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Retirement Planning > Retirement Investing

Doing Wealth Transfer, The Boomer Way

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Are baby boomers at the point in their lives where they want to “do” wealth transfer? That is, do they want to make arrangements to provide for their surviving spouse, children and grandchildren? To leave something for their favorite foundations and charities? To pay for a new wing at the local library?

The conventional thinking is, as people age, their thoughts and actions naturally turn in this direction.

But what about the boomer generation, with their heavy debt load, projected longevity increases, potential long term care needs and penchant for spending? Is this on their minds now?

Some financial experts think so. A few weeks ago, for example, North American Company, a Chicago member of the Sammons Financial Group, debuted a universal life policy (Customer Access UL) designed especially for baby boomers who what to build legacy and transfer wealth.

As boomers near retirement, the firm says, citing research from LIMRA International, Windsor, Conn., many have begun seeking ways to preserve their assets to pass on to loved ones. The new product is targeted at clients who have “significant funds” they do not plan to use for retirement income, says the insurer. (But it has an accelerated death benefit provision, too, to respond to boomer concern about draining assets due to terminal illness and assisted care, says Garth Garlock, senior vice president and chief marketing officer. It also offers a return-of-premium feature.)

Apparently, however, there is not yet a boomer stampede for wealth transfer products and services.

“Its a bit early in the game for this,” says Matthew Greenwald, president of Matthew Greenwald and Associates, a Washington, D.C., demographer and researcher.

“There are tiny strata of wealthy boomers who have over $3 million in wealth right now,” Greenwald says. “These boomers are the ones who are committed to passing on a significant amount of the money they have accumulated.”

But boomers of lesser means have other matters on their minds, he says. “The top priority for a lot of boomers we have studied is to maintain lifestyle during retirement and not outlive their money.”

Such boomers are committed to the welfare of their children and grandkids, he points out, and many feel an emotional and psychological obligation to their kids. “But they dont necessarily feel a financial obligation to their kids, or if they do, that comes second.”

For example, many want to leave the house to their children. But they also are coming to see that the reality is “the kids will get whatever is left over,” Greenwald points out.

In fact, he predicts that many who live 25 or more years in retirement will end up taking out a reverse mortgage on their house.

By then, they will have found out that “retirement costs more than they expected, that income from assets will be less than expected, and inflation may have done more damage to earning power than expected. For example, if inflation stays at 3.5%, over 20 years, this will cut purchasing power in half.”

In short, for boomers, retirement will be a different dynamic than for the previous generation, surmises Greenwald. As a result, only the wealthiest boomers are looking seriously at wealth transfer right now.

This is the view from the field, too. “Ive found that among my clients in the 40-55 agent group, the more they are worth, the more they want to pass on to heirs and also the more they want to be sure they manage the funds properly,” says Quentin Ledford, a benefits consultant at AFC-MD Benefits Consultants in Crossville, Tenn.

The net worth figure he cites for such boomers is $500,000 or more (exclusive of the family home)a substantially lower number than Greenwalds ballpark estimate of $3 million.

Ledford says many are small business owners and professionals who are still working and want to start their planning now. They figure that they already have $500,000 and that they will hit the $2 million mark before they retire. “These people do not want to retire and then have to go back to work, so they want the money managed well, too.”

Apparently, its more than net worth that starts boomers on the wealth transfer path, however. As Ledford puts it, the boomer or a colleague “usually has encountered some nightmare problem involving an estateproblems among siblings, for exampleand especially when the estate was not done properly.”

That triggers them to start wanting to plan their own estate and wealth transfer, he says. Many become insistent about this. “They want the plan drawn up, and they want it done now, no waiting.”

The personal event “just hits them between the eyes,” says Ledford.

By contrast, those age 55 and up with $500,000 or so in net worth, as well as younger people with under $500,000 in net worthtend to be chiefly interested in not outliving their money, Ledford says. “Many may have watched their parents struggling in retirement, and they dont want that for themselves. They may even worry that they will not be able to retire. So, they are really not interested in leaving an inheritance.”

A lot of boomers that Phillip Lubinski sees have a heavy debt load. A financial advisor and managing partner with First Financial Strategies, LLC, Denver, Lubinski says this is not necessarily a reflection of greed and careless spending.

“There was a logic behind it. Many boomers came into adulthood when inflation was soaring and they worried that if they did not buy the house today, they may never be able to afford it. Their parents were upset with that, because they came out of the Depression and they saved until they could afford to pay cash for things.”

The boomers early behaviors set up the dynamics for today, Lubinski continues. The boomers started wanting “more things, and nicer things than their parents hadand their parents actually wanted that for them, too.”

The upshot, says Lubinski, himself a boomer, “is that we did what our parents wanted us to do, and we leveraged it all.”

This put boomers on a “late start” on accumulating retirement wealth, he continues. That, plus increasing longevity, the decline of traditional pension plans, the worries about whether Social Security will continue and how, all set things in motion to the point that today, many boomers now ask, “do I have enough for me?”

In retirement, boomers will live longer than other generations, be more active and possibly face bigger medical bills, he continues. “They are recognizing that this is going to have a big price tagso very few boomers are coming to me to say, I want to do wealth transfer.”

That said, Lubinski says some boomers do express interest. These are people who have a secure pensiongovernment workers, schoolteachers or people who have worked with the same employer for 30 to 40 years.

“If they have an inflation-proof retirement plan that replaces 70% to 90% of their pre-retirement paycheck, they are very comfortable and they are not concerned about living too long. They are concerned about passing along the assets they accumulated along the way. This might be $100,000 to $300,000 or so.”

For such individuals, the challenge is to transfer the assets in a tax-efficient manner. Until they come to talk with Lubinski, many are not aware of how severely their assets can be taxedup to 40% to 60% of assets, in some cases. “Thats very disturbing to these boomers,” he says. Even if they dont want to leave money to their kids for some reason, they also dont want to leave it to the IRS!”

So, they start planning in earnest.

Like the experts quoted earlier, Lubinski says most of the boomers he meets really do like their kids and would like to be able to leave them a significant amount of money, even if the children are already successful and financially secure.

But, he adds, many also have a distinct view on this. “They say, we made our investment in our kids early on. We put them through college and sometimes graduate school. So, they got their inheritance early. Therefore, Im not going to go out of my way to leave them money at my death.”

Also, he says, if the adult kids are already in their late 50s or early 60s, “many prefer to leave money to help their grandkids.”

Reproduced from National Underwriter Edition, September 23, 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.


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