Few generations have been as discussed and studied as the "baby boom" generation of Americans born between 1946 and 1964. According to testimony to the U.S. Senate Special Committee on Aging, this group consists of an estimated 76 million people. A quick Google search of "baby boomer" will generate more than six million Web matches. With a generation so hyped, it would be easy to make vast generalizations and create one-size-fits-all products and services for these people. But in our practice, we've learned that would be a mistake.
If there is one commonality among the boomers, it's that they are all individualists with unique needs. In fact, these 42 to 60 year olds can pose quite a challenge. In addition to spanning nearly 20 years, this generation came of age in the time of "me." They're accustomed to doing things their way, having specialized attention focused on their needs. By targeting their individual needs with a customized mix of financial products, we're helping our boomer clients reach their full financial potential.
Today's planning, especially for boomer clients, is complex. Just as life insurance isn't a cure-all, one planner can't be an expert in everything. We have a number of advisers in our office, each with a different area of expertise. When we build a relationship with a boomer client, we seek to be the primary source for all their financial and planning-related services, so we employ a team approach to personalize our clients' plans. More than 75% of clients come to our office for meetings, so we're able to pull in their personalized team of experts as needed. Boomers appreciate this personalization and service.
Longevity Concern
One thing we do know about boomers is that, on average, most will live much longer than previous generations did, and many will live years beyond their retirement. In fact, many can't fully comprehend how long they might live because it runs so contrary to their life experiences.
Younger boomers, in their mid 40s and early 50s, might comprehend longevity better than their older counterparts, but even older boomers are often surprised by predicted life expectancies. According to the government's Joint and Survivor Life Expectancy Tables, a married couple in their early 60s has a 50% chance that one spouse will live into his or her 90s. We undoubtedly will have clients who spend more time in retirement than they ever did working. This previously unimaginable longevity creates the most pressing concern for all boomers -- the fear of outliving one's money.
Sometime during their 50s, most boomers go through a change in their mindset. Up to this point, all their financial goals are motivated by wealth accumulation, or "what is the highest return I can earn on my money?" Our younger boomer clients are still very much in accumulation mode. Most financial decisions have been made with an end goal of making more money.
During "the change," the mindset moves from accumulation to a distribution mode. As they get older, boomers' investment philosophy typically becomes far more conservative --sometimes too conservative. Fearful of making a wrong decision, sometimes people don't do anything at all.
This fear is easily understandable. Watch CNBC or any other financial-related cable programming, and you can fully comprehend why clients are so hesitant. To be "newsy," the financial media focuses on the day-to-day market fluctuations instead of long-term trends. We help our clients avoid the analysis paralysis that accompanies their mindset changes. Part of this is to help them realize that by not making a decision about how to invest their money and minimize financial risk, they're in effect making a decision. And it's a disadvantageous decision at best, because the preoccupation with safety can lead to the erosion of purchasing power that doesn't become readily apparent until it is too late to correct.
Managing Downside Risk
When moving from an accumulation mode into a distribution mindset, we've found that most boomer clients become far more concerned with the downside risk than upside potential. We try to help our clients balance their investments in a diversified portfolio and manage for the downside risk while still trying to maintain purchasing power down the road. The specific allocation of their portfolio -- how much into equities and how much into fixed investments -- is personalized based on the goals and investment temperament of the clients.
Boomers Jack and Mary, for example, are in their mid 50s and retirement is in the foreseeable future. They are concerned about the volatility of their investments and can't see past the fear of knowing where their retirement paycheck will come from. After discussing the amount of monthly income they will need during retirement, our solution is to place two to three years' income from their assets into a fixed investment. If the clients know where their "paycheck" is coming from for the next three years, it reduces concern about market volatility and they're able to focus on the long-term future knowing that their immediate retirement needs will be covered.
Understanding that this change of mindset will occur allows us to prepare for it ahead of time. Products like variable annuities, especially with income benefit riders, give clients the upside potential they need to maintain purchasing power, while providing the downside protection they crave. As the need for retirement income draws near, immediate annuities work well to guarantee a portion of the monthly income requirements.
The Role of Life Insurance
Life insurance is an essential part of the financial plan for most boomer clients, regardless of age. Life insurance is an invaluable estate creation tool that gives boomer clients the freedom to live and spend down their unallocated assets without worrying about leaving something for their heirs.
By choosing from the different life insurance products available, we're able to select products best suited for the specific boomer client based on his or her unique needs. In most cases, we've found that whole life and universal life are the most ideal products given their built-in guarantees, and variable life insurance products typically aren't as appealing. Because we want a portion of the client's investments to be in fixed investments, the guaranteed policy values on WL and UL products become a fixed portion of the clients' asset allocation.
Permanent life insurance policies have another attractive feature. Health care costs, especially for a catastrophic illness during retirement, are a concern for all boomers. Whole life policies can help address that because many policies allow for a portion of the policy's cash value to be pulled out of the policy as a loan or withdrawal.
Certainly one of the most attractive aspects of life insurance is its tax-preferred status. When I first started in the business, the prevailing investment philosophy was to move as many dollars as possible into tax-deferred investments such as IRAs and Section 401(k) plans. Part of the justification for this was to make the contributions deductible while you were working and in a "higher tax-bracket," and then pull the money out during retirement when you would be in a "lower tax-bracket." Some of the projected shortfalls in the funding of Social Security and Medicare, because of generous benefit payouts, have changed that thinking. Studies have indicated that many boomers are increasingly likely to be in a higher tax bracket after retirement.
Serving Multiple Objectives
Because of this potential for higher tax rates, as we develop a retirement plan for our boomer clients, it's imperative to reduce the potential tax consequences of their investment portfolio. Roth IRAs and tax-free bonds can help achieve this goal, but for many clients life insurance can be an ideal tool. This is especially true because much of the time we have to let some of our investment dollars do "double-duty." In a perfect situation, clients would be able to segregate dollars for different purposes: retirement income, health care, family protection, and so on. But in the real world, we rarely have enough assets to accomplish this. So we often need to allow the same dollars to serve multiple objectives.
Jim and Barb are older boomer clients. Barb is a retired teacher who receives $1,800 per month in post-tax pension. A recently retired corporate executive, Jim received a lump sum of $500,000 from his 401(k) and rolled it into an IRA. Their retirement goal is $4,000 per month of spendable post-tax income. They will achieve this goal through a combination of Barb's pension, Social Security benefits payments, and withdrawals from Jim's IRA.
Based on their plan and income level, Jim and Barb would fall into a 15% tax bracket for the first few years of retirement - until they reach the 70 1/2 "tax trap." At that point, the required minimum distributions take effect and they will be forced to pull substantial additional income out of the IRA. These forced withdrawals are far in excess of what they need to live on and will bump them up into a 25% tax bracket. So they would be forced to pay significantly higher taxes on income they really don't need or want to receive at that time.
We can plan around the tax implications and avoid the additional tax burden with the help of whole life insurance. In this case I chose Ohio National's Prestige Performance for its strong values at a moderate premium level. Jim and Barb were able to pull an additional $1,000 per month from Jim's IRA during the first 11 years of retirement and still remain in the 15% tax bracket. They pay the policy premiums with this excess money, After the first 11 years of the policy, it would have sufficient cash values to pay future premiums. This whole life insurance solution helps our boomer client avoid negative tax implications and gives them an additional source of tax-favored dollars to maximize their post-retirement income.
Just as boomers are turned off by one-size-fits-all products and services, they're looking for more than just life insurance. In fact, we've found that some boomer clients are averse to life insurance. They recall the days of "buy term and invest the difference," when they got burned after they forgot the "invest the difference" part of the equation. To combat this, we advise them upfront that life insurance is only one part of the plan, not the entire plan. Our comprehensive boomer planning does include life insurance, however, as a key tool for the risk management portion of the financial puzzle.
As boomers age, their needs will invariably change. For this generation that grew up with the Beatles, the Vietnam War, and Watergate, retirement is simply the next adventure. We can help make sure it is a well-funded one and provide financial security for our boomer clients.
Bill Maxson, CLU, ChFC, CFP, CFS, joined Ohio National in 2002, but has been active in the financial services arena since 1982. He is president and chief executive officer of The America Group and The America Group Financial Advisory Services. A graduate of Cornell College and Southeast Missouri State University, he is a past president of the St. Louis chapter of the General Agents and Managers Association.
For representative use only. Not for use with the general public. Insurance and annuity products are issued by The Ohio National Life Insurance Company. Guarantees are based upon the claims-paying ability of the issuer. Product, product features and rider availability vary by state. Dividends are not guaranteed. Loans and withdrawals from life insurance reduce the cash value and death benefit. If the policy lapses with an outstanding policy loan, adverse tax consequences could result. The issuer is not licensed to conduct business and products are not distributed in Alaska, Hawaii, and New York.
