When planning for retirement, a fundamental question for most boomers is when. "When" means different things to different people. For some, it's the point in time when they attain a specific age. For others it's simply the point in time when they look back at their careers and look forward to their pending retirement.
Unfortunately for many advisors, retirement is frequently a reaction as opposed to a carefully planned exit strategy. The process of planning your clients' retirement is neither entertaining nor predictable, but there are certain steps you can take to help ensure your clients are prepared.
As a group, boomers are not ready and not confident that their retirement will be what they envisioned. While much of this is attributed to the recent economic turmoil, faulty planning assumptions or a lack of planning entirely are also to blame.
A troublesome statistic from the EBRI survey is that only 46 percent of workers have tried to calculate how much money they'll need to retire, with 44 percent simply guessing at how much they'll need. The message here is that misperceptions combined with apathy leads to unpreparedness, and this likely is not a road you want to go down with your clients.
Determining the amount of money needed in retirement and managing that income over a 20 or 30 year period is a difficult task. A good place to start is to assess your clients' individual lifestyle expectations and financial resources.
To estimate the future retirement income needed, create a retirement budget which segregates between the "must haves" and "nice to haves." Items such as food, shelter, and health care are the first things that should be budgeted into your clients' plan. These expenses are non-negotiable and are required to maintain a minimum standard of living. From there, move up the list to more discretionary items and find out what your clients want and what they're comfortable sacrificing.
It's important, however, to make this an honest and open discussion. Many near-retirees assume everything will be fine because they've worked for so long and saved as much as they can. But even the best retirement plans can be derailed so it's important to be up-front with boomers at this stage.
Many advisors use a replacement ratio of 70 percent to 80 percent of pre-retirement income to estimate aggregate retirement income needs. The belief here is that retirees will no longer incur expenses for work commutation and most people will stop saving for retirement, which in turn lowers the amount of income they'll actually need. The theory suggests that boomers can maintain their current standard of living for less money than when they were working.
Be careful, though. Income replacement ratios generally don't account for clients' retirement lifestyle expectations or unexpected expenses such as health care and long-term costs. Health care in particular will tend to represent a larger portion of your budget in retirement than when you were young and working, and these expenses will likely increase over time.
Questions like "when can I retire" and "how much will I need" can be painfully complicated and are unique to each person. The answer will depend on many factors. Put simply, retirement readiness is not determined by reaching an age or a date. Instead, retirement readiness is really an exercise in planning, risk management and financial discipline. It's important to sit down with your clients and establish a retirement plan as soon as possible. The time you invest now will benefit you and your clients in the long run.
Keith Hylind, CLU, ChFC, is vice president of retirement solutions at OppenheimerFunds Inc. in New York. He can be reached at khylind@oppenheimerfunds.com.
