Retirement Planning
Major retirement Issues for Baby Boomers
There are critical challenges facing today’s baby boomers as retirement is upon them…
Demographic, social and financial factors have changed drastically over the years – Americans are living longer and retirement needs are ever changing. There is a new world now for retirement planning and now is the time to get everything in order. From rising health care costs to changes in the critical factors changing estate planning, there is no time to waste in getting your “house in order”. Some of the most pressing issues are…
Higher Health Costs
An estimated 10,000 Baby Boomers turn 65 every day. Higher-income individuals are often in better health at retirement and will face higher lifetime health costs as they live longer. Planning for these higher costs will be challenging, but very important.
Longer Life Expectancy
A 65 year old couple retiring today will likely see at least one spouse live longer than the 30 years. That completely changes the planning models that have been used in the past.
Balancing Risk and Return
Developing a proper asset allocation in a portfolio requires balancing many factors including risk tolerance, cash flow needs, time horizon and return requirements. Retirement age is not the time to take major risk in a portfolio.Planners want to reduce risk as much as possible in the portfolio while still achieving a sufficient return to achieve the client’s financial goals.
Withdrawal Strategy
It can be very difficult to move from a lifetime of spending what comes in to drawing down on a portfolio. Coming up with an amount to keep in cash reserve — and maintaining it — is critical. Many people might find a bucket strategy helps them compartmentalize what they are spending in order to not stress about market fluctuations. Managing the tax impact of withdrawals and understanding how each piece of income is taxed is also very important.
Monitoring Expenses
Expenses are often much different in retirement than they are during working years, but they are still incredibly important to the overall plan. Often, clients will spend more in the early years of retirement, see expenses dip in the middle, then rise as the near the end of their lives and medical expenses climb. Also, not all expense categories grow at the same rate of inflation, and this needs to be considered when forecasting long-term expenses. In addition, there always needs to be an allowance for the unexpected. In retirement, many individuals find themselves needed by children and grandchildren for assistance.
Social Security Uncertainty
The role of Social Security in the retirement planning process is changing as concerns grow over the availability of benefits for future generations. According to the Annual Report of the Board of Trustees, the reserves for Social Security will be fully depleted in 2033, which is not too far away. While it’s impossible to predict what will happen to the system, planners and their clients need to consider the impact of potential reductions to payments.
When to File for Social Security
There are various Social Security claiming strategies that help to maximize the benefits for an individual or couple. The breakeven age where you would be better off delaying benefits typically occurs between your late 70s and early 80s, depending on how long you wait and some other factors. The 8% per year increase from full retirement age to age 70 is powerful, and once a client crosses that breakeven age, the benefit grows exponentially. Strategies such as “file and suspend” can be used to fully maximize Social Security benefits, especially for married couples.
Estate Planning
While estate planning is less important for federal estate tax reasons with the increase in the exemption amounts to over $5 million per person, the non-financial aspects of estate planning are still critical. Making sure clients have a power of attorney updated and in place, and addressing the need for health care documents like a health care power of attorney and advance directive can be very important. Trustee designations and naming the proper beneficiaries are often missed or not changed when life circumstances change.
Long-Term Care Needs
Long-term care costs are increasing — as is the percentage of the population that will need this kind of care at some point in their lives. Looking broadly at how to fund these costs is important, whether that means self-insuring if you have enough assets or buying some form of LTC insurance. In purchasing LTC insurance be certain to read the fine print. Oftentimes by the time a plan benefit is needed the waiting period is longer than the life expectancy. Read carefully.
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