Baby Boomers - those Americans who were born between 1946 and 1964 - total about 79 million people.This segment of the population may soon find that they will be spending more annually in their retirement years than they did while working. Over the past century, life expectancy has increased over 56 percent, and this trend is expected to continue, so Baby Boomers will face the financial challenge of the cost of living for many years in retirement, as well as the associated costs of aging.

Also, the cost of health care, including prescription drugs, is increasing at double-digit rates. The Baby Boomers need to rethink their financial planning strategies to ensure that their retirement funding streams are sufficient. The first Boomers turned 60 last year, so the time horizon for proper planning is rapidly closing. Baby Boomers face many challenges if they want to maintain their lifestyles into retirement.


The asset accumulation process needs to be addressed immediately. Hopefully, your Boomer clients have been accumulating assets in deferred accounts, real estate and taxable accounts. Perhaps, however, there has been little or no urgency. It's now time for them to wake up.

First, identify savings goals. Some key questions need to be answered. What annual income will be needed in retirement? Are there other goals that require funding - such as a child's education, weddings, trusts for children, or charitable contributions? Second, what sources of funds will be available to meet retirement needs? Specifically, how much has already been funded, and what can be done to increase or enhance those investments before retirement?

Setting a course now for asset accumulation amounts by various target dates is a good start. This will provide a platform from which investment decisions should be made.

Achieving asset accumulation goals may require one, or all, of the following:

* Maximizing client contributions to deferred accounts, especially those matched by an employer;

* Establishing a disciplined savings program, either through direct deposit from payroll or through discretionary contributions; and,

* Monitoring investments and asset allocation on a quarterly basis at a minimum.

If appropriate, consider the effect that downsizing a client's primary residence will have on the availability of funds to assist with achieving their goals.

Many Baby Boomers, especially those with very short time horizons who have not taken sound planning steps to date, will have to consider deferring retirement past age 65, or plan for a second career or part-time employment.

A continued stream of earned income will help meet current goals and provide a hedge against inflation and unexpected costs.


For Boomers, an investment strategy must enhance asset accumulation. This process has to be customized to the specifics of each individual's circumstances, however, as there is no blanket approach in determining asset allocation. The three main factors are risk tolerance, time horizon and diversification. Each facet needs to be evaluated in concert with the individual's profile, income stream and goals, among other variables.

* Risk tolerance. Risk tolerance can be defined as how well the individual can live with market fluctuations in their total investment portfolio. There are several factors to consider.

First, the greater the individual's wealth, the greater the ability to tolerate risk for potential gains and losses. If the wealth base is smaller, there should be less risk associated with asset allocation. Second, if the individual has a significant income stream from employment, what is the likelihood that employment will continue for an extended period of time? The more sound the earned-income situation, the greater the risk that can be taken with asset allocation. On the other hand, if earned-income levels will continue for only a limited period of time, and the amount of accumulated wealth is not as great, risk tolerance should be low, and a more conservative allocation must be used.

* Time horizon. The investment time horizon is how much time there is before access to funds is needed. The longer the investment time horizon, the greater risk that can be taken, because time will permit recovery from market downturns.

That period of time is critical to investment philosophy. For example, a Boomer who is 42 has another 25 years of income and a longer investment horizon to help recoup losses on a failed investment. A 60-year-old has significantly less time to earn income and compound earnings on investments to make up for poor financial decisions.

When determining the time horizon, however, remember that all retirement funds do not need to be available on the first day of retirement. Most Baby Boomers will probably use a relatively small percentage in the first few years.

* Diversification. Diversification is the need to invest in various asset classes with dissimilar risk/return characteristics to potentially produce a higher return while reducing risk. This is especially critical as Boomers approach retirement.

One might assume that investing solely in bank certificates of deposit would involve the least risk. This is not true. The underlying principal in the CDs does not increase. Therefore, if inflation were to increase dramatically, there would be a significant loss in purchasing power. Investing across several asset classes reduces risk and, if structured properly, should improve returns.

The allocation between fixed-income and equity investments requires constant monitoring. Over the past 75 years, long-term, fixed-income securities have returned about 5.7 percent, while equity securities have returned 10.5 percent. A simple change in allocation could mean significantly more dollars over an extended period.

When considering how a client's assets should be allocated, try to project anticipated annual expenses for the next five years. Then evaluate current retirement income sources and amounts. Portfolio allocation can be more aggressive if expenses can be covered by current retirement income. If there's a funding gap, portfolio assets will have to be used to bridge the gap, and asset allocation will need to be more conservative.

Consider allocating some percentage for current usage within a range of time - say, five years. Take the remaining percentage and invest on a longer-term basis, seeking higher rates of return with greater risk, since the time to recover from market downturns is longer.

* Distribution. A critical phase of the planning cycle is when and how accumulated funds will be distributed over the Boomer's lifetime, and perhaps that of a spouse. This issue requires an evaluation of the sources of funds, as well as the timing and potential tax implications of portfolio liquidation.

* Tax-deferred accounts. Should taxable assets be used first instead of deferred assets, such as an IRA? This depends on the ratio of taxable assets to deferred assets in the portfolio.

Allowing the deferred portfolio to continue to compound tax-deferred until it is needed would be ideal. However, an individual might not want to fully deplete taxable assets if this would leave only deferred assets. The distribution of funds from both deferred and taxable accounts may be preferable to take advantage of lower tax brackets now and in the future.

Failure to draw on an IRA until the age of 70-1/2, however, may require larger taxable distributions, which could push the Baby Boomer into a higher tax bracket, making Social Security benefits taxable.

* Principal residence. For most Boomers, their principal residence represents a significant asset in their portfolio. For federal tax purposes, up to $500,000 of gain for qualifying married couples may be excluded upon disposition. Disposition of the principal residence, therefore, may provide a significant source of tax-free funds.

If the Boomers are intent on maintaining their current residence, yet are in need of funds, they may want to consider a reverse mortgage. The reverse mortgage creates a monthly stream of funds from the equity in their home, while allowing continued residence. The minimum age to qualify is 62 years. Careful evaluation will be required, since these mortgages can be very costly, and may not be for everyone.

* Disposition of assets. You will also want to evaluate the tax consequences of your client's taxable asset disposition to see if lower long-term capital gains rates apply. Capital losses can be offset against short-term capital gains, taxed at ordinary rates. Remember, excess capital losses over capital gains can only offset ordinary income up to $3,000 per year.

For dispositions of real estate, the Boomer may want to consider an installment-sale method, which spreads taxable gains over the collection period. This applies to gains from the disposition of property where the proceeds are received in more than one year. An installment sale not only provides a future income stream for retirement purposes, but also eliminates spikes in income that may move the Boomer into a higher tax bracket for one year, or make Social Security benefits taxable by exceeding the specified base amounts.

* Social Security. Boomers need to consider what role Social Security benefits will play in retirement. To receive full benefits, Boomers will be required to retire at the full retirement age of 66 to 67 years, depending on their year of birth. There is a sliding scale of reductions in benefits in the event of early retirement. Continuing to work while receiving Social Security benefits can also affect the amount of benefits received. If the amount of earned income exceeds certain limits, part or all of the benefit can be lost. However, the longer the work life, the greater the benefits.


Once funds have been accumulated, the goal is not to lose them. At this later stage of life, recovery from a significant loss is very difficult. Boomers need to look at ways to preserve assets and mitigate losses.

Just as important as protection is a plan for the direction of unused assets at death. Wishes must be in writing to ensure that heirs receive what the Boomer wants them to have. Here are the key legal and insurance issues that should be an integral part of every boomer's financial plan.

* Wills. The writing and maintenance of a will is put on the back burner too often. Thinking about one's own death is not pleasant, but it is necessary. A will serves two primary purposes: It gives intended direction to assets after death, and it maximizes wealth retention for the spouse and heirs.

* Estate planning. The federal estate and gift tax laws are in a period of transition. This is problematic, since the value of an estate that may be subject to estate tax is a moving target. Be sure to keep an eye on this issue, and to keep your Boomer clients appraised of any changes.

* Long-term care insurance. The current average daily cost of a private room in a nursing home is $203. With life expectancies increasing, some estimate that approximately 60 percent of Boomers who reach age 65 will need long-term care, whether at a facility or at home. This may place a severe strain on retirement assets.

Long-term care insurance is an important form of asset protection. There is a lot of controversy over the need to obtain long-term-care insurance. The industry is relatively new, and insurance carriers are still determining if this is a line of business that they should be in. Consequently, the consumer needs to be aware of the company writing the policy, guarantees on premium increases, and the stability of the insurer.

Within the next five years, the Boomer generation will begin to retire. The quality of their lives will depend on how well they have planned for their financial future. There is no one way to plan. Boomers must evaluate their circumstances given the resources available to them.

With a limited time horizon in front of them, however, Boomers must take a proactive approach in determining their goals, and the framework from which to achieve them.

Jack Zook, CPA, PFS, is managing director of Zook, Dinon & Roman PA CPAs, and an assistant professor of accounting at La Salle University in Philadelphia. Reach him at Reprinted with permission from The Pennsylvania CPA Journal.

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