Baby-Boom Retirees Want Advice On High-Balance IRA Rollovers

After assessing estate planning and medical illness exposure, the psychology of the individual should be considered, Evans says.

“You have to really understand the contingency,” he says. “They want to be independent, they are risk-averse, even though they might be able to take a little more risk with investments. You have to really understand what the clients risk tolerance is about and then respond accordingly. Peace of mind is a real consideration.”

Baby boomers have seen failures, and can find the tax laws regarding rollovers complex, Evans says.

“Doing a rollover involves sensitivity. You need to give people a best-case, worst-case scenario. Youve got to see the forest for the trees in dealing with the client.”

Michael Bonevento, a senior financial adviser who works in the Wall Township, N.J., office of American Express Financial Advisors, agrees that sensitivity is crucial when working with a baby boom-age retiree.

His first consideration in evaluating and developing a baby boomers retirement portfolio is age. An advisor must understand and explain to the client the tax implications of taking money out of a qualified retirement plan (usually a 401(k) plan) before and after age 59 1/2, he says.

One opportunity to access money before 59 1/2 is through net unrealized appreciation. NUA allows individuals under 59 1/2 holding company stock in 401(k) plans to roll that stock into non-IRA accounts, without incurring the 10% penalty and income tax on the full amount. Instead, the individual incurs the 10% penalty and income tax on the cost basis, not on the full value of the stock. For example, if the value of the stock is $1 million, but the cost basis is $50,000, the individual only pays the 10% penalty and income tax on the $50,000 cost basis.

“I work with so many people who are baby boomers and these are people who are heavily weighted in company stock in their 401(k),” Bonevento says. “These individuals have done a wonderful job of accumulating assets for retirement, but the assets are difficult to access, so retirement may still be difficult.”

Taking substantial periodic payments is another way to take distributions before age 59 1/2 without incurring a penalty, Bonevento says; however, income tax is incurred and so are penalties if IRS guidelines are not met.

A calculation is done that indicates the monthly stream of income a client can take from an IRA to avoid the penalty.

“If you dont take what youre supposed to take, theres a penalty, if you take more, theres a penalty,” Bonevento says.

An advisor should also understand what the retiree needs the assets to do.

“Spend time exploring how that client defines retirement, what excites them, what strikes fear in them,” Bonevento says. “Then youre in a position to start developing a portfolio that will minimize the possibility of those fears becoming a reality for them.”

Bonevento advocates using multiple layers of diversification to help determine the types of investments most appropriate for the client.

He also looks at the main objectives a portfolio can strive to achieve, depending on what the clients primary concerns are. For some, interest and dividends are a primary concern and growth is secondary; for others, growth is the primary concern.

“Then I look at diversification by sector and industry,” Bonevento says. “In the late 1990s, people were weighted heavily in certain sectors and did well in an up market. However, the lack of diversification by sector and industry in the year 2000 resulted in above-average losses for many investors.”

Maintaining that diversified portfolio is also important, Bonevento says. When certain investments are performing significantly better than others, the temptation is to dump the ones that earn less and pour all the assets into the higher performers.

Its imperative to resist this temptation, Bonevento warns.

“It comes down to discipline,” he says. “If you build a good portfolio, youll do well in the good times, and youll hold up well in the bad times.”

Reviewing and fine-tuning a portfolio is expected, but making major changes to a portfolio built on the retirement needs of the client is not a well-advised move, Bonevento says.

Reproduced from National Underwriter Life & Health/Financial Services Edition, June 29, 2001. Copyright 2001 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.

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