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Retirees significantly underestimated the impact taxes would have on them during retirement years, according to a recent Lincoln Financial Group Survey.
The Survey, “2013 – Expense Challenges of Age 62-75 Retirees,” is based on interviews with 750 individuals, with an annual household income of $100,000 or more, and was developed to better understand how individuals plan and manage living expenses and taxes before and during retirement. The survey has a margin of error of +/- 3.5 percent.
The majority of retirees surveyed anticipated home and mortgage, healthcare and travel/leisure to be the most significant expenses during retirement, when they were asked what they expected their top expenses to be before they retired. However, these retirees found that their actual top expenses included taxes, rather than healthcare.
“Given the current environment, with taxes at a 30-year high, it is critical that advisors help their clients understand all factors – including taxes – when developing a plan to help clients protect their legacies,” said Richard Aneser, Chief Marketing Officer, Lincoln Financial Group Distribution. “Advisors who offer this type of wealth protection expertise will demonstrate their value and unique understanding of their clients’ needs.”
On average, when reviewing all household expenses paid on an annual basis, retirees reported spending the most on federal income tax. Additionally, 36 percent of retirees said taxes were a larger expense than they had anticipated, while 23 percent didn’t even consider planning for taxes as an expense prior to retirement.
Underestimating the role of taxes was not based on a lack of knowledge among those responding to Lincoln’s study, which was conducted late last year. When participants were asked if they were aware of recent tax law changes, 62 percent said they were, while only 16 percent were unaware of tax law changes. Encouragingly, 57 percent of survey participants said their advisor regularly discussed tax changes with them and shared the impact those changes could have on retirement. However, 43 percent said their advisor did not take that initiative.
“Retirement is more of a mindset than a specific age,” said Christopher Price, Advanced Sales Attorney for Lincoln Financial Distributors. “Financial advisors need to have the retirement conversation with their clients early on during regularly scheduled portfolio reviews. Those reviews should include identifying tax-control options and strategies to help mitigate the impact of taxes on the client portfolio.”
Other Key Survey Findings
Women had higher levels of concern, especially as it related to the health of their spouse, healthcare expenses and receiving full Social Security and Medicare benefits throughout retirement.
Reinforcing the need for wealth protection, individuals in the 62-65 range have more intense anxiety than other age segments about major retirement concerns, such as leaving an inheritance, generating enough income, and having assets to last throughout retirement.
About 43 percent of retirees in the 62 to 65 range indicated that they would like to pass on a financial legacy to children, grandchildren or a charity, yet nearly half of the survey participants indicated that they had not worked with a professional to establish an estate plan.
About the Survey
Lincoln Financial Group worked with The Spectrem Group, a leading investor research firm, to determine how individuals plan and manage living expenses and taxes before and during retirement.
There were 750 qualifying individuals who completed an online survey from October 1, 2013 through October 9, 2013. Respondents were categorized in various segments:
Age – 62-65, 66-70, and 71-75;
Income -- $100,000 - $124,000 and $125,000-$999,999; and,
Net Worth -- $100,000 - $499,000, $500,000-$999,999, and $1,000,000 and above.
The survey also included individuals who worked with a financial advisor, as well as those who did not.
By Guest Author Anne Allen, University of Missouri (MU)
As more Baby Boomers reach retirement age, state governments face the likelihood of higher workforce turnover.
For example, in the State of Missouri, more than 25 percent of all active state employees will be eligible to retire by 2016. Such large numbers of retirees threaten the continuity, membership and institutional histories of the state government workforce, according to Angela Curl, assistant professor in the University of Missouri School of Social Work. In a case study of the state of Missouri’s Deferred Retirement Option Provision (BackDROP), Curl concluded that states may need to restructure deferred retirement incentives to encourage more employees to remain on the job longer and minimize the disruption to government operations.
“Employers need to ask if their organizations are designed to promote turnover or promote retention,” Curl said. “States should recognize the benefits of promoting retention. Using delayed retirement incentives to encourage retention is important, particularly when dealing with older employees.”
Curl said that a good system of employee retention is inclusive, flexible and accounts for the wide range of circumstances that retirement-eligible employees may consider when deciding to defer retirement. These circumstances could include caregiving for older parents or having a spouse who is retired. In Missouri, BackDROP offers a one-time payment equaling 90 percent of what employees would have received in benefits for an additional five years of service as incentive to delay retirement.
The best predictors of whether state employees chose to delay retirement were: their levels of awareness of retirement options, job functions, and how old they were before they became eligible for deferring retirement. The more aware employees were of BackDROP, the more likely they were to defer retirement. Employees who became eligible for deferring retirement at an older age also were more likely to choose to work longer.
Curl’s study was designed to see if race, sex, level of education and marital status played a significant role in retirement-eligible employees’ decisions to defer retirement. The study of 296 Missouri state employees eligible for BackDROP revealed that these social demographics did not play significant roles in employees’ decision to work longer.
“Deferred retirement options like BackDROP may be effective at retaining skilled employees in positions that are difficult to fill,” Curl said. “Often, state employees retire and go on to second careers in the private sector.”
Curl’s research, “A case study of Missouri’s deferred retirement incentive for state employees,” will appear in the Journal of Aging and Social Policy. Kirsten Havig, who received her doctorate from MU, co-authored the paper and now works at the University of Oklahoma-Tulsa. The School of Social Work is part of the MU College of Human Environmental Sciences. Since the case study was completed, the state of Missouri discontinued BackDROP for new hires.
Curl says using delayed retirement incentives to encourage employee retention is important, particularly when dealing with older employees.
People start to long for grandchildren—and many start to pressure their adult child, in overt or subtle ways, to produce those grandchildren.
For the current generation of would-be grandparents and their children, those desires are getting more urgent—and the pressure is getting a lot more intense.
It comes down to simple arithmetic. More individuals are waiting until their 30s and beyond to have their first child. Perhaps they want to get their finances or career in order first, find the right partner or take on other big projects like an advanced degree or world travel.
Whatever the reason, the result is that their parents have to wait longer for their first grandchild—perhaps to age 70 instead of age 60. They have to worry about whether they will be healthy enough to help out and enjoy the time they have with their grandchildren. Or if they'll be alive at all.
Christopher Mayer, Columbia Business School professor, says "You have $3 trillion in housing wealth among older Americans. You have large institutions exiting the market, and more and more elderly with housing debt coming out of the crisis, as well as other kinds of debt.
A reverse mortgage is a loan made to a homeowner typically age 62 or older with no payments due as long as the borrower occupies the home. The lender aims to profit from fees when making the loan and the sale of the home when the borrower moves or dies. One danger is that the borrower will spend the proceeds too quickly, leaving nothing to live on.
In 2012, the Consumer Financial Protection Bureau warned that retirees taking out assets as a lump sum through a reverse mortgage could find themselves impoverished later. Borrowers without the funds to pay property taxes and insurance could end up losing their homes, the agency said. In some cases, brokers have persuaded reverse-mortgage borrowers to invest the cash they received in dodgy financial products.
To address those issues, the Federal Housing Administration, which insures almost all reverse mortgages, instituted rules limiting the amount of equity borrowers can withdraw upfront. In 2014, the agency also started requiring lenders to verify that borrowers can afford to pay property taxes and insurance. In addition to protecting consumers, the changes are intended to stem projected losses of $2.8 billion on the $88 billion in reverse mortgages the agency insures. Losses occur when homes sell for less than the loan's amount.
"These changes all make this a much more attractive business, and the product is a better product," says Mayer.
Under the new rules, borrowers will have access to only 60 percent of their equity at closing or during the first year of the loan. Even with those limits, homeowners need to be careful that they use the funds appropriately, say Stephanie Moulton, an associate professor at the John Glenn School of Public Affairs at Ohio State University. "It is becoming a different product than it was even two years ago, and it is a safer product, but there are still risks," says Moulton, who is studying reverse-mortgage defaults. "Any time you take an asset and you spend it, you have to have a good plan for how you're going to spend that money."
With nearly 78 million Baby Boomersheading into retirement, trying to stay young is the worst way to grow old. Instead, we should welcome the experience and spiritual riches that age has to offer.
In collecting stories for his book, "Rich in Years," Johann Christoph Arnold met some amazing old people. He wanted to know how they continue to enjoy life despite the limitations, indignities and discomforts that old age brings. What was their secret?
If we follow their example, each of us can find peace and purpose. Living our life purpose or life signature gives us the meaning we were born to carry out. Martin Luther King Jr. encouraged his supporters in this way: "If you can't fly, run; if you can't run, walk, crawl, but by all means keep moving."
"No man is born into the world whose work is not born with him." James Russell Lowell
Baby Boomers are considered a wealthy generation; however, many are not prepared to ensure their wealth lasts. As a generation, boomers have tended to avoid conversations surrounding long-term planning and do not sufficiently account for all of the important financial factors of retirement.
According to a recent retirement study by Merrill Lynch Wealth Management, the majority of people aged 50 and older provide financial assistance to family members, yet the vast majority have never budgeted or prepared for providing this support. Factoring financial support and care for loved ones into retirement planning assists in ensuring long-term financial security. Quality planning for life after retirement is essential to the happiness and well-being of both baby boomers and their families.
In order to continue being as generous with supporting their family as Baby Boomers have been, they should consider planning their finances and retirement plans early. To get started, follow these tips for retirement planning.
1. Ask yourself: “Are you the ‘Family Bank’?” The more financially responsible and secure you are, the more likely you are to be considered the “Family Bank,” meaning someone extended family will most likely turn to for financial help. Look into helping family out responsibly by making sure you are not affecting your long-term goals.
2. Prioritize. If you are the “Family Bank,” make sure you balance your family needs with your own retirement financial security. Giving too much without accounting for your future needs may jeopardize your retirement—and ultimately require you to rely on support from your family.
3. Anticipate and budget. Anticipate and budget for support you may provide to multiple family members—adult children, parents, siblings, and grandchildren - during your retirement. Also lay out what your personal goals are in retirement.
4. Identify challenges. Recognize and plan for the unique challenges that blended family and divorce can have on retirement preparedness and family financial decisions. For example, a blended family may have to account for stepchildren’s financial needs.
5. Discuss, plan and coordinate. Discussing, planning and coordinating with family members around important financial topics prepares everyone for potential challenges, reduces emotional and financial costs and creates greater financial peace of mind for both yourself and your loved ones.
With today’s challenging economic climate, more and more baby boomers are extending financial support to their loved ones. While supporting your family is admirable, it is important to ensure it does not become a risk to retirement.
Question: What is your biggest concern when you look at how the generations are managing their finances?
Liz Davidson, CEO of Financial Finesse, answers questions regarding their 2013 Generational Research report:
The most immediate threat, from an economic perspective, is older Baby Boomers (age 55-64) being unprepared for retirement. You would think that recent stock market performance would make a big difference, and that post-recession employees would be back on track now, but it’s not that simple. A large nest egg in and of itself is not enough to successfully retire.
Success in retirement is not only about how much you accumulate, but how you manage the assets that you do accumulate so that they last a lifetime. Without proper planning, Boomers put their retirement security in jeopardy. Fifty-one percent of Baby Boomers aged 55-64 report they have NOT run a retirement plan projection, despite the fact that they are very close to retirement age and only 22 percent report having long-term care insurance in place, despite the fact that the average cost for nursing home care is more than $50,000 a year and climbing, according to AARP.
Q: What are the economic implications of this?
In some cases, older Boomers are retiring with insufficient assets because they haven’t figured out how much they need to save for a comfortable retirement and/or are at risk because they have no plan as to how to manage their assets in retirement. Both of these dynamics could cause them to become dependent on their families or the government at a time when both are under significant financial pressure.
On the other end of the spectrum, more employees are reporting they plan to delay retirement. According to the Employee Benefit Research Institute, 22 percent of employees expect they will need to delay their retirement, and 33 percent expect they won’t be able to retire until age 70 or older, or never at all. Based on our experience working with pre-retirees, we believe that a large percentage of these employees are planning to work longer than they would like to because they have not effectively planned for retirement and don’t know how to navigate this change from a financial perspective. In instances where employees delay retirement due to poor financial planning (as opposed to a genuine desire to continue working), the employer faces huge financial costs and the employee may be jeopardizing their physical and mental health.
Q: You say that Baby Boomers’ lack of retirement preparedness poses the most immediate threat. Does that mean this is the biggest threat?
No, not really. When you factor in everything that we know right now, Gen Xers face the biggest obstacles. They are behind other generations in key areas of financial planning, and are particularly behind when it comes to basic money management skills that drive the attainment of key financial goals. They also face the most obstacles in terms of financial pressures, often juggling the expense of raising minor children with the expense of taking care of elderly parents, all while having mortgages and car payments that weigh them down. Lastly, they are at a disadvantage to the other generations, having less time than Millennials to save for retirement and other long-term goals, and less expected benefits from employers and Social Security than Baby Boomers.
Q: What about the millennial generation? In a recent report on retirement preparedness, you call them the lost generation. How do you think they will fare financially?
Honestly, that depends on many factors. I believe they will suffer through higher taxes and higher inflation for much of their careers, and they will almost certainly receive less support from their companies and the government than older generations. They lag all other generations when it comes to retirement planning, with only 29 percent
having run a retirement projection, 37 percent having taken a risk tolerance assessment, and 29 percent saying they rebalance their investment accounts.
That said, Millennials are doing a relatively good job with respect to day-to-day money management (despite record levels of student debt and high unemployment). They came of age during the Great Recession, so they are aware of what it’s like to struggle financially and have a desire to avoid that fate.
They also have time, technology, and idealism on their side. We are actually seeing more Millennials starting their own financial education businesses, in many cases leveraging technology to automate positive financial behaviors. When it comes to social responsibility, they appear to be reminiscent of the Boomers in their sense of connectedness to the world, and they actively want to do what they can to make the world a better place. It is entirely possible that financial literacy could become a cause Millennials galvanize around and that this generation reinvents the way we think about and manage our finances, and ultimately redefines retirement.
About Financial Finesse:
Financial Finesse is an unbiased financial education company providing personalized and innovative financial education and counseling programs to over 600,000 employees at over 500 organizations. Financial Finesse partners with organizations to reach goals such as reducing fiduciary liability, increasing plan participation, decreasing employees’ financial stress, and increasing productivity through its unique approach to financial education. Financial Finesse does not sell products nor manage assets. For more information, visit www.financialfinesse.com.
A disconcerting question for those who have just retired or are nearing “retirement”, as Boomers face what is often a big unknown. The conventional wisdom of life after retirement is that it’s a time to enjoy oneself after many years of working hard and paying dues, and to do all the things we’ve deferred.
Yet perhaps more than any other generation alive, boomers have to come to terms with the numerous big changes in personal, financial, and social norms and expectations that have influenced and shaped our lives.
We’ve lived through the period of greatest economic abundance and equality in history (though not all benefited from it) only to see the prosperity we took for granted slip through our fingers just as we’re ready to no longer be working so hard. Economic and political volatility and uncertainty now buffet us continuously. We’re living longer but just when our life stage has even those of us who relished change and adventure wanting the kind of stability (and security) that we grew up with, it has vanished.
The changing nature of work - thanks to technology and globalization - further leaves us wondering whether we can actually earn an income if we want or need to.
And societal norms – at least in the West – still treat life after 60 as winding down. Yet, in some ways we’re at the height of our power – still vital and with a wealth of learning and life/work experience.
Many find themselves asking questions like these:
“How can I make a meaningful contribution or difference with my knowledge, experience, talents and skills?”
“I don’t think I’m ready to not work at all but I have no idea what I want to do next.”
“Is it possible to have an encore career at this stage of life?”
“I don’t have enough retirement savings to live the life I want now. What should I do?”
“What is my/our best option for moving forward?”
If you’re a Boomer who finds yourself feeling uncomfortably stuck and at a loss for what to do now that you’re without the structures of career, work, and children, there is a new resource designed to help you sort through the confusion. The “What’s Next Program for Boomers”, created by coach, counselor and guide, Dr. Manya Arond-Thomas, is a structured personalized four-month coaching program that will guide and support you in creating a roadmap for the next phase of your life with purpose, fulfillment, and ease.
While plenty of Baby Boomers have become affluent, the wealth disparity of many boomers is emblematic of a broad shift occurring around the country.
Many graying boomers are less secure financially and have a lower standard of living than their parents. The median net worth for U.S. households headed by people aged 55 to 64 was almost 8 percent lower, at $143,964, than those 75 and older in 2011, according to U.S. Census Bureau data.
That's left many ill-prepared to provide for themselves as they approach old age, even as they are likely to live longer than their parents. For the first time in generations, the next wave of retirees will probably be worse off than the current elderly.
Today, retirement savings of $120,000 is right at the median 401(k) balance for households headed by Baby Boomers, according to 2011 data from the Center for Retirement Research. That will provide just $4,800 a year to boomers when they turn 65, assuming they take out 4% annually, the top amount many financial planners say should be withdrawn to assure retirees don't run out of money during their lifetime.
37% of the elderly in the U.S. collect pensions, which provide some guaranteed income until they die. Fewer than 10% of boomers do, and that number is quickly shrinking.