Big Boomer Mistake: Dipping Into Retirement Savings

Another cause is termination of employment, says Steven M. Kluever, senior vice president-product management and investment management at Jackson National Life distributors in Denver. If a worker receives no severance pay and/or does not have sufficient funds to cover the period of transition to a new job, the person may have to dip in to make ends meet, he says.

Carpenter thinks a chief problem is that boomers lack a specific retirement goalsay, for the amount needed to retire the way they want. “The average boomer does not have a figure in mind, and when they find out, their eyeballs pop. They feel defeated, so they just go on living for today and getting further in the hole.”

Lack of information creates confusion, he says. For example, one client worried he was saving too much. Floored, Carpenter asked the reason. It turns out that some friends had told the client that he was saving “way more” than they were, so the man thought he might be on the wrong track. (Carpenter reminded the man of his retirement goal and how cutting back or dipping in would affect it. “I also reminded him what the worst case would be if he sticks to his plan: He could retire early.”)

Douglas R. Conoway, president and managing principal of Wealth Management Group, a Rochester, N.Y., registered investment advisor, says he has not seen a lot of 401(k) loans lately, but “consistently, Ive seen a lot of boomers who arent saving enough for retirement.

“It seems the more money they have, the more wasteful they become.” The dipping in problem is a spending issue, not a retirement issue, Conoway contends. He lays blame on boomers not making the time or effort to examine what is important and meaningful in their lives.

This realization has spurred him to take financial planning deeply into client values. “We dont ask about things and stuff. We ask what makes them happy, what they want to do and what is meaningful. Then, we make that work.” The process helps curb purposeless spending and motivates money management around goals, he says.

Example: One couple came to Conoway with a $250,000 a year income but a negative net worth, no retirement savings and no financial concept other than “spend, spend, spend.” He says he worked with them to identify life goals and values and then to design a financial plan around what they felt was meaningful, including retirement savings but also including such things as signing up for a golf outing and an art class.

Significantly, Conoway adds, neither had spoken to a financial planner before then.

OppenheimerFunds believes contacts with financial advisors play a key role in helping boomers find other alternatives to dipping in to retirement accounts, says Schoenfeld. Her firm has developed consumer and advisor educational materials to help support retirement discussions, and it also offers an asset allocation service, Portfolio Builder, for advisors for use with clients in retirement savings planning.

Advisors need to talk seriously about the consequences of taking debt into retirement as well as about living longer in retirement and inflations impact, she stresses. As for dipping in, they need to help clients set up specific goals, perhaps establishing separate accounts for each, she says. This is feasible, Schoenfeld notes, because various products exist today that can help people meet many goalse.g., a 401(k) for retirement, a liquid account for a mortgage down payment, a 529 plan for college savings, etc.

At the very least, says Carpenter, advisors can help boomers set up a rainy day emergency fundto be tapped instead of the retirement savings.

Advisors also can guide boomers into doing things automatically, such as rebalancing and investing in life cycle funds, notes Greenwald. And employers can work with plan providers to educate workers on retirement income planning, he says.

Some reps are using 72(t) distributions to help clients bridge between jobs, says Kluever. These allow penalty-free, early withdrawals from qualified retirement accounts, with the money taxed as it comes out. Negative tax consequences might occur if a person later shuts off the distributions, he cautions. Still, an advisor can use the arrangement to help someone in dire straits, he says.

Some advisors dont want to work with boomers who are just starting to save, Carpenter says, citing time and education involvement as reasons. But this work can be rewarding, he says, if the boomer is committed to trying.

Reproduced from National Underwriter Edition, April 15, 2005. Copyright 2005 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.