Boom Or Bust: The Baby Boomer Generation Plans For Retirement

By Nancy K. Crevier

Baby boomers, those adults born between 1940 and 1960, may find themselves paying dearly in their later years if they are not paying attention to their financial health today. As so-called masters of the MasterCard generation, “boomers” have become spoiled; they are used to having what they want, when they want it. Deferring pleasure is not a trait commonly associated with this generation.

Deferred gratification is, however, one of the signs of a mature adult, according to Newtown attorney Paul Lux.

Mr Lux specializes in elder law, which generally covers any legal issues that may crop up between retirement and death. Buyout agreements, estate planning, long-term care and disability planning are just a few of the many issues Mr Lux handles for his clients.

While younger baby boomers may not see themselves in a situation that warrants his advice right now, seeking expertise in these areas early on is a wise decision, Mr Lux believes. But he is not seeing a lot of baby boomers planning for their inevitable retirement.

“The average retirement today is 30 years, [so] you have to look at two things,” he explained. “Number one, you have one product to protect — your body. Number two, cash flow. If you take your annual salary and multiply it by 12, that is what you should have in the bank when you retire. The number will take your breath away.”

Retirement today is not your grandfather’s retirement. This more active generation plans to keep busy after retiring, often weaving travel plans into part-time work and hobbies. Because of this, young retirees tend to use more dollars every year than do those retirees in their later years. But a serious illness or long-term disability can throw a wrench into the works of even the most smoothly running and adequately financed retirement plan.

Heart attacks, strokes, emphysema, lung and skin cancers can cost an amazing amount of money to treat, and are largely preventable diseases with today’s knowledge and technology. So even an attorney like Mr Lux is qualified to dispense some elementary medical advice on the subject.

“Exercise, don’t smoke, don’t overeat! Care of the body is in our control and that can be instrumental in protecting the retirement fund,” he said.

Boomers may not be aware that the average long-term care facility or nursing home care cost them nearly $10,000 a month — a huge chunk out of the retirement fund if their good health is not maintained.

“There are a ton of people who have failed to plan for long-term disability,” Mr Lux says. “Plan for the worst; take care of yourself. Run your body like a business. Never abuse it, never defer maintenance.”

What other steps should baby boomers be taking to prepare for retirement?

The local elder law expert emphasizes the best way to save for retirement is to pay off debt.

“Pay off your mortgage, pay off your credit cards,” he urged. “You need to build equity and maximize retirement plans.”

Many baby boomers have counted on big pensions from their employers. But recently, companies as large as IBM and Alcoa have decided to freeze employee pension plans.

And over the past decade or two, traditional pension plans have typically been replaced by 401(k) plans, funded by withholdings from the employee’s paycheck, rather than by company profits and investments.

“With a 401(k) plan, companies know how much the plan will cost the business every year. They know the exact profitability of the company,” Mr Lux explained. “Old-style pension plans are no longer popular because there is no prediction for profitability. How much a company needs to fund a pension is dictated by an actuary each year, and they never know how much exactly will be needed.”

When a pension plan is replaced by a 401(k) plan, baby boomers, particularly women, lose out on part of the benefits they may have expected to receive from the pension.

Paying off debt, Mr Lux reiterated, will offset unexpected retirement fund losses and unexpected, costly health issues.

Healthy Lifestyles Pay Off

John Tolson, a Newtown CPA with an office on Church Hill Road, agrees that taking care of one’s self is essential to enjoying retirement without the expectation of contracting a financially crippling illness.

“Health is a big pitfall,” he said. “Try to stay healthy.”

If baby boomers have put off socking away funds until their late 50s, though, Mr Tolson warns that it is going to be hard to play catch-up in preparing for retirement.

“People are living for today,” he said of the many baby boomers who visit him for tax and financial advice. Approximately 60 percent of those clients are between 40 and 60 years old.

“People want the big house, the new car, the fancy vacations, but you can never start too early putting away money for retirement,” he warned. “If you are in your 40s and don’t have some kind of a savings plan yet, you are in trouble.”

People need to think about what their expenses will be once they are out of the work force, he said. If the mortgage is not paid off, if car payments are still being made each month, those things need to be factored into how much money is going to come out of savings each year.

“Most people will need about 70 to 80 percent of today’s income put away for retirement to live comfortably each month,” Mr Tolson said.

By the time people are in their 30s, they should be saving 15 percent of their income. The longer saving is put off, the harder it becomes to come up with the money each year. People who wait until reaching their 40s and 50s to start saving for retirement means having to set aside 20 percent or more each year to achieve a comfortable level of savings.

“That’s a lot of dough,” he says. “It’s hard to do that. To accumulate enough to live on through retirement takes a long time.”

Baby boomers will be hard hit by new company policies that more and more frequently are freezing and eliminating pensions, he asserted.

“We used to have what could be called ‘the three-legged stool’ for retirement. One leg was Social Security, one leg was the pension, and one leg was our own savings. Now one leg is being pulled out — the pension,” he said. Replacing that leg with a 401(k) is a bit like screwing on one shorter leg, Mr Tolson added, but it is better than nothing.

Baby boomers who are reluctant to shore up the third leg of personal savings might take note that in early February the US Department of Commerce announced that for the first time since the Depression, the annual personal savings rate for 2005 dipped into negative numbers, minus 0.5 percent. The rate for 2005 followed a 1.8 percent rate of savings in 2004. According to the US Bureau of Economic Analysis, “personal saving is the amount left over from disposable personal income after expenditures on personal consumption, interest, and net current transfer payments.” Personal savings allow a person to increase financial assets and to reduce debt, two important methods of preparing for the future suggested by Mr Tolson.

“Baby boomers should max out their 401(k) plan and max out any additional contributions every year,” he said. “Any leftover money should be put into Roth IRAs or something like that.”

No one likes to think that his/her final days could be spent in a long-term care facility, but because people do live much longer today than they did 50 or 60 years ago, it is not a possibility that should be overlooked.

A Sound Investment

“I would say it would be wise for a baby boomer to consider purchasing long-term care insurance,” Mr Tolson said. “It is expensive, but think of it this way: you pay $1,000 a year for 20 years; that’s $20,000, a lot of money. But if you end up in a nursing home paying almost $10,000 a month [without insurance], you can burn through saved money very quickly. If you have spent the $20,000 on insurance, your other assets are protected and the insurance covers your long-term care costs. [Long term care insurance] is a good idea. You don’t know how long you’ll live or what your health will be.”

A financial plan can help keep a savings plan on track, as can an automatic savings plan and diversification in investments, Mr Tolson advised. “There are online calculators at places like Money.com that will help. It will help you know how much to save.”

Not enough baby boomers are buying long-term care insurance (LTCI), financial advisor Daniel Patti concurred. Mr Patti, a Newtown resident with offices in Southbury and New Canaan, believes more people should look beyond what they perceive to be a costly extra.

“People feel they might not use [long-term care insurance],” he said, referring to why this financial safety net is commonly left unfurled. In reality, it is much more likely that LTCI will be put to use than fire insurance or term life insurance, which are much more frequently purchased, said Mr Patti.

“One out of two people over age 65 will need long-term care for at least one year,” he stated. “People are living longer. The chance of needing care skyrockets.”

From a financial point of view, LTCI allows your retirement plan to stay intact, Mr Patti said.

“That is particularly important given the recent steep decline in portfolio value,” he said. “The product, in effect, protects the balance of your account value. LTCI also protects income. Although you may qualify for Medicaid to pay for nursing home costs by transferring assets, your income [pension, social security, IRA and or 401(k) payout] cannot be protected. Ask yourself, is it so expensive you would risk your entire portfolio to cover your care? How long can you afford to self-pay? Do I ask my children for the money?”

Consideration must also be given to making savings grow as efficiently as possible, he suggested, and planning is essential to retirement. “Look at your options and make sure you plan. Make sure you can afford to live a long life.”

The Earlier The Better

At Newtown Savings Bank, financial expert Nancy Adams sees more people looking for advice and choosing a planning partner to help evaluate their needs, goals, and strategies. “There is definitely a growing concern of retirement planning,” she said.

She stressed the importance of evaluating risks such as longevity, inflation, and income. So as not to be caught by surprise, Ms Adams also recommended baby boomers max out their retirement opportunities by contributing to 401(k) and SEP plans and identifying opportunities for savings.

“Start now,” she said about saving money. The earlier, the better, is her recommendation for putting aside enough money for retirement.

“The most common pitfall today,” she said, “is underestimating one’s life expectancy. People face a greater risk today than ever before of outliving their assets.”

In other words, it is easy to run out of cash before running out of breath.

Managing assets properly and managing distribution of those assets effectively will determine a person’s comfort level upon retirement. Baby boomers who are not at ease with financial management would do well to meet with someone trustworthy for effective and objective strategies to protect financial risks, she says. By analyzing risk, which is what Ms Adams does as a financial professional, the impact of someone’s retirement plan can be significantly changed.

Boomers who delayed having children and are trying to save for college and retirement now face additional challenges, Ms Adams says.

“It boils down to evaluating their options and planning. You must look objectively at the options and the resources available to you. It was once put nicely to me that you can probably get some real good loans and grants for college, but I have yet to see grants or loans offered for retirement,” she said.

Nobody wants to believe they will get old or sick. And baby boomers especially do not want to think about a future where their lifestyle is dictated by an ever-decreasing stash of cash.

“Better late than never,” may be the adage for baby boomers who have put off planning for their inevitable retirement, but those who wise up and take the advise of these financial planners will be able to look back one day and say it’s true: “The early bird gets the worm.”