Financial Planning for Baby Boomers
Deb Kriebel | January 31, 2013
You were born between the years 1946 and 1964 — part of the explosion of births that resulted from World War II vets returning home and starting families. You’re often associated with the hippies of the 60’s and TV generation of the 70’s. You grew up with American Bandstand, Bewitched, Bonanza, Gilligan’s Island, and Lassie, and went to the big screen to see The Sound of Music and Gone With the Wind. You experienced the elation of our first steps on the moon, and the tragedy of the untimely deaths of John F. Kennedy, Robert Kennedy, and Dr. Martin Luther King.
As a baby boomer, your financial planning will differ from that of your parents’ generation. Because of the dramatic increase in the cost of a college education and the disappearance of the company pension plan (and its “retire at 65” promise), the financial landscape has changed and new challenges have emerged. If you want to secure your future and achieve your retirement goals, you need to address them now.
How will I pay for my kid’s college?
Paying for a college education these days is equivalent to buying a new BMW every year but never getting to drive it. However, with the advent of 529 college savings plans and Coverdale education IRAs, you finally have the ability to save and pay for college in a more tax-efficient manner. The problem is usually a matter of saving enough money. Four years at a public in-state university will run roughly $80,000, whereas four years out of state will cost approximately $168,000.
If you haven’t saved enough when that first tuition bill hits, then you’re likely to investigate student and parent loans where the rates and terms of government loans are typically not favorable; more often a Home Equity Line of Credit (HELOC) becomes the best financing option. In addition, some employers will allow you to borrow against your 401k plan or Thrift Savings Plan and pay yourself back.
Can I buy a second home?
Once the kids go off to college, you can refocus on yourself. Since you may not want a stationary retirement, you might be considering a second home. If you have paid off the mortgage on your primary home and covered your kids’ tuition bills, it’s a good time to investigate buying a vacation property. Home prices have fallen steadily over the past 5-6 years and are now starting to stabilize. Interest rates are at historical lows. If that beach home or new sailboat fits into your planned retirement lifestyle and you have the available resources, now may be a good time to act on those dreams.
When Can I Retire?
Saving for retirement should be your number one goal – gone are the days of the company pension plan. You’ve taken advantage of an employer sponsored 401k plan and saved pre-tax for retirement, so continue to sock away those savings. If you’re self-employed now, open a defined contribution plan, such as a solo-401k, SEP IRA, or SIMPLE IRA. In some situations, a defined benefit plan may be the right solution for your business retirement plan.
How much do you need to save? You can use the 4% safe withdrawal rate for starters. For every $40,000 of annual spending, you will need $1,000,000 invested in a conservative to moderate growth portfolio. Let’s say you plan on spending $160,000 a year and you estimate your Social Security net paychecks to provide $40,000 a year. In that situation, you’ll need an additional $120,000 a year from your portfolio (which means a nest egg of roughly $3,000,000 in your active portfolio).
Social security full retirement age (FRA) benefits no longer start at age 65, as they did for your parents; if you were born between 1943 and 1954, the new age is 66. If you select early benefits starting at age 62, your benefits are reduced, and if you delay benefits beyond your FRA, those benefits increase by 8% per year till you reach age 70. If you have reached FRA and are not yet 70, you can also use the “file and suspend” option if that makes sense for your situation. This is often useful for married couples when the high earning spouse continues to work till age 70, but the other spouse would like to claim 50% spousal benefits on the working spouse at their FRA.
Should I buy Long-term Care Insurance?
As we age, our thoughts concerning insurance move from disability and life insurance (while we’re still working) to long-term care insurance and Medicare coverage. Medicare parts A, B, and D cover a large portion of medical, hospital, and prescription costs; however, it will not cover home health care, assisted living, or nursing home stays when you need help with “activities of daily living.” Long-term care (LTC) insurance helps to defray the expenses when you need help with eating, dressing, transferring, bathing, and toileting. Dementia and Alzheimers are also covered under most LTC policies.
Your retirement plan should address your possible long-term care needs. The average stay in a nursing home is 3 years at a cost of $200 a day, with costs increasing at 6 to 8 percent a year. That’s $219,000 in today’s dollars. Would you be able to self-insure or would you need a policy to help pay those costs?
Do I need to update my Estate Plan?
Many boomers put together their Wills, Trusts, Power of Attorney documents, and Health Care Directives when their children were born. If your children have graduated from college and you haven’t updated your documents, now is a good time to schedule a meeting with your advisor. The Federal Estate Tax Laws changed on January 1st, 2013. You now have the ability to pass $5.25 million in assets to your heirs without Federal taxation (and your spouse may do so as well). In addition, you have the ability to combine the benefits as a total pot of $10.5 million: If one spouse passes away, the other can use any remaining portion of the benefit, as long as a Federal Estate Tax return is filed for the deceased spouse.
What will my lifestyle be like in retirement?
It’s time to put together a comprehensive retirement picture and map out your goals for the transition to your new life. Would you like to maintain your current lifestyle or do you plan to travel? Will you be a volunteer on mission trips? Will you be visiting grandchildren? Catching up with college buddies through Facebook and Linkedin? A recent article in the Wall Street Journal followed a newly-retired boomer couple who sold their home and decided to travel around the world with no itinerary and no schedule: Their only destination was “adventure.”
However you imagine your own retirement – whether sailing around the globe or spending time with family at home — you need to be preparing for it now.