The Boomers Are Coming: Strategies For Planners
If someone dressed up like Paul Revere on horseback and galloped down the halls of most financial planning companies shouting, “The baby boomers are coming,” a security guard might be called, but few would notice the message.
Boomers are the most chronicled generation that most of us can recall. Their impact on everything from fashion to financial planning has been discussed ad nauseam. In fact, most of us take the size of the boomer generation as a fact of life and have little reaction to it.
But consider just two factors: First, boomers (almost 80 million strong) are about to reach traditional retirement age and yet the next generation is about half as big.
Second, the Social Security program has always been a pay-as-you-go program. This means active workers pay for those receiving benefits. That mismatch already has pressed the system into program changes such as delaying benefits (a full retirement benefit for someone born in 1947 is age 66) and increasing taxes (the wage base is $87,000 in 2003 and up to 85% of benefits are now subject to income taxes).
The ratio of active worker to retiree has been in decline for a long time. In 1945, there were 45 workers available to support one retiree. By 1960, the worker/retiree ratio had fallen to 5-to-1.Today, the ratio is 3-to-1. By 2050, when the youngest baby boomer is 85 years old and a majority of his/her peers have passed away, the worker/retiree ratio will have fallen from three workers per retiree to two.
Planners typically find it appropriate to use Social Security benefits as a benchmark in a financial plan. When preparing clients for the changes ahead, the starting question is usually, “What would you need for retirement?” The discussion turns to what Social Security will do and then to what can be set aside to fill any gap between a goal and projected cash flow.
What advice can planners give on how to deal with this? Here are a few suggestions:
1) Work on what you can change. Whenever possible, take care of your own financial obligations.
The simple formula of having a plan, saving systematically, living within your means, and using debt wisely goes a long way toward carrying you and your family in good times and bad.
Dont wait for the government to come up with solutions. Chances are, legislators will debate a full range of proposals (such as individual accounts) to solve the dilemmas, but dont wait for that to happen.
2) Take advantage of the increased tax-deductible contribution limits to qualified plans.
At the top of the food chain (in terms of contribution limits for older business owner employees) are defined benefit plans for the closely held corporation market. Expect to see a re-emergence of these plans as a direct reaction to the higher salary base that may be considered ($200,000), the higher benefit limit allowed ($160,000), the ability to obtain this benefit without reduction at age 62, and the removal of penalties for spousal plans.
A subset of this design is the IRC Section 412(i) plan–a plan funded exclusively with individual insurance contracts. Recently, there have been some concerns in the Internal Revenue Service with some perceived abuses in this market, but a traditional insured plan should be a good design.
All other types of plans, such as the defined contribution 401(k), 403(b) and 457 plans as well as IRAs got a boost from recent tax legislation to encourage thrift.
3) Pay attention to opportunities. President Bushs proposals for Lifetime Savings Accounts, Retirement Savings Accounts and Employer Retirement Savings Accounts are all designed to expand the direction of this market.
The proposals may not pass as introduced, but variations could create market options never seen before.
What planners can and must do is to show clients that by planning ahead, they will have more financial options. Boomers have often thought that having the freedom to do what they want when they wanted was a birthright. Planners can show them that pre-planning can allow them to claim that birthright.
is second vice president and tax attorney in the Hartford, Conn., office of Lincoln Financial Distributors Inc., a broker-dealer that is the wholesaling distribution organization of Lincoln Financial Group.
Reproduced from National Underwriter Edition, May 19, 2003. Copyright 2003 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.