Retirement Planning Doesn't End at Retirement
Thursday, December 4, 2008
As millions of Americans transition from full-time work to retirement, they move from the life stage of asset accumulation to a new stage – distribution planning. Instead of trying to acquire and build up savings for retirement, they are now repositioning their assets to provide an income they can rely on for the rest of their lives.
The impact of this shift, which is beginning right now for the initial waves of millions of baby boomers, cannot be overestimated. Born between 1946 and 1964, these boomers will need to plan for a retirement that could last for more than 30 years. So, it's not only those close to retirement, but an entire generation that may need professional help to ensure that their portfolios will provide an income throughout their lifetimes.
There are several key risks that can undermine the success of a retirement plan – longevity, inflation, asset allocation, fund withdrawal rate and last, but certainly not least, health care expenses.
Underestimating the Risk
Many people underestimate what their life expectancy is and therefore risk outliving their assets. The facts indicate that at least half of the population may outlive the average life expectancy. A successful lifetime income plan can help retirees prepare for living well into their 90s as there is a very real possibility that people will live 20, 30 or even 40 years in retirement.
The anticipated longer retirements and the impact of inflation make it more important than ever that portfolios include investments with the potential to outpace inflation. It's also of paramount concern to provide income protection for the surviving spouse in the event of long-term care needs for an unhealthy partner.
Many retirees think they need a conservative portfolio. But, given the anticipated length of their retirement, this could create a heightened risk of outliving their assets. A key to long-term success may lie in balancing portfolio income with portfolio growth.
Obviously, a conservative withdrawal rate would dramatically increase the likelihood of retirees not outliving their assets. A good financial advisor can help people understand how much they need to save to meet their lifestyle goals, and what is a realistic withdrawal rate.
Rising health care costs coupled with inadequate medical insurance coverage can have a devastating impact on a lifetime income plan. Addressing this risk may mean targeting savings specifically for health care and purchasing long-term care insurance.
Sporty Forties
Looking at the differing needs for various segments within the baby boomer generation may make more sense if we divide them into age groups. Let's consider the first group as those who are currently ages 40-49. These are the youngest baby boomers. They are too busy to think too much about retirement planning right now. They have multiple financial goals, including college savings, retirement, children's needs and housing costs.
The important risks for this group to consider are longevity and asset allocation. These people really need to understand the value of extra years of compounding on their savings. They also should look into a growth-oriented portfolio so they can take advantage of long-term equity performance. Some questions to consider:
- What events could capsize your current retirement savings plan?
- Has market volatility impacted your savings?
- Will you be paying college tuition for your children?
- How would you prioritize all of your different financial goals?
Possible solutions to these issues are: risk tolerance and subsequent proper asset allocation, college savings planning, health insurance, life insurance, disability insurance and deferred variable annuities.
Nifty Fifties
The next segment includes those who are currently ages 50-59. They are now beginning to think about retirement and are uncertain whether they have saved enough. They probably don't know how to put together a retirement income estimate themselves, and they are concerned about life's changes: kids leaving home, aging, new goals and directions.
These individuals should be thinking about longevity, an appropriate strategy to provide for growth until retirement age and how they will meet their needs during a long retirement. They should be looking at transitioning their asset allocation plan to take advantage of the next 5-15 years before retirement.
Now is the time to discuss life and health coverage in retirement, including obtaining long-term care insurance, discontinuing disability insurance and looking at the options for supplemental health insurance coverage at retirement. Questions to consider:
- Your retirement could last 25-30 years or more. Are you prepared financially?
- Do you know how much you will be spending in retirement?
- How is your long-term portfolio holding up?
- Do you feel comfortable about your retirement savings plan?
Possible solutions for people in this age group include reviewing their asset allocation plan, taking advantage of catch-up provisions in their IRAs and employer-sponsored plans, consolidation of assets for more efficient management, and fixed or variable annuity products. Now might be a good time to also consider living benefit riders on variable annuities.
Super Sixties
Finally, those individuals who are 60-69 years of age. Their key concerns might be wondering whether they have saved enough for retirement, wondering about their health prospects and concern about taking care of children and grandchildren financially.
Issues to consider include planning for the possibility that they will live longer than they think, asset allocation review, health coverage and the risk of inflation eroding their spending power. Questions to consider:
- How much can you expect to receive from Social Security or your pension?
- Would you like to help fund your grandchildren's education?
- Have you thought about protecting your spouse or partner if something should happen to you?
- Can we discuss the retirement income potential of your portfolio?
Possible solutions to these issues: asset allocation and diversification, catch-up provisions for IRAs and employer-sponsored plans, consolidation of assets for more efficient management, assessing your life insurance coverage, long-term care insurance needs or annuity laddering. Conversion to a Roth IRA might be considered. Additional considerations:
- Checking your beneficiary designations for all accounts
- Discussing required minimum distribution options
- A health care power of attorney, or living will
- Systematic withdrawal plans
- Estate planning considerations
The transition from full-time work and asset accumulation to retirement and asset draw-down brings a new set of financial decisions. The main challenge – achieving potential lifetime income solutions – is a serious one.
Education is of paramount importance. No matter which age group you currently are in, understanding how to, and adequately planning for, your retirement takes effort. It's important that you understand the issues you currently are facing and the issues you will face as you get closer to retirement.
It's education that will last a lifetime.
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