Baby boomers near retirement are being challenged to rethink retirement planning in response to unforeseen opportunities and pressures. Critical decisions made in the early years of retirement can have an impact on lifestyle quality for many years to come. Even for boomers who have planned ahead, key retirement decisions are taking place in an environment of change that could not have been anticipated.
We've identified five key areas where recent changes have introduced new complexities and advisor opportunities.
Housing and relocation -- With home prices softening in 2006 and 2007, many boomer homeowners face a dilemma. In many U.S. markets, the cost of renting homes has dropped well below the cost of owning, creating opportunities for retirees to downsize. You can provide a valuable service by helping clients objectively evaluate decisions about home sales, relocation, rent-vs.-buy and mortgage financing.
Health care in retirement -- In the past, reaching age 65 brought relief from high health insurance costs, because Medicare Part B premiums have been less expensive than private insurance. But, with the introduction of "income-relating" last year, government entitlement program benefits are now linked to income, so that affluent seniors will pay more or receive less. Now affluent retirees have more reason to participate in forward tax planning strategies. Some experts believe that in addition to Medicare Part B, the income-relating concept may eventually be applied to Social Security benefits as well. If this prediction comes true, retired people may face even higher effective tax impact than younger taxpayers.
The Social Security start date decision -- Most boomers qualify to start Social Security retirement benefits as early as age 62, before reaching full retirement age (currently 66 for many individuals). The extra income generated by this decision can help to make early retirement easier, but may come at a steep price. Helping boomers decide when to start Social Security benefits can be among the most valuable services a financial advisor can offer. Ask your clients for a copy of their Social Security Statement, normally mailed to them a few months prior to their birthday.
Roth IRA conversions -- Wealthy boomers have not yet had a chance to participate in Roth IRAs because their incomes have exceeded the limits for contributions or conversions. That will change in 2010, when everyone will become eligible for a Roth conversion, regardless of income. A Roth conversion effectively prepays income taxes on retirement plans or IRA assets.
"No-impact" rollovers -- According to the Employee Benefit Research Institue, boomers will roll over an estimated $4 trillion in assets from retirement plans to personal IRAs over the next decade. With all the other retirement decisions boomers need to make, what is the secret to helping Boomers avoid rollover mistakes?
You can make the rollover decision simple with the concept of a "no-impact transfer" which means:
- 100 percent of employer plan money is directly transferred to a Traditional IRA with no current tax consequence;
- your client is not forced to make difficult decisions right away;
- the transaction consolidates assets in a Traditional IRA.
Once assets have been consolidated into a Traditional IRA, you can help your clients evaluate investment strategies, retirement income needs and tax consequences. Ask clients if their workplace retirement plan permits "in-service withdrawals" at a given age. These withdrawals, which are plan-specific and described in participant disclosure materials, can help accelerate transfers to a personal IRA while the client continues to work for the same employer.
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