From the November 2007 issue of Boomer Market Advisor • Subscribe!

November 1, 2007

Four critical points about your boomer client's retirement

One of the key responsibilities of financial advisors is -- of course -- to educate their clients about the realities of financial planning. Many advisors report a good deal of success in educating their boomer clients. Boomers are beginning to understand the meaning of diversification and asset allocation, dollar cost averaging and the inevitability of market to recovery. I spoke with a number of advisors who told me that, during the recent market downturn, their phones did not ring. Their clients had learned to stay calm and that proper asset allocation will serve them well.

But now boomers are retiring, and this education imitative will begin anew. The income stage is quite different than the accumulation stage and boomers are woefully ignorant of the differences. There are four key differences that I will explain. I preface the discussion by saying there is a tendency for a significant proportion of the affluent to want to spend more than is prudent early in their retirement. Monte Carlo analysis suggests that a person with $2 million, for example, should at withdraw about $80,000 age 65, typically the first year of retirement. If qualified money is withdrawn (and most accumulations are qualified) taxes on the withdrawal could reduce it to barely over $5,000 of after tax money each month. How many of your clients with $2 million will want to spend more than that?

The first difference is that in the accumulation stage workers can plan to a target date (their expected point of retirement). If they haven't accumulated enough they can postpone retirement and continue to work. Retirees cannot predict the end date, have no control over it and have no safety net. If they have not accumulated enough, they have to turn to their children, the government or take other actions that most consider unpalatable.

The second difference is that when they are accumulating, time is their ally, but during the income phase it's their enemy. The longer they work, the longer your money is able to grow through investment returns and the power of compounding interest. But when they retire, the longer they live the more they will have to spend, and the more vulnerable they are to the corrosive impact of inflation. Purchasing power is usually cut in half in less than 20 years. Many economists predict high inflation over the next several years, which makes time even more of an enemy. Your clients need to know this crucial difference and what it means to investment strategy.

The third difference is that accumulation is a key measure in the accumulation period, but sustainable yearly income is the key measure in the income period. Social Security is usually not counted as an asset, but it produces a significant amount of sustainable income. Your job is to produce ever increasing yearly income for your client in order to keep pace with inflation. This does not mean that assets, bequest motives and emergency funds are unimportant. But the main goal is income.

The fourth difference is that, during the accumulation period, health care costs are manageable and predictable for affluent clients. In the income stage, however, health care (I include long term care in this category) are unpredictable and significant. With Medicare's long term deficit, it won't be a surprise if the health care expenses rise dramatically for the affluent. In September issue of BMA, Alan Greenspan said, "We are not getting enough to support the promises we made in Medicare. I predict we will have a very dramatic increase in co-payments, with the upper income levels experiencing 100 percent co-payments." A friend recently placed her parents in an assisted living facility with a cost $90,000 per year. What will it be after 20 years of inflation and the heightened demand created by the large size of the boomer population?

The income stage has a new meaning, and new rules, for boomers; rules with which your affluent clients are likely unfamiliar. Many think that wealth inoculates them from the risks. But when the task is to fund a long and expensive retirement in a time of uncertainty, $1 million to $5 million is simply not what it used to be. School is now in session and you're the teacher. I hope you consider what I've outlined as the first four lesson plans.

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