The Top 4 Things Missing in Boomer Retirement Plans
It’s no secret that life can significantly alter long-term plans, even the most detailed ones, and create a rocky path forward instead of the smooth road previously envisioned. The Baby Boomer generation is now starting to confront this divergence head on. It seemed so easy to hit retirement goals when they were younger, that is, until starting a family, buying a home, going to college, losing a job or dealing with unexpected medical expenses threw rocks and other obstacles in their way towards planning a smooth road into retirement.
However, unexpected changes and expenses are not the major reason so many Baby Boomers are behind on their retirement planning. Most of the difficulties in Baby Boomer retirement planning can be attributed to a simple lack of long-term preparation, mixed with some personal miscues. Data shows that a significant percentage of baby boomers are expected to rely on Social Security for a big chunk of monthly income.
The Social Security Administration has suggested that Social Security benefits should not be more than 40% of a client’s monthly income during retirement. However, the most recent data from the AARP suggests that about 51% of boomers are expecting to rely on Social Security for 41-100% of their monthly household income. This is a troublesome notion. Given the current state of Social Security, beneficiaries could be facing large benefits cuts by 2034.
Even as nearly 10,000 Baby Boomers a day are heading into retirement it is not too late for prudent long-term retirement planning. Here are the top four ways to help get your clients get on track, and stay on track, for a smoother road to retirement:
1) Budgets that allow clients to fund properly retirement accounts
Many Boomers seem like they’re not prepared to fund their retirement accounts. A recent study shows that 1/3 of boomers report not sticking to any type of monthly budget. It doesn’t seem like that big of a deal or even a significant percentage, but if clients aren’t sticking to a budget, it becomes impossible to effectively and optimally save for retirement no matter the client’s age. Without a budget in place, it becomes impossible for clients to fully understand what their monthly cash flow looks like. Because understanding cash flows, both income and expenses, is a foundational aspect of retirement planning, it can quickly become impossible to save what is needed for retirement.
A lot of folks are caught off-guard in early retirement because it’s not uncommon for these newly retired people to see income drop off from working income levels, sometimes significantly. It’s important to prepare well in advance for these instances by helping clients change spending habits today and create a budget to smooth this transition as much as possible going forward.
2) Defined Withdrawal Plans
Several studies have found that almost 56% or more workers have distribution plans put in place to make sure they’ve planned how they will access their money once they retire.
For those without a drawdown plan once they hit retirement, things could end disastrously as this typically leads to clients burning through their retirement accounts much more quickly than they had planned. It can create significant tax issues. If clients haven’t fully thought through their possible disbursement options and when or where they will retire, taxes can siphon much more income than expected.
It is important that financial advisors take the time to carefully go through and help clients understand the tax implications of the state where they’re planning on retiring. Does it tax Social Security benefits? How high are the state’s property taxes? It’s also important to make sure clients are aware of the tax responsibility and fees they might face for making unplanned withdrawals from their accounts.
3) Plans for higher healthcare costs
People are living longer today than at any point in the past, with expected longevity continuing to increase each passing year. That is a fact backed up by countless studies of all kinds, with women typically gaining longevity even faster than men. With longevity increasing, medical costs can be expected to increase as well.
One of the most overlooked parts of successful retirement planning is taking the time to estimate what healthcare costs could be during retirement, then including this into the calculation of what clients will need as part of their income during retirement. Healthcare is an exorbitant expenditure to plan for already, and can become unmanageable quickly on top of everyday living expenses. Medical expenses are non-discretionary spending, unlike many other facets of retirement. If clients are unwell, they will need to make sure they have access to affordable treatment.
It’s important that clients understand that if they wait until they’re sick to obtain medical insurance coverage it is often too late as they may be facing a much more expensive product or even denied medical coverage. Much like life insurance, it’s more cost-effective to obtain coverage when younger.
4) Second Pair of Eyes
Most baby boomer retirement planning efforts are lacking a secondary look-over by either a family member, friends, or even their financial advisor.
Recent surveys show that fewer than 10% of retirees admit to receiving financial assistance from their employer while transitioning into retirement. This includes about 9% that says that they received some financial counseling. Based on the findings from the data, only 1/5th of the 45% of people who did have financial plans in place were working with financial advisors, but 83% said that they’d benefit from consulting with one.
Whether it be a second pair of eyes looking at an existing plan, or planning for future possible healthcare costs associated with both normal aging and increased longevity, it is important to have long-term retirement plans that can provide the income necessary to meet retirement expenses. Defining withdrawal plans early and budgeting current cash flows with an eye to the future can help remove some of the rocks from the path and, hopefully, allow clients to remain on a smooth road into retirement.