The
impact of this shift, which is beginning right now for the initial waves of
millions of baby boomers, cannot be overestimated. Born between 1946 and 1964,
these boomers will need to plan for a retirement that could last for more than
30 years. So, it’s not only those close to retirement, but an entire generation
that may need professional help to ensure that their portfolios will provide an
income throughout their lifetimes.
There
are several key risks that can undermine the success of a retirement plan –
longevity, inflation, asset allocation, fund withdrawal rate and last, but
certainly not least, health care expenses.
Underestimating the Risk
Many
people underestimate what their life expectancy is and therefore risk outliving
their assets. The facts indicate that at least half of the population may outlive
the average life expectancy. A successful lifetime income plan can help
retirees prepare for living well into their 90s as there is a very real
possibility that people will live 20, 30 or even 40 years in retirement.
The
anticipated longer retirements and the impact of inflation make it more
important than ever that portfolios include investments with the potential to
outpace inflation. It’s also of paramount concern to provide income protection
for the surviving spouse in the event of long-term care needs for an unhealthy
partner.
Many
retirees think they need a conservative portfolio. But, given the anticipated
length of their retirement, this could create a heightened risk of outliving
their assets. A key to long-term success may lie in balancing portfolio income
with portfolio growth.
Obviously,
a conservative withdrawal rate would dramatically increase the likelihood of
retirees not outliving their assets. A good financial advisor can help people
understand how much they need to save to meet their lifestyle goals, and what
is a realistic withdrawal rate.
Rising
health care costs coupled with inadequate medical insurance coverage can have a
devastating impact on a lifetime income plan. Addressing this risk may mean
targeting savings specifically for health care and purchasing long-term care
insurance.
Sporty Forties
Looking
at the differing needs for various segments within the baby boomer generation
may make more sense if we divide them into age groups. Let’s consider the first
group as those who are currently ages 40-49. These are the youngest baby
boomers. They are too busy to think too much about retirement planning right
now. They have multiple financial goals, including college savings, retirement,
children’s needs and housing costs.
The
important risks for this group to consider are longevity and asset allocation.
These people really need to understand the value of extra years of compounding
on their savings. They also should look into a growth-oriented portfolio so
they can take advantage of long-term equity performance. Some questions to
consider:
- What events could capsize your current retirement savings plan?
- Has market volatility impacted your savings?
- Will you be paying college tuition for your children?
- How would you prioritize all of your different financial goals?
Possible solutions to these issues are: risk
tolerance and subsequent proper asset allocation, college savings planning,
health insurance, life insurance, disability insurance and deferred variable
annuities.
Nifty Fifties
The
next segment includes those who are currently ages 50-59. They are now
beginning to think about retirement and are uncertain whether they have saved
enough. They probably don’t know how to put together a retirement income
estimate themselves, and they are concerned about life’s changes: kids leaving
home, aging, new goals and directions.
These
individuals should be thinking about longevity, an appropriate strategy to
provide for growth until retirement age and how they will meet their needs
during a long retirement. They should be looking at transitioning their asset
allocation plan to take advantage of the next 5-15 years before retirement.
Now
is the time to discuss life and health coverage in retirement, including
obtaining long-term care insurance, discontinuing disability insurance and
looking at the options for supplemental health insurance coverage at
retirement. Questions to consider:
- Your retirement could last 25-30 years or more. Are you prepared financially?
- Do you know how much you will be spending in retirement?
- How is your long-term portfolio holding up?
- Do you feel comfortable about your retirement savings plan?
Possible solutions for people in this age group
include reviewing their asset allocation plan, taking advantage of catch-up provisions
in their IRAs and employer-sponsored plans, consolidation of assets for more
efficient management, and fixed or variable annuity products. Now might be a
good time to also consider living benefit riders on variable annuities.
Super Sixties
Finally,
those individuals who are 60-69 years of age. Their key concerns might be
wondering whether they have saved enough for retirement, wondering about their
health prospects and concern about taking care of children and grandchildren
financially.
Issues
to consider include planning for the possibility that they will live longer
than they think, asset allocation review, health coverage and the risk of
inflation eroding their spending power. Questions to consider:
- How much can you expect to receive from Social Security or your pension?
- Would you like to help fund your grandchildren’s education?
- Have you thought about protecting your spouse or partner if something should happen to you?
- Can we discuss the retirement income potential of your portfolio?
Possible solutions to these issues: asset allocation
and diversification, catch-up provisions for IRAs and employer-sponsored plans,
consolidation of assets for more efficient management, assessing your life
insurance coverage, long-term care insurance needs or annuity laddering.
Conversion to a Roth IRA might be considered. Additional considerations:
- Checking your beneficiary designations for all accounts
- Discussing required minimum distribution options
- A health care power of attorney, or living will
- Systematic withdrawal plans
- Estate planning considerations
The transition
from full-time work and asset accumulation to retirement and asset draw-down
brings a new set of financial decisions. The main challenge – achieving
potential lifetime income solutions – is a serious one.
Education is of
paramount importance. No matter which age group you currently are in,
understanding how to, and adequately planning for, your retirement takes
effort. It’s important that you understand the issues you currently are facing
and the issues you will face as you get closer to retirement.
It’s education
that will last a lifetime.
- Grant Barra
Grant M. Barra, LUTCF, CLF®
Connect with me at www.linkedin.com/in/gbarra
Connect with me at www.linkedin.com/in/gbarra