Boomers watched their nest eggs take a substantial hit over the last three years, but some experts are saying 2012 will be rife with opportunities to get savings back on track.
The beginning of a new year is the perfect time for boomers to examine their portfolio and if necessary, talk to a financial planner to evaluate holdings. Now is the time for boomers to review their household budget: calculate income coming in and spending and savings.
The past year certainly didn't make saving or planning for retirement easy with extreme volatility in equities, while bonds gave little or no return on their investment. In addition, our nation’s growing budget deficit meant we suddenly had to worry about future cuts to Social Security and Medicare—something many boomers plan to rely on when they exit the work force. The housing market remained depressed as home values continued to decline, and laid off older workers struggled to find employment.
But alas, it’s a new year, and it’s time for us boomers to repair our nest eggs so we can retire in the fashion we’ve always wanted. I reached out to Robert Quinlan, owner of Quinlan Insurance & Financial Services in Windsor, N.Y., for some tips on how boomers can mend their retirement plans, here’s what he had to say:
Boomer: Because of the stock market turmoil of the past few years, many baby boomers are reluctant to continue investing on Wall Street. Do you agree or disagree with this thinking?
Quinlan: I would disagree. Yes, there has been a lot of volatility in the stock market since 2008, but we need to realize that when we are saving for retirement, we are in it for the long haul. We have to keep ahead of inflation-- even though inflation, in my opinion, is not a great concern today with all of the pressure on wages.
Long-term stocks have outperformed other types of assets. But remember, long term is not one or two years, it’s more like five, 10 or 15. I think the stock market is still a good place to put some of your money, but the key is diversification. Diversification should be inside of a 401(k) plan plus personal investments outside of a retirement fund.
It is also equally important to make sure you have an emergency fund available—I recommend having three to six months of living expenses set aside in a very liquid, safe and secure place.
Another factor to take into account when planning for retirement is life expectancy. People are living longer today due to better health care. Right now for a female the life expectancy is about 82 years old, and for a male it is about 76 or 77; expect those numbers to increase over the next 10 to 15 years. While this is good news, this means we need to plan on using our retirement funds for a longer period of time. When it comes to a long-term retirement fund, a portion should be in the stock market because of its historical appreciation. Boomers should also keep in mind their risk tolerance. Some people cannot substantiate any volatility, and they should be looking at different places to invest money. Make sure you are matching your risk tolerance to a portion in the stock market.
Boomer: With interest rates as low as they are, would it be wise for boomers to refinance their homes or pay off their mortgage if they are financially able?Quinlan: The conventional wisdom over many, many years has been to pay off the mortgage as soon as you can, or certainly before entering retirement for the benefit of cash flow. But now, we are in a very unique economic situation with very low interest rates, and the wisdom is leaning towards holding onto that mortgage.
Right now, you can get a fixed loan for 4% or a 15-year mortgage at 3.25%--both historically low numbers. In terms of refinancing, if your rate is close to 5% or above on your current mortgage, consider refinancing to capture these low interest rates.
Boomer: Do you think reducing debt should be the No.1 priority for baby boomers approaching retirement?
Quinlan: In general, I say the answer is definitely yes. However, we need to look closer at what type of debt we are talking about. For example, mortgage debt: I think there is a stronger argument today not to pay off a mortgage and hold onto the cash. Having said that, with regard to paying off consumer debt the answer is yes.
Boomers with high credit card debt should actively work to pay it off or significantly reduce their balance. Consumer loans and car loans should be paid off. Car loans are hovering at very low rates, but as you get closer to retirement, it is nice to be able to take that $300 or $400 payment down to zero to increase your cash flow.
Getting rid of these consumer debts, obviously shores up more money for retirement savings. One situation that I could perhaps justify having some outstanding credit card debt or other types of debt is for people that want to start a business. You may need to be running up some credit card expenses to get that new business off the ground.
Boomer: For baby boomers that are still working, should they continue investing in employer sponsored 401(k)? If so, should they increase their contributions?
Quinlan: YES! Particularly if the employer is matching funds at 1, 2, 3 or 4%-- there is no reason anyone would not want to continue to participate in this plan.
Boomers in a position to increase their contribution should, you can’t save enough for retirement. You are able to get the tax deferral on the gains portion and you are able to reduce taxable income today--that is pre tax dollars going in.
Boomers and financial advisors are not planning enough for the cost of long-term care. People generally underestimate its cost, and are stunned at the amount of health expenses that aren’t covered, and have to be paid out of pocket down the road. People who can afford to buy long-term care insurance should, it will keep their retirement savings in a much more secure place. Medicare and most health insurances do not cover long-term care. One of the most dramatic rising costs today is the out-of-pocket costs for prescriptions.
Boomer: Are there any new tax law changes or investment opportunities in 2012 that baby boomers should be aware of?
Quinlan: There are two things baby boomers need to know about this year: one is in regards to taxes, and the other investing. There was a change in the federal estate tax in late 2010. The good news is that lawmakers put in place (for two years) the federal estate tax law, which currently says that for a single person, if you have an estate under $5 million, you will not be facing federal state tax. For married couples, the estate would be under $10 million.
For those with estates above those amounts, estate planning is going to be important. If you were lucky enough to die in 2010 there was no estate tax. Here is the planning components you should be looking at: The estate amounts were put in place in 2011 and goes into 2012, but it expires at the end of this year. We do not known and Congress has to decide what is going to happen in 2013. If they don't decide the estate tax—the amount drops to $1 million. So clearly for people that have substantial net worth, they should be looking at going back to estate planning attorneys and financial and tax advisors this year to see how they want to properly structure their estate going forward.
Also, the lifetime gift tax exemption is currently at $5 and $10 million, it was previously only at $1 million. Under the old tax law, it was probably better tax wise to give your money away at death, but since they have raised the gift tax, it probably makes more sense today to give money while you are alive so you can see how it is being used and hopefully be appreciated by the beneficiaries. This $5 million gift tax exclusion will not be affected by the annual gifting that people can do which is at $13,000—this means you can give $13,000 away each year to an unlimited number of people. With regard to investments, diversification is absolutely necessary. For people that are holding mutual funds, you should go inside these funds to make sure there is no overlapping of the same securities that different mutual funds might be holding—this is not an effective way of investing. When we talk about diversification, it is not just simply 60% in stocks, 30% in bonds and 10% in cash, you should go inside the mutual fund to make sure they have distinct investment objectives. Some duplication is unavoidable, but you want to avoid substantial overlapping of these funds.