Retirement...Sweet Dreams or Reality Check?

by Robert Quinn

Dreams of the golden years-endless opportunities to visit places and participate in activities we have not had time for during our working lives. Most of us have similar expectations: to be intellectually stimulated throughout our careers, to live in a beautiful, comfortable home, to provide our children with a good education, and to accumulate enough wealth to enjoy the retirement lifestyle of which we have dreamed. We all hope we will be sufficiently healthy, both physically and financially, to enjoy this satisfying stage of our lives.

As the years roll by and we bury ourselves in our work, we must take a periodic look at our financial situation, to see how we are progressing toward our long-term retirement goals. Sometimes, we find more questions than answers: Where will I want to live, summer and winter? What activities will stimulate me? Will I have the financial resources to afford the lifestyle I want?

As with most situations in life, our expectations and perceptions are everything. A lifestyle that is comfortable to one person might be considered "roughing it" by another person's standards. These questions prod us to the conclusion that realistic retirement planning is an essential part of our lives whether we are ready to face reality, or not.

As a general rule, the earlier one starts planning and saving for retirement, the easier the road will be. The longer one has to save and invest, the greater the chances that one will accumulate the retirement funds necessary to realize that dream. However, it is never too late to increase one's savings and grow a retirement nest egg.

The Baby Boomer generation (those born between 1946 and 1964), with its 76 million participants, has had a large impact on all aspects of our economy-from consumer products to leisure goods to housing. The huge population of Boomers in or nearing retirement will have just as large an impact on retirement planning services. The tsunami of Boomers will result in an aging population, which will increase the over-65 age group from 12.5% of the population today, to over 20% of the population by 2030.

The financial service industry will need to be prepared to help answer the question all Boomers ask, "Will I have enough money to retire?" Not surprisingly, the answer is, "it depends."

There are a number of variables that need to be considered. Lifestyles vary, but as a very general rule of thumb, most financial planners believe that people who can happily live on no more than 4% of their principal each year (i.e., liquid assets, which excludes home value) are usually well situated to enjoy a long and solvent retirement without running the risk of running out of money. The variables that affect this general rule of thumb can be broken down into five risk categories:

1. Longevity risk - Outliving your assets. Some people would like to bounce their last check due to insufficient funds.
2. Asset allocation risk - Choosing investments that are unable to produce the growth that the retirement lifestyle requires due to a mismatching of goals and investments.
3. Inflation risk or purchasing power risk - The cost of retirement expenditures increasing faster than the income stream of your assets.
4. Withdrawal risk - Taking too much money from your liquid assets too early in your retirement years, leaving insufficient assets to weather unanticipated future downturns in the markets.
5. Healthcare risk - Not being ready for the cost of future out-of-pocket healthcare needs that are not covered by Medicare and private insurance.

These risks must be managed realistically in any retirement plan to ensure peace of mind during retirement years. For instance, every retirement plan must have an asset allocation strategy which includes a provision for increasing inflation and health care expenses as critical variables. The plan must balance the need for long-term investment growth with the risk of short-term market price volatility.

Within the Boomer population, there are two major segments. The early Boomers are those at or approaching retirement age. The late Boomers are those born later in the era that may be in their forties or early fifties. This latter group has at least ten years until retirement age. Planning issues for each of these groups differ. In fact, decisions made by the early Boomers may have a serious impact on the retirement environment that later Boomers may face.

In particular, retirees or soon-to-be retirees (early Boomers) should consider as part of their retirement planning:

1. How to schedule disbursements/withdrawal rates of income and principal;
2. How much long term growth is required to minimize the impact of inflation and maintain the desired lifestyle;
3. Projected retirement income from pensions, 401(k)s, IRAs, etc.
4. Minimizing the impact of market downturns, which have immediate impact during the retirement years; and
5. Investment and tax planning for the required annual minimum IRA distribution.

The goals of older Boomers differ significantly from younger Boomers. Younger boomers are in their forties and fifties, have more years of earnings ahead and are often caring for children, as well as aging parents all while they are saving for retirement. These late Boomers should be a little selfish with their assets if they are unable to save for education at the same time as retirement. There are many college funding resources available; but there is only one source for retirement savings: you.

Another source of concern for this younger group may be how the behavior of their older counterparts will impact their savings and assets in the future. Will there be a glut of large residential houses on the market from early Boomer liquidations just as the late Boomers are anticipating the use of their home equity to finance retirement spending?

Will this cause a weakening in the housing market and a corresponding decrease in prices just as the late Boomers are relying on their home values as a major source of their wealth?

Will early Boomers start to shift their invested assets from growth-oriented funds to more income-oriented funds, thereby causing a decline in the fund values held by the late Boomers? Late boomers should consider:

1. Maximizing the accumulation of retirement savings during prime working years;
2. Planning for viable long-term asset growth;
3. Reviewing current savings versus projected retirement income needs;
4. Understanding how time affects the recovery from market downturns and impacts investment decisions; and
5. Determining the best investment options for tax deferred growth.

Basically, the difference between early Boomers and late Boomers resides in one segment of the population (late Boomers) doing accumulation planning while another segment (early Boomers) are entering the asset spend-down phase. The real dilemma is when is it too late to make up for lost time, or bad decisions, which is really much the same thing. How do people force themselves to be objective and "get real" about what they do and do not "need"?

No matter what stage of the Boomer generation in which you find yourself, now is the time to take an active role in your retirement planning by:

1. Reviewing your goals and objectives to determine if they are realistic;
2. Analyzing your current financial situation to determine if you are on track to reach your goals and objectives;
3. Determining the level of college funding you will be able to offer your children;
4. Consulting your professional advisors to ensure that you are protected in the areas of investment asset allocation, income tax planning, estate planning, etc.;
5. Making the necessary changes to your plans and documents;
6. Implementing those changes; and
7. Reviewing your plans on a regular basis.

A wise person once said, "Failure to plan is a plan to fail." Don't let that happen to you.