Most Americans over the age of 40 have nowhere near enough savings for retirement. You may have heard about the poll taken decades ago indicating more young people have faith in flying saucers than the future of Social Security. Your baby boomer clients are really worried about retirement. How can you help them focus?
How Big is the Problem?
The demise of the defined benefit pension plan, a low savings rate, and low interest rates have created the perfect storm for baby boomers approaching retirement. Seventy percent of baby boomers think they will have to delay retirement or can never give up the 9-to-5 workday, according to the AARP.
Sixty percent of workers age 55 and older have less than $100,000 in retirement assets, according to Schwab, and only 46 percent of those workers have a retirement plan.
People’s retirement in the future might realistically be funded from three income streams:
- Income from Social Security, defined benefit pension plans, and other fixed sources.
- Income derived from their investment portfolio.
- Income from a part-time job or home-based business, like consulting.
What’s the Real Problem?
Baby Boomers are often in denial, clinging to the memory of 12 percent interest rates in the early 1980s and expecting a return sometime soon. They forget about inflation levels at the time.
They think of the days when “$50,000 a year was plenty” and have unrealistic ideas of how much they will need in retirement, especially if they are paying part of their health insurance costs. They hope the stock market will enter a 30-year bull market, enabling them to draw 10 percent annually while preserving their principal. Or they can just dip into savings now and then.
What’s the Risk of Not Addressing the Issue?
This problem is consuming them. Not taking any action makes the situation worse, not better. Their grown children, also your clients, are now worried about their folks arriving with luggage in hand.
Worse, they may see an annuity ad as a pop-up on the Internet promising 8 percent returns. They plow all their savings in, thinking “what could go wrong?” The rate might only be good for a certain number of years, reverting to a lower rate afterward. Once the policy owner/annuitant elects to start receiving monthly payments, the principal usually belongs to the insurance company.
Now their problem is bigger. You are still their accountant and trusted adviser.
Is There a Right Solution?
You can’t get blood from a stone. However, let’s assume your boomer client is in their 50s and still working. You need to do some financial planning to determine the scope of the problem. The American Institute of CPAs (AICPA) has resources in this area. In fact, a recent AICPA survey of CPA financial planners found that running out of money for retirement is a huge concern of their baby boomer clients.
Here are some steps you can take to find the right solution.
1. Start by analyzing the assets they have, any automatic savings, income from Social Security, and any pensions. Get a realistic estimate of the income they think they will need in retirement.
2. Run simulations. Where do they stand? Factor in inflation. When would the money run out?
3. If there’s a shortfall, your clients have two initial alternatives. Those options are working longer or taking less income in retirement. Get them thinking.
4. How much time do they have to address the problem? Are they funding their retirement accounts at the maximum allowed level? Do they have an outside source of income (consulting) allowing them to set up an additional retirement account to shelter income? Can they save on a regular basis?
5. Do they have expectations of an inheritance? This isn’t a definite.
6. Examine their investment assets. Are those assets properly positioned consistent with their goals, timeline, and risk tolerance?
As their accountant, you are getting Baby Boomers to address an issue they are avoiding. If you are able to focus attention and determine the scope of the problem you can start them on the right road to actually having a decent retirement plan when they thought there was none. By championing the cause of Baby Boomers and retirement, finding a workable solution, and offering them the hope they didn't formerly have you become a sort of accounting hero!
For Baby Boomers and other readers concerned with retirement, read our post, Everything You Need to Know About Retirement.
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