Boomers Spending Addiction: Its Like Taming A Sweet Tooth

By Jim Connolly

When baby boomers approach retirement income planning, most want to know, “what can I spend?” says Colleen Walsh, a certified financial planner and CPA based in Farmington, Conn. “Spending is an issue with boomers.”

There are 2 opposing forces at work, she points out. These are lack of savings and a desire to spend. “Those 2 forces can spell disaster.”

Many financial experts note the same thing. Boomers are confronting a financial issue that is equivalent to children having to decide whether to eat their dessert now or hold off until later, they say. Their first instinct may be to go for the sweet now, say planners and company representatives, so the response needs to be the equivalent of taming that sweet tooth, by applying careful income planning and industry offerings to facilitate that planning.

“There is definitely a difference in [the thinking] between generations,” Walsh says. “The older generation is keen on preserving principal because of what they have experienced in their lives.” But boomers are part of a generation that is bombarded with marketing, she adds.

And, she continues, “Baby boomers have a hard time thinking for themselves. If everyone on the street has an SUV, they want one.” This need goes beyond keeping up with the Joneses but is based in what they think they need, she says. “They think they need that SUV to make their baby safe,” she cites as an example.

The key to working with boomers on income planning is to get them to hold onto principal in the early stages so that there will be more later on in their retirement, Walsh says. Say the ideal withdrawal rate is in the 4%-5% range, she says, then the more they withdraw in the early stages, the harder it will be to withdraw at that rate at later stages in life. This point is important, she says, because, in general, principal is not enough to get someone through retirement.

To prepare for retirement, behavior modification such as budgeting may be needed. If that is the case, the key is to have the modification come from the client. Helping the boomer client take action also requires addressing perceptions about what the future needs will be. “Perception of security” is powerful, she says. “If you feel that you need $3 million to retire, the only way you will feel secure is if you have $3 millionwhether that is what you need or not.”

Walsh does note, however, that not all boomers are spenders. There are some clients who “cant spend without a justification process.” Such individuals need to be aware that not accessing income can result in the loss of goals, she says.

There are clients who want to make sure that there will be an inheritance to pass on to their family and loved ones, says Diane M. Pearson, a certified financial planner who is the director of financial planning and a financial advisor for Legend Financial Advisors Inc., Pittsburgh.

Clients with whom her firm works are affluent and largely over age 50. Typically, they have assets of over $1 million, she says. Some 85% are over age 50 and 35%-40% are over age 65. Many “are used to spending money, and getting them to think differently is a real battle,” she says.

It is important to teach such clients that as long as their portfolio is growing, the issue is not whether income comes from principal or dividends, she says. This appreciation is critical because, although inflation is perceived as low, inflation for items such as health care and prescription drugs that impact seniors is higher. Appreciation of the portfolio is also important, she adds, because of longevity.

So, what is important, Pearson says, is to get clients to look at their income needs realistically. For instance, a common perception is that in retirement, a person needs less money to live. But, for a generation accustomed to spending, having that extra 40-60 hours of free time each week will probably result in higher income needs, she says. “A lot of people just dont retire and garden.”

Income planning also entails helping clients make decisions about whether they want to spend their money before retirement, drawing down on principal that can be used to accumulate assets for income distribution after retirement.

An example is a client who is a doctor with 3 children aged 16-28. He wanted to provide the first child with a house, the second child with a graduate school education and the third child with an undergraduate education. But, by taking income before retirement, there would not be anything left upon retirement, she says. So, after a family meeting, it was decided that the oldest child would assume his own mortgage and the second, his own graduate school loans. The youngest childs undergraduate education was funded by using a 529 plan, she said.

Insurers can help planners and producers grapple with deciding when to access principal for income, maintains Terry Mullen, managing director and senior vice president of the American Legacy business unit of Lincoln Financial Distributors, Philadelphia. They can do this by continuing to develop product features such as guaranteed withdrawal benefits and principal protection features that will offer tools for meeting client objectives.

For instance, he says, the principal protection feature can make clients more comfortable with the income planning process.

An income distribution feature is just starting to become more popular, says Heather Dzielak, vice president, variable business unit and product management at Lincoln Financials Hartford office. At the moment, accumulation is playing more of a role, so principal protection is important, she says.

But as drawing on principal becomes more important, Mullen says, more advanced annuitization options instead of a simple fixed annuitization feature will be important, he adds. People are not dying 2 years after retirement as they did in previous generations, so having sufficient principal to draw on will be important, he says.

Indeed, Dzielak says research Lincoln has done “suggests that they are going to be spenders. They are not as focused on transferring wealth but on enjoying themselves. We have to find the most effective way to make income available.” Laddering of income streams that draw on principal will be one possibility, she says.


Reproduced from National Underwriter Edition, November 18, 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.