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Envisioning Retirement Helps In Planning, Expert Says

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Financial advisors can help boomers plan their retirement successfully if they start by making it easier for the client to imagine life after their working years are over, said Ellen Schoenfeld, a vice president of OppenheimerFunds Inc., New York.

Speaking at the Financial Planning Association’s annual convention in Nashville Oct. 22, Schoenfeld urged advisors to start the planning process by focusing on the intangible side of the individual’s retirement hopes, including the emotional factors attached to planned goals and activities. Asking the client to think about what their ideal retirement would be like can be a useful starting point, Schoenfeld noted.

The next step is to define the individual’s basic income needs and lifestyle goals following retirement, she said. Schoenfeld played down the general advice heard from retirement experts–to shoot for 70% to 80% of the individual’s final year of earnings. That figure is a good starting point at best, she said, noting that two-thirds of retirees spend more than that and that for most retirees, income needs change with time.

Estimating health care costs is basic, she said, pointing out that Medicare is generally unavailable for those retiring before age 65. With fewer and fewer retirees covered by private health insurance, and with high health care inflation, individuals living to age 80 will need $151,000 to cover costs of health care, Schoenfeld said, citing estimates by the Employee Benefits Research Institute, Washington.

Other costly activities that tend to be underestimated in retirement income planning are travel and entertainment, membership dues, and residential upkeep and maintenance.

The client also has to give thought to the fact that their retirement income goals affect the inheritance they will leave to family. Helping the client find the most tax-efficient way to transfer wealth to the next generation is a key consideration, she said.

With goal setting and income planning done, the advisor next must take inventory of all the income the individual will have following retirement. That includes annuity-type income such as pensions or Social Security along with savings and such other assets as real estate and life insurance.

At this point, the client’s available resources must be matched with income needs, Schoenfeld said. Establishing a lifestyle income withdrawal strategy for savings is vital.

For instance, according to estimates, an individual withdrawing 5% of assets for 25 years would still have 85% of his initial portfolio value. At a 6% withdrawal rate, only 65% of assets would remain in the same period, she said.

Finally, Schoenfeld pointed to a key part of planning: quantifying and managing the risks the client will face after retirement.

Foremost among these was the longevity risk, she said. This requires ensuring that income continues for the client even to an advanced age in the face of extensive out-of- pocket health care expenses, the potential of high inflation and a decline in market value of investments, Schoenfeld said.

For the advisor, the task is to assure a lifetime income from current assets by planning for longer holding periods and using investments that provide an inflation hedge, she said.

Also important: exploring the idea of protecting those assets with long term care insurance, she advised.


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