Are Boomers taking retirement seriously? Greg Olsen, CFP, CLTC, has his doubts. A partner at Lenox Advisors (www.lenoxadvisors.com), working extensively with high-net-worth individuals, Olsen finds a lot of misconceptions that advisors have to clear up. Boomers seem to have only vague ideas about issues ranging from how much money they'll need, to what they'll have to do about healthcare coverage. So we spoke with Olsen about some of the drawbacks to early retirement, some great options in the long-term-care insurance market, and what happens if clients live too long, or not long enough.
Q:
Do people—Boomers in particular—have trouble grasping how much it will take to maintain their current lifestyle in retirement?
A:
It depends on where you want to be. Do you want to be in the same house? Do you plan to downsize? Moving down to Florida can be an upgrade in lifestyle, for example, even though the costs are less. We find that Boomers have no idea how much it will take to retire and maintain the same quality of life. Have they thought about the effects of inflation? Interest rates? Health insurance costs? We find people have a simple goal, such as, "If I could retire with $3 million, that would be great." This is like driving cross-country to Los Angeles with no roadmap, and just saying, "I'll drive until I get there."
Q:
What do people not understand about managing long-term health costs in retirement?
A:
People don’t understand the effects of retirement before 65. They come to us and say, "I want to retire at 55," and we ask, "What about health insurance?" It’s a big question mark. Medicare is not yet available, so you retire on COBRA for 18 months, and then that's it. Some people may have a spouse who can carry them, and others may take a new job, even part-time, that offers benefits. But individual health insurance is expensive and difficult to obtain. As for LTC insurance, people should get it sooner rather than later, and pay it off sooner. Get a limited-pay LTC policy. Although it's expensive, it allows you to pay off an LTC policy in 10 years—and then, no more premiums! It's a great planning tool: We don’t have to factor in huge premium raises over the years. Every Boomer should have LTC insurance.
Q:
401(k) plans are becoming increasingly important with the gradual fading of traditional DB plans. Should Boomers be mixing these with other vehicles, and what should they do with them as they reach retirement age?
A:
When someone of the right age comes to us, we take the retirement plan and roll it over into an IRA because there are more options. For those still in the accumulation years, we recommend investing more aggressively and putting more in the accounts. Too many people are being too conservative in choices. (And then, when the market is doing well, they're too aggressive!) If you're 45, for example, and planning to retire at 65, you should be 80% to 100% in stocks in your 401(k). And supplement that with mutual funds and annuities if you can afford it.
Q:
People in their 50's and 60's today may live until their 90's. How do you address what could be a very long retirement?
A:
At Lenox, we plan for either "living too long" or "dying too soon." Life insurance will help the plan continue if the client dies earlier than expected. If a client lives longer, on the other hand, we make sure the plan has the flexibility to allow for that. We use Monte Carlo to mare sure the plan works in 95 out of 100 scenarios. You have to build in a lot of flexibility. For example, who would have guessed a year ago that gas would be $3.50 a gallon? You also have to plan for obsolesce: Even retirees want to use DSL Internet connections and cell phones, so communications costs have gone up too.
Q:
What are you telling your clients about Social Security, and the possibility that it may be reformed?
A:
We have a high-net-worth clientele, and these people are not that concerned about $1,500 month. We tell them it will be there, and there will be supplemental income to last as long as you live. But for our younger clients, we tell them not to count on Social Security. When it was developed, people died in their early 70's Now you retire at 65 and live until 85. There are more people, living longer. So don’t count on it—it's just gravy.