For Some Boomers, Income Planning And Travel Planning Go Together

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If a baby boomer client is planning to do extensive traveling once he or she enters retirement, the financial arrangements can be quantified well before the time the person books the first trip, contends David Shapiro, founder and CEO of Retirement Solutions Inc., Los Gatos, Cal.

In fact, just about any goal the boomer has for retirement canand shouldbe quantified well in advance, he says.

Most boomers will not be able to do this alone, he cautions. They will need the advice of an advisor who takes the time and effort to do the planning with the client.

National Underwriter is exploring the relationship between travel and income planning because many researchers are finding that a lot of boomers are setting their sights on extensive travel in their retirement years.

Various travel media have picked up on the trend. The Travel Industry Association of America, Washington, D.C., notes that boomers travel more than other age groups (see chart). Also, other travel sources indicate the airline and ticketing industries are expecting a substantial rise in boomer travel in the near futurethe year 2005 is often cited as the tipping point.

Meanwhile, financial planners are starting to notice that more and more boomer clients are voicing interest in becoming travel buffs once they retire. They want travel that goes beyond the usual trips to see the kids and grandkids. Some want to take a string of world class tours before their health declines; others want exotic adventures and safaris; and still others want to make extended stays in various regions and even other countries.

The question for the advisor is how to help the clients get there, financially speaking. The answer has to do with structuring an income plan for retirement, say experts like Shapiro.

His recommendation is to build a GORP, or a goal oriented retirement plan. Shapiro says he uses that term to refer to a logical, goal oriented process. This process entails quantifying the goals the client has, framing out the expected costs, and then backing those costs into the assets needed to generate the income to pay the costs in the future. The income plan is structured, and adjusted, according to the framing process.

Advisors might start by refreshing themselves on what is important to the boomer. Those who want to travel a lot tend to feel youthful, empowered and optimistic about their future, says Ronald Barrett, vice president of practice management at Allianz Life of North America, Minneapolis, Minn.

At our company, we call such individuals the ageless explorers, he adds.

The research his firm has done indicates that these boomers love freedom and flexibility. And they want their financial plan to reflect those qualities, Barrett says.

Advisors need to keep these things in mind as they work with travel-minded boomers, he adds.

Such clients are going into retirement planning with optimism, he says, and they know what they want. They usually want to protect their assets so funds will be available to them when they need them the most; and they want to create an income stream that will last through their lifetimes so they will not have to worry. They want to set things up now, so they can move forward and travel and do other things when they retire.

In short, they want safety of principal, security of assets and flexibility to ensure financial freedom, he says. They want to set it up and get on with their lives.

The advisor needs to structure a plan that achieves those goals, say experts.

Doing income planning for any client is not a cookie cutter kind of thing, stresses Robert Fagan, an independent agent and registered representative in Lencadia, Cal. You have to get to know the person and the goals, needs and objectives.

Many boomers come to the planning table with a lot of unknowns and fears, he says. The nation is at war, there have been terrorist attacks and there is talk of more such attacks. They worry about this and about the impact on their financial investments.

They also come to the planning table wanting to see growth in their portfolios, especially the boomers who want to travel a lot during retirement. They will tell the advisor, I want to spend my money, but I also dont want to run out of it, so I wont have to depend on my kids, Fagan explains.

All of this creates a lot of uncertainty, he says.

A change he says is occurring today surrounding this uncertainty is that a number of insurers are starting to target these issues in new products they are designing. They are building in flexibility, income, reasonable returns and inflation protectionso the clients can spend their money (on travel, for example) but still have money for later on.

Not every producer has clients who name extensive travel as a targeted retirement activity for which they want to plan. And not every advisor thinks it is important to develop strategies for travel-inclined boomers as opposed to boomers with other inclinations.

Take John LeCheminant, for example. A financial consultant with Equity Services Inc. in Baltimore, Md., he says he never encounters the travel plan as the isolated need. Nor does he encounter boomers or any other clients who say they are looking for a worry-free portfolio.

People come wanting objective recommendations, he says, and if theyre in the pre-retirement stage, we look at all their retirement goals, what other income they have, and go from there.

The point is, we go through this process, no matter what it is they want to do. It would not make a lot of difference in the portfolio if they want to travel or do something else.

The process he uses entails looking at how much funding the client has now (from pension, Social Security, existing assets, etc.). LeCheminant also uses a very detailed fact finder, his purpose being to obtain the most accurate picture possible. In some cases, he also works with the clients CPA, who may offer other relevant details.

Then, after his computer software analyzes the information, he sends the results to the CPA and/or client for verification and fine-tuning. Mostly, we find just little errors at that point, but sometimes we find important information has been left out, he says. It is very important that the information be accurate.

All this preliminary work is necessary, LeCheminant says, in order to build the correct asset allocation, one that aligns with the persons risk tolerance, timeline and goals.

Because boomers today often want flexibility due to anticipated changing financial needs and goals, Fagan of California says the days of designing portfolios to produce a monthly income equal to 70% of pre-retirement savings are pretty well over.

So, too, are the days when agents would set up split annuities on a routine basis, he says.

Instead, Fagan says many advisors are now structuring boomer portfolios with one partmaybe a third or soin a safe money instrument (he uses an index annuity) and another larger portion in growth investments (he uses a diversified mutual fund portfolio).

This is an engine that he says can enable a travel-minded boomer to spend money and still have assets protected.

In this type of plan, the boomer would draw on the mutual funds first, with the goal of this lasting forever (if the initial amount is adequate and performance is as projected). But if the fund portfolio should become depleted after many years, he says, the index annuity would be there to draw upon. It would be beyond its surrender charge period by then. Also, the account value would be much higher than the original deposit due to many years of growth in accumulated value (via guaranteed interest rate plus equity-linked interest buildup).

The client will get more income this way than in a traditional split annuity arrangement, and the person wont have to allocate as much to the safe money side, either, he says.

Barrett of Minnesota says he is seeing a lot of advisors using index annuities for the safety component of the plan. And, since many types of index annuity structures exist today, the advisors can diversify between them, he says.

Many advisors also include long term care policies in the plan, positioning it to provide security of the existing assets, Barrett adds.

Also, many use multiple annuity products and ladder them so their surrender periods end at different times, enabling the client to access those funds, penalty free, on a planned schedule.

According to Shapiro, the California retirement solutions executive, the insurance and financial services industry has not yet begun to figure out how to bring all the income solutions together in a holistic manner.

A few firms have developed proprietary solutions, but the industry generally has not yet come up with strategies that approach things from the consumers point of view. The consumer view he refers to requires meeting the needs of the consumer, based on retirement goals and situation.

He is urging the industry to change this, because consumers today need to have diversification. They will not want to put all their money into one specific variable annuity, for example, or into any other one product.

Instead, he says, boomers will more likely be benefited by plans addressing multiple needs, including travel.

Some boomers might use a fixed annuity that has an inflation factor, say, to cover fixed expenses in retirement. They might choose variable annuitization to cover their long-term expenses, and they might choose systematic withdrawal from mutual funds for lifestyle changes or times when people just change their mind.

As for travel goals, the advisor will need to explore with the boomer the type of travel the person wants to do, says Shapiro. Does the client want to go luxury or economy? How many times a year? Or, how many luxury trips a year compared to economy trips? How long are the trips expected to last?

Details like that will help planners put a dollar value on the goal and then, after exploring assets, income, and other projected expenses and goals, run scenarios from there. They should be sure to add an inflation factor, he adds.

Concerning product selection, Shapiro says it makes me nervous if the advisor who is working on such plans only handles fixed insurance products. Consumers today have the right to get advice from someone who is capable of solving all their financial problems, not just ones that can be addressed with fixed products, he contends.

Far from simplifying things for consumers, the fixed-only advisor runs the risk of making things more complex for the consumer, he says. Clients in that situation will most likely end up seeking out other experts to address their other needs, only to end up hearing multiple voices in their heads.

The future for income planners will be people who provide advice and who have the capability to work with and manage any asset the client needs, Shapiro predicts. As for the distributors and companies, he says, the ones that have success in the income planning market will be those who create products and processes that revolve around the consumer.

The younger boomers with big travel plans should start this kind of planning as quickly as they can, he suggests, adding that time (for growth in assets) is on their side.

As for older boomers (now aged 48-58), he says they will have to compromise a bit if they do not now have substantial assets built up. They have less time to accumulate wealth, he explains, so they might need to plan fewer trips than they had hoped for, filling in with more economy trips. But they can still make a plan that includes travel, Shapiro says. The important thing is not to procrastinate.


Reproduced from National Underwriter Edition, June 25, 2004. Copyright 2004 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.