Time for Boomers to Prepare for 2015


December is always a busy time of the year spent with family and friends celebrating the holidays, but it is also a good time for baby boomers to take a good look at their personal finances. With only a few weeks left in 2014, it is the ideal time to make sure your 2015 financial plan is in order.

Jason Konopik, chief financial officer at AMZ  Financial Insurance Services LLC, and Mark Triplett, president of Mature Markets, offered the following tips for boomers to prepare themselves financially for the end of 2014 and the start of 2015:

Boomer:  What can baby boomers do to best financially prepare for the end of 2014 and the start of 2015?

Konopik:  If you are currently working, one of the most important financial issues you need to address before the end of 2014 is to make personally funding your retirement the top financial priority in your life.  The reason, there’s not a single bank that’s going to allow you to take out a loan to fund your retirement.  With corporate pensions becoming a thing of the past, and many believing that Social Security won’t provide even a foundation of retirement income, it’s now up to the individual to save for their retirement.  If you haven’t made saving for retirement a reality in 2014, beginning immediately you need to start setting aside a little bit of money each month, typically about 10% of your take-home pay, and within a few years you’ll be on your way to building up a nice retirement nest egg.  Additionally, many people may not realize that the 401(k) may not be the best vehicle to address their financial needs.  Also, people should open their eyes to alternative asset classes such as Indexed Universal Life (IUL), a product that can provide more benefits with less risk.  A properly funded and structured IUL policy allows you to earn tax-deferred growth, receive tax-free income and solves multiple financial needs without changing the amount of money they’re currently saving.

Boomer:  With the reporting of great gains for mutual funds, how much should boomers have invested with them?

Konopik:  With the S&P 500 gaining almost 15% over the last 12 months, people who are invested in mutual funds should congratulate themselves and realize that based on one-year historical analysis, this happens about 30% of the time.  Conversely, almost another 30% of the time you’ll go negative over that same one-year period and in about half of those instances you’ll experience double digit losses.

Knowing that the markets are volatile, when it comes to mutual funds, it’s really not important how much the mutual fund gained — it’s how much you get to keep over the long term.  If you want to keep those gains and not give them back to the volatile market, it’s important for people to find ways to take some of the risk chips off the table, but in doing so you’re going to need to find safer places which often times means watering down your returns.  You can turn to money managers to make the necessary trade-offs between risk and reward, and hope they’ll always do the right thing at the right time to generate the best return.

However, people with gains also need to consider that we’re in one of the lowest tax environments we’ve ever seen.  With more than $18 trillion in U.S. national debt, most economists predict we’ll need to find ways to increase revenue to offset government expenses, which translates into higher future taxes.

What many people still don’t know is that there is an alternative asset class that keeps pace with the ups of the market but avoids all the downs.  It accomplishes this without needing a money manager and hits the efficient frontier with the right risk to reward tradeoff, and also immunizes people who invest in it from future tax increases.  The wealthy have been using this asset class for years and they’ve been seeing long-term positive returns of close to 8% year-over-year — but the only problem with this alternative asset class is its name — Indexed Universal Life Insurance.  This trend is clearly changing though as Indexed Universal Life insurance policies are up over 11% totaling more than $1 billion in premiums through the third quarter of 2014.

Boomer:  For those boomers in or nearing retirement what mistakes should they look to avoid?

Triplett:  If you are nearing or already retired, if you haven’t already done so it’s time to visit with a financial professional that specializes in guaranteed retirement income planning.  This financial professional is vastly different than the financial advisor you used during the accumulation phase of your retirement.  The accumulation professional was there to help you accumulate retirement assets, but may not be specialized in turning those assets into a guaranteed retirement income stream.

When you stop earning a paycheck in retirement you need to replace that salary with spendable income.  Many advisors have done a terrific job of building up portfolio values, and for their services they've taken an asset management fee every year.  The asset manager's ongoing goal is to maintain or build the asset value because as the size of the portfolio decreases, the fee they earn also decreases.  So, having a pile of money and eating Ramen noodles every night in retirement can be a reality even if you've done everything right, because many advisors only focus on one side of the equation.  It's not just how much you can accumulate.  What's more important with retirement planning is knowing how to efficiently distribute your assets so that you can have a predictable paycheck in retirement, regardless of the size of your initial asset.

For those who feel they did not save enough, or for those who want to be more efficient with their retirement assets, Guarantee Lifetime Income (other than a pension or Social Security) is worth a look.  By pooling your retirement longevity risk with others in the same boat, clients can have a higher spendable income than they could without risk pooling.  That means clients can take more income from the same assets, with zero chance of running out of a retirement paycheck.  Unfortunately this isn't a do-it-yourself retirement strategy because to efficiently accomplish risk pooling you need to know exactly when you're going to die.  Since you can't predict the date upon which you'll pass, clients cannot optimally budget for the most retirement income, regardless of investment performance.  We find that for many boomers pooling their longevity risk may be the only way to salvage their retirement dreams.  The companies best suited to evaluate and hedge against the retirement longevity risk are insurance companies offering annuities.

Naysayers argue that strategic investing is the only way to a secure retirement.  They suggest that a well-managed portfolio and a specific withdrawal rate will get you through retirement.  Unfortunately, I have yet to find an investment advisor or brokerage firm willing to pay their client's bills or living expenses if the portfolio performance doesn't work out as planned.  Additionally, many money managers won't accept a client unless they have half a million dollars or more.  What about the "little guy?"

The reality is that many boomers need both.  They need to commit some retirement assets for future income needs to ensure a retirement paycheck.  They also need to allocate assets to investments in order to stave off inflationary concerns, but they should consider alternatives that eliminate the risk of taking a loss in a down market.  According to the Fidelity Income Strategy Evaluator(R) tool, it generally encourages that 30% to 50% of a retiree's overall financial portfolio should be allocated to fixed income annuities.  Insurance companies that offer fixed income annuities provide the guaranteed income stream that allows clients to cover their monthly living and discretionary expenses.  Taking a piece of your retirement assets and turning it into a guaranteed, predictable retirement income stream allows baby boomers to comfortably enjoy their retirement without worrying if they’ll have enough money, regardless of stock market performance.  Knowing that you have a guaranteed income in retirement for the rest of your life, regardless of how long you live, is the equivalent of creating your own pension and knowing your retirement is secure is very comforting.

Lastly, for the person who feels they haven't accumulated enough, the highest priority of their retirement should be electing strategic claiming options to maximize Social Security benefits.  It's the only source of government-backed, inflation-protected, guaranteed lifetime income.  It's important for clients to realize that the difference between picking the optimal Social Security benefit option and just the easy one can mean thousands of lost dollars in Social Security benefits.