retirees do tend to spend more money in the first five or so years after retirement, since they are often enjoying travel and other activities while their health is still good, but O’Neil says that generally most spending habits do not drastically change. “You don’t usually start buying Gucci purses in re­tirement if you didn’t do it when you were working,” she notes.

One important question that Labowitz must answer is whether he is serious about not working during retirement, Borno says. Many aging baby boomers choose to continue working either out of need or desire, and that income stream can change retirement planning because it means the retiree does not have to rely as heavily on an investment portfolio for income and can instead let it continue to grow through riskier investments.

When it comes to running numbers, Borno says it also is imperative to start doing an inventory of assets in advance of retirement, including checking a portfolio for that all-important factor: diversity.

“Some people think that they have a diverse port­folio because they have four or five different brokerage accounts. But when they look under the hood, it’s basically different mutual funds with all the same holdings,” he says. “They are going up and down at the same time.”

Ideally, 15 years before retirement is the time to start getting aggressive about planning, says Borno. Increase 401(k) contributions as much as possible and reduce debt. It’s especially wise to pay off credit cards while you still have steady income, he says.

O’Neil also encourages clients to take Social Security as soon as they are eligible. Given the time value of money, it is a mistake not to, she says.

FINAL TOUCHES

Both Borno and O’Neil recommend continually fine-tuning the retirement plan by re-evaluating your goals and checking the value of retirement port­folios on a regular basis.

As retirement looms closer, they recommend shifting investment portfolios into more conservative positions. “We can look historically at the performance of their portfolio,” Borno explains. “We also want to protect against the risk of a negative stock market when they are taking money out of it.”

O’Neil cautions not to forget to factor in inflation: In 10 years, for example, it will take $128,000 to cover today’s $100,000 budget.

Of course any plan must take into account poten­tially substantial expenses like education for children or grandchildren and the price of caring for elderly parents, O’Neil says.

“I always recommend talking to your siblings about your parents. Will one sibling be taking the responsi­bility or will it be shared among the children? It is important to have a plan in place,” she says.

It is also important to have a plan in place for your own health care as you age, Borno says. He ad­vises that clients purchase long-term health care insurance for themselves, but when to buy is almost always a gamble. A long-term policy is cheaper to buy when the beneficiary is younger and healthier, but then the policy may not be needed for decades. On the other hand, if you wait until your 70s to purchase a policy, it may be cost-prohibitive, Borno says.

Immediately before retirement, he recommends making further adjustments to a retirement plan. These should include further reducing estate tax liabilities by sep­arating assets between spouses and also funding any future bequests.

Ideally, Borno says, Labowitz’s retirement planning shouldn’t end—even when he retires. It’s important that he continue to evaluate his portfolio’s return in its entirety, he says, to make sure risk remains low and the income continues.

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