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Retirement Planning > Retirement Investing

Retirement Revamp

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Today’s retirees have different lifestyles than those of retirees just a generation ago, and their expectations for retirement are greater as well. Most are fitter and more active than prior generations of seniors. They’re also much more likely to include work on the itinerary for their golden years.

Even prior to the current recession, 80% of baby boomers in a 2002 AARP survey said they planned to mix work with their R&R after retirement. Money usually isn’t the key motivator; retirees are instead choosing to pursue work that coincides with their interests and furthers their opportunities for social contact.

Of course, much has changed since 2002, and the financial fallout of the worst recession since the Great Depression devastated many boomers’ hopes for their retirement years. While a number of retirees are staying the course, some have been required to change gears a bit.

Aging Americans used to rely on company pensions, Social Security income and the ability to retire comfortably at 55 years old, but that’s just not the case anymore. Those without solid investment income may be sacrificing their dreams for retirement in order to pay health care costs and keep up the mortgage payments in a tough economy.

All is not lost. Rather than throwing in the towel and scrapping their dreams, many smart Americans are heading back to the drawing board to refresh their plans — with the assistance of financial professionals who can support them with realistic strategies.

Take a second look

Clients with dreams of a second home or a fancy yacht may need some help taking a second look at priorities to create a revised retirement plan that’s both satisfying and realistic. Instead of shelling out for a top-of-the-line motor home, perhaps renting an RV as needed could achieve the same objective and fit within a smaller budget. Financial restraints may rule out the purchase of a summer home but still leave room for annual vacations.

The goal isn’t to cut every corner. It’s to make an honest assessment and allocate funds to the things that are most important and will support the most satisfying lifestyle.

It’s time for retirement advisors to take a more holistic approach to financial planning by conducting a more thorough, quantitative analysis of financial situations. Only then can people identify a lifestyle that they can both afford and really enjoy.

Use the retirement tool chest

As a generation of 401(k) contributors approaches retirement age, the No. 1 question financial planners hear is, “How can I convert my 401(k) into monthly income?” That answer varies, of course, depending on the client’s age, asset mix and financial needs. And it’s important to look at all the client’s assets in concert, because that’s the only way to decide how, when and how much to tap each resource. A complete financial picture involves a variety of assets and how they can work with one another.

  • Social Security: Monthly payments are guaranteed to keep pace with inflation. Although Americans are eligible at 62, the longer they wait to enroll, the higher the monthly payments they’ll receive.
  • Stocks and mutual funds: The stock market still offers opportunities for investors, and it’s the first place to turn for aggressive growth to keep up with inflation.
  • Bonds: While they don’t provide the heart-stopping payouts that some stocks have offered in the past, bonds are great tools for fairly predictable streams of income and limited loss potential.
  • Savings accounts: These are great parking places for annual living expenses — but not much more, since interest rates are low.
  • IRAs and 401(k)s: These accounts are untaxed until accountholders begin making withdrawals. Failure to make annual withdrawals after the age of 70½ triggers stiff tax penalties.
  • Roth IRAs: These retirement accounts involve tax pre-payment, so qualified withdrawals after the age of 59½ are completely tax-free.
  • Pensions: Only a select few Americans still have pension plans, but some smart planners create their own by purchasing annuities with their savings.
  • Mortgage pre-payment: Those who own their homes outright give themselves the gift of much lower monthly expenses — something that offers much greater flexibility in allocating retirement funds.
  • Health insurance: Controlling costs and avoiding disaster both play a huge role in a successful retirement plan, and both are great reasons to ensure retirees have the proper health and long-term care insurance.

Don’t overlook life insurance

Most baby boomers think of Social Security and 401(k)s first when they’re planning for retirement. But when it’s time to make calculations and determine all the resources to tap, life insurance can sometimes bridge the income gap.

Most whole or permanent life insurance policies offer a cash value component that offers access to cash via a loan from the insurance company without canceling the policy. The associated interest payments are likely to be lower than interest rates on any other type of loan. This flexibility builds a case for hanging on to these policies and allowing the cash value to grow over time in case of an emergency for a tax-free income source. Carriers can often use the dividends on these policies to pay the premiums and streamline cash flow. Please note that loans from a life insurance policy decrease the death benefit and cash value of the policy by the loan amount as well as interest accrued.

Life insurance is the ideal strategy for ensuring that a surviving spouse can continue to enjoy the same standard of living. In this case, term life insurance is the easiest and least-expensive choice. But in an era when most couples are generating their own income, more experts are counseling boomers to let their term policies expire when the kids move out, relying instead on a combination of Social Security payments and retirement assets to provide for the surviving spouse.

Counseling aspiring retirees means taking many factors into account. In every case, it is best to prepare a package that meets their individual needs and may include retirement income, long-term care and estate protection as primary considerations.

Start with the 4% rule

Financial planner William Bengen first put forth the 4% rule in a 1994 article, asserting that retirees who withdraw up to 4% of their portfolios each month, adjusting for inflation, should be able to make their funds last for 30 years or more. His rule has proved sound for every 30 years since the 1920s — including any 30-year span that overlapped the Great Depression.

Most Americans have no idea how much money they need in order to retire, and many don’t know how to begin to approach the math. The 4% rule is a great starting point. It tells clients that they’ll need a portfolio that’s 25 times their annual expenses. Social Security, annuities and pension plans are likely to only cover a small portion of that — a portion that continues to decrease with each successive wave of retirees.

The math also indicates how early some people may be able to retire. Assuming retirement income will last 30 years means that retiring at 45 may only see you through to the age of 75, unless adjustments are made in the plan. Many people choose to tap into retirement accounts more slowly, beginning with a 3% withdrawal rate. And we already know that many seniors plan to incorporate some amount of work in their retirement years, even when finances are less of an issue. That income can also serve as a useful contribution to a comfortable retirement.

As retirement advisors, it’s important to walk clients through the hard numbers in order to find the soft corners. The facts are the facts, but the great thing about crunching the numbers is that it identifies the options and opportunities to retool any financial plan and accommodate what’s most important. What’s most important is completely subjective. The advisor’s role is to help make the best use of all the available resources and design a plan that best resembles what clients really want — safe and enjoyable golden years.

Darin Gibson, M.B.A., CFP, ChFC, CLU, is owner and president of Burnham Gibson Financial Group Inc. in Irvine, Calif. A problem-solver by nature, Gibson believes in the power of prudent financial planning, and he takes satisfaction in helping his clients look objectively at their financial situations. Throughout his 15-year career, Gibson has specialized in comprehensive financial and estate planning strategies for closely held businesses. Gibson currently manages more than $250 million in assets for individual and corporate clients. For more information visit


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