This Month:
Youth Appeal: 20-somethings more likely to prefer guaranteed income in retirement
LIMRA: Nearly half of Americans are not contributing to retirement plans
Emerging Trends in distribution planning
Many are financially unprepared to live beyond expectancy
Retirement income planning becoming more important to advisors
W&S helps advisors target retirement plan rollovers
Half of Americans take a casual approach to planning
Malin: Countdown to 2013
Libbe: Client Resolutions
Turner & Cohen: Equipping the retirement advisor
Youth Appeal: 20-Somethings More Likely To Prefer
Guaranteed Income In Retirement Than Older Workers
The farther the horizon to retirement, the greater the attraction
Simsbury, Conn., - A new study from The Hartford shows that while many American workers find it appealing to have a guaranteed income in retirement, the younger the employee, the greater the attraction.
"Our research shows that Americans, regardless of age, want the ability to create a guaranteed income for their retirement as traditional pension plans vanish from the scene," said Patricia Harris, assistant vice president of product management for The Hartford's Retirement Plans Group. "Surprisingly, we also found that the farther retirement appears on the horizon, the greater the appeal of guaranteed income."
The Hartford's Guaranteed Retirement Income study finds that three out of five Americans (64 percent) say their employer's 401(k) or other retirement plan does not allow them to turn their savings into guaranteed income in retirement or they are unsure if it does. Overwhelmingly, those respondents say they would welcome the opportunity:
- Overall, 87 percent of respondents of all ages say they find it 'very' or 'somewhat' appealing to be able to turn at least a portion of their retirement savings into a guaranteed income.
- 95 percent of workers younger than 30 say the same, the highest of any age group.
- The same sentiment was expressed by 90 percent of those ages 30-39, 89 percent of ages 40-49, 88 percent of ages 50-59, and 77 percent of age 60 and older.
"Although the economy and the financial markets are on the mend, many younger employees are seeking sources of greater long-term financial security," Harris observed. "Few younger workers have access to traditional pension plans and many wonder whether Social Security will continue in its current form. They are clearly saying they want the ability to create a guaranteed income for themselves in retirement."
The Hartford's study, which surveyed 2,500 Americans ages 18 and older earlier this spring, was conducted following the introduction of The Hartford Lifetime Income (HLI), an investment option that allows 401(k) participants to use their savings to create a pension-like income in retirement.
"Overall, the study confirms our own experience since January in offering Hartford Lifetime Income through employer-sponsored retirement plans across the country," said Harris, the actuary who designed the patented investment option. "We see broad acceptance of lifetime income among 401(k) participants of all ages, even younger workers who are decades from retiring."
However, The Hartford's study did pinpoint some differences related to gender and income. For instance, women (89 percent) have a greater preference for guaranteed retirement income than men (84 percent).
Household income also impacts the level of appeal, although not in a linear fashion. The concept of guaranteed retirement income appeals most to those with a combined annual household income of $50,000-$74,000. A total of 92 percent in that demographic would like their employer to offer a guaranteed income option compared to 87 percent of those earning $30,000-$49,000, 86 percent earning less than $30,000, and 84 percent earning $75,000 or more.
"As a leading provider of retirement plans, The Hartford is acutely aware of the need for Americans to not only save for retirement but to use a portion of their savings to create a guaranteed retirement income that they cannot outlive," Harris said. "We recommend that everyone should ensure they have enough guaranteed income from a variety of sources, including Social Security, a pension if they have one and retirement savings, to at least cover their basic living expenses when they retire."
About The Hartford
The Hartford Financial Services Group Inc. (NYSE: HIG) is a leading provider of insurance and wealth management services for millions of consumers and businesses worldwide. The Hartford is consistently recognized for its superior service, its sustainability efforts and as one of the world's most ethical companies. More information on the company and its financial performance is available at www.thehartford.com.
Nearly Half of Americans Are Not Contributing to Any Retirement Plan
Often lack understanding of the savings vehicles available to help them
WINDSOR, Conn., - According to a new LIMRA survey, 49 percent of Americans said they weren't contributing to any retirement plan; Americans ages 18-34 were more likely (56%) to be among those not saving.
"The findings from this survey were disturbing, given that people will increasingly need to rely on their personal savings to make ends meet in retirement," said Matthew Drinkwater, associate managing director, LIMRA Retirement Research. "It was especially troubling to see that a larger portion of younger Americans, who are less likely to have a defined benefit plan, are not saving for retirement in IRAs or defined contribution plans. In order to have the adequate savings necessary to meet their financial needs in retirement, which could last 20 or more years, it is critical that these individuals begin saving systematically early in their working years."
The survey found that only a quarter of all Americans and less than a third of Americans over age 50 worked with a financial professional to plan for retirement. However, even controlling for income. those who did were more likely to be contributing to a defined contribution plan or IRA. Seventy percent reported that their financial professionals recommended how much they should save for retirement. These findings suggest that financial professionals can have a positive influence on their clients' saving behavior.
Younger and higher-income consumers are more likely to be considering contributing to an IRA in the next year. But nearly half of all consumers said they are not planning to contribute to an IRA because they could not afford to do so. "In the long run, these individuals would benefit if they made even modest contributions to a pre-tax savings plan that could accumulate until retirement," said Drinkwater.
The survey also revealed consumers' lack of knowledge about IRAs. On average, consumers answered almost half the questions posed about IRAs incorrectly; those consumers who currently contribute to IRAs answered only slightly better than non-IRA-owners.
"Despite the extensive news coverage on the need to save for retirement, a large number of Americans are not heeding the warnings and preparing financially," Drinkwater commented. "Our survey shows that consumers often lack understanding of the savings vehicles that could help them attain their financial goals for retirement."
The findings are based on a nationally-representative survey of 2,697 Americans who are either the primary financial decision-makers or share responsibility for making financial decisions. The survey was fielded in April, 2012.
Emerging Trends in Distribution Planning
A diverse market requires more than a cookie cutter approach
by Herbert K. Daroff, J.D., CFP
For many years, financial planners focused their attention primarily on the contribution and accumulation phases of wealth management. Today, as more and more boomers are already enjoying retirement or are anticipating retirement, our focus has shifted to the distribution phase.
Until the boomer retirement trend, the only real distribution planning that was being done was Estate Planning. So, let's start there.
For the moment, at least, each U.S. citizen has a $5.12M federal estate exemption, which can also be used during lifetime. For couples whose marriages are recognized by the federal government, they have an unlimited marital deduction and can transfer $10.24M to the next generation free of federal estate taxes.
For the LGBT community, whose marriages are not recognized for federal estate tax purposes, they do not enjoy the federal unlimited marital deduction, however, right now, one spouse can still transfer $5.12M to the other without incurring federal gift taxes, or estate taxes. That's a significant opportunity for the LGBT community, until the window closes. Under current law, the federal estate tax exemption automatically drops to $1M on January 1, 2013, unless Congress acts to change that.
States, like Massachusetts, do not have a gift tax. Massachusetts has a requirement that estates over $1M pay estate taxes. If you make gifts of greater than $1M during lifetime, you don't pay any gifts taxes during lifetime, but would be required to file an estate tax return for the remaining assets at death.
For gifts to non-citizen spouses, only $139,000 can be transferred this year, not unlimited. Any amount over that requires the creation of a Qualified Domestic Trust (QDOT) with a U.S. citizen trustee. However, a U.S. citizen spouse can still transfer $5.12M outside of the marital deduction to his or her non-citizen spouse.
Single parents can make gifts up to $5.12M without incurring federal transfer taxes. Depending on the size of the estates of you and your parents, a single parent could transfer up to $5.12M to his or her parents who then could create an irrevocable trust for the benefit of their child (the single parent) and their grandchild(ren), so long as there is no clear pre-existing arrangement to do so. Be careful.
Let's shift to Elder Care Planning, which is another part of distribution planning. Not all irrevocable trusts are created equal. Irrevocable trusts (like the traditional Irrevocable Life Insurance Trust, ILIT) are designed to remove assets not only from the Medicaid estate, but also from the taxable estate. The grantors of the trust cannot retain lifetime use and enjoyment over the assets. The heirs do not get the benefits of stepped-up cost basis. However, there are also irrevocable trusts where the grantor does retain use and enjoyment over the assets contributed. The assets in these trusts, after a waiting period of 5-years or less (depending on the size of the Medicaid estate) are excluded from the grantor's Medicaid estate, but remain in the grantor's taxable estate. The benefit of being included in the taxable estate is that the heirs benefit from a step-up in cost basis on the assets. That allows them to sell the assets after their parents die and minimize or avoid capital gains taxation.
In all cases, insurance products should be combined with Elder Care Planning.
Just a quick comment about ethnic market clients, whose first language may not be the same as yours. Be careful that they hear what you think you said. Sorry for the following bad jokes**, but for those of you who have followed my writing, you know that I can't resist.
- Doctor prescribes medication to be taken ONCE a day.
How many did Joe take? ONE
How many did Jose take? ELEVEN (uno, dos, tres, cuatro cinco, seis, siete, ocho, nueve, diez, ONCE, doce)
- American soldier walks into a bar in Germany and orders a DRY martini.
What did he get? THREE martinis (eins, zwei, DREI, vier)
Finally, let's discuss Retirement Income Planning. Why do we retire at 65? Years ago, our lives were divided into discrete segments:
- The Formative Years: from birth to Kindergarten;
- The Education Years: from Kindergarten through High School, College, Grad School;
- The Working Years: from the end of formal education until retirement; and
- The Retirement Years: from retirement until death, just a few years later.
The retirement years were for traveling. Today, we may continue our educations during our working years. We may travel during our education and working years. We may continue to work even during our retirement years. Our retirement years may last as long as our working years. The two may simply blend together. So, what does that do to the old retirement income paradigms?
Boomers remember the three-legged stool made of up roughly equal parts of employer-provided pension (Defined Benefits), government-provided pension (Social Security), and private savings (Taxable Accounts). That stool is a bit wobbly right now, isn't it? Social Security may not be a large portion of many of our clients' retirement incomes. Employer pensions are becoming fewer and farther between. Dollar cost averaging (institutionalized in 401(k) plans) works well during ACCUMULATION. However, taking equal amounts of retirement income from all of your buckets during DISTRIBUTION can be fatal to your income continuation plan. If you experience down markets in the first few years of distribution, you may outlive your money. (You could move in with your children or take on roommates, just like your kids do after college). Instead, there is a NEW three-legged stool, combining Private Savings (taxable accounts and 401(k), IRA, etc.), plus Guaranteed Income for Life from fixed annuities and VA riders, and Life Insurance benefits (and maybe cash value, too).
Life insurance is for survivor income, which is an integral part of most clients' retirement planning. Death benefits enable a surviving spouse and/or descendants to pay the income taxes on a Roth Conversation in the year of your death. If my retirement accounts total $1M, my financial plan says that my wife has the use of $600k after taxes. However, if I have $400k of life insurance and use that to pay the income taxes on a Roth Conversion, then she has $1M continuing to accumulate tax-deferred, but now distributed tax-free. Remember, you cannot execute a Roth Conversion on an inherited IRA. You can convert a spousal IRA to a Roth. You can execute a deathbed Roth Conversation. If the following April 15th you look in the mirror and are still there (you survived), you can always reverse the Roth Conversion. However, if your image is not in the mirror (you died), the death claim would certainly have been processed by April 15th even if you died at a New Year's Eve party just before midnight.
Death benefits also give you the permission to invade principal during lifetime to improve your retirement standard of living, knowing that the principal will be replenished by the death benefits. This is like electing the single life annuity on a pension instead of the joint and survivor election, and then buying life insurance with the extra income you receive from a single life annuity.
The new three-legged stool needs all three legs. Over balance in variable annuities and your distribution plan may lack sufficient liquidity for emergencies or opportunities during retirement. Over balance in private savings (assets under management) and your retirement income or longevity of income suffers when market values decline. You need a balance of liquidity (private savings, assets under management), private pension (lifetime benefits provided by variable annuities), and life insurance.
The Life Insurance Foundation for Education (LIFE) has a great line: "A financial plan without insurance is just an investment portfolio that dies with you."
Mr. Daroff is affiliated with Baystate Financial Planning, Boston. He can be reached at hdaroff@baystatefinancialplanning.com.
** His alter-ego, Herb 'Shecky' Daroff may have a nascent career on the nightclub circuit, but we hope he continues writing for us for the time being. -Editors
April 30,2012
Many Are Financially Unprepared
to Live Beyond Average Life Expectancies
Women surveyed feel the least prepared, yet are most likely to live longer lives
MILWAUKEE, WI - Northwestern Mutual released Friday the Longevity & Preparedness Study that reveals Americans appear to be startlingly unprepared financially to live into their 70s, 80s and 90s. The study is the second in a series of research exploring the state of planning in America.
The study asked people, based upon their current financial plan, how prepared they feel to live to age 75, 85 and 95. Findings revealed that only slightly more than half of Americans surveyed (56%) feel financially prepared to live to the age of 75. Less than half (46%) indicated that they feel financially prepared to live to the age of 85. And barely more than one-third (36%) said they feel prepared to live to age 95.
This stands in contrast to current longevity data. According to the Centers for Disease Control (CDC), average life expectancy in the U.S. has increased to 78.2 years (75.7 for men and 80.6 for women). For couples age 65 today, there is a 50 percent likelihood that one partner will live to age 94, and one out of 10 couples will have a partner that lives to be 100 or older.
"This research indicates that many Americans are financially unprepared to live long lives," said Greg Oberland, Northwestern Mutual executive vice president. "With longevity comes an increased need to proactively manage your personal finances, which includes a solid risk management strategy. No matter what age you'll live to, it's important to protect the dollars you'll eventually depend on to provide an income in your retirement years."
Northwestern Mutual's Lifespan Calculator is an online quiz that gives you a sense of your own life expectancy. Taking 13 different lifestyle factors into account, such as diet, drinking, smoking and stress, the tool calculates how long you might live. Social networkers on Facebook can download the new Lifespan Calculator Facebook application to compare their life expectancy score with that of other Facebook friends.
Women, Young Americans Report Feeling Least Prepared
When it comes to certain segments, the findings are even more revealing. Women, who on average life five years longer than men, feel significantly less financially prepared to live longer lives.
The research indicates:
- Men regardless of age are significantly more likely than women to feel financially prepared to live to age 75 (65% vs. 48%), 85 (55% vs. 37%), and 95 (43% vs. 30%).
- Younger Americans (25-59) feel less prepared than older Americans (60+) to live to 75 (47% vs. 79%), 85 (37% vs. 66%), and 95 (29% vs. 52%)
The fact that people feel behind in their preparedness was also underscored in the first of this series of research, called the Planning and Progress Study, which revealed that more than one-fifth of Americans surveyed (21%) would like to be more cautious with their money but feel they have a lot of catching up to do.
About the Research
Northwestern Mutual sponsored the Planning and Progress study to evaluate the state of financial planning in America, and where people stand in the way of progress toward reaching their long-term financial goals. Independent research firm Ipsos conducted the online survey of 1,015 Americans aged 25 or older between February 2 and February 13, 2012. Results were weighted as needed to U.S. Census proportions for age, gender, marital status, household size, region and household income. Propensity score weighting was also used to adjust for respondents' propensity to be online. No estimates of theoretical sampling error can be calculated; a full methodology is available on request.
About Northwestern Mutual
The Northwestern Mutual Life Insurance Company, Milwaukee, WI (Northwestern Mutual), among the "World's Most Admired" life insurance companies in 2012 according to FORTUNE magazine – has helped clients achieve financial security for more than 155 years. As a mutual company with $1.2 trillion of life insurance protection in force, Northwestern Mutual has no shareholders. The company focuses solely and directly on its clients and seeks to deliver consistent and dependable value to them over time. Northwestern Mutual and its subsidiaries offer a holistic approach to financial security solutions including: life insurance, long-term care insurance, disability insurance, annuities, investment products, and advisory products and services. Subsidiaries include Northwestern Mutual Investment Services, LLC, broker-dealer, registered investment adviser, member FINRA and SIPC; the Northwestern Mutual Wealth Management Company, limited purpose federal savings bank; and Northwestern Long Term Care Insurance Company; and Russell Investments.
Retirement Income Planning Becoming More Important to Advisors
Six out of ten advisors deem longevity to be the greatest risk facing their clients
WINDSOR, Conn., - According to a new LIMRA survey, three quarters of advisors who offer retirement income services to their clients said they had adjusted their business to do more retirement income planning over the past year. (chart)
"With 10,000 Boomers turning 65 each day for the next 18 years, advisors are recognizing the substantial market for retirement income planning," said Matt Drinkwater, associate managing director, LIMRA Retirement Research. "Outside of the pure demographics, LIMRA's research has found that only one-third of Americans feel they are saving enough for retirement and a majority of pre-retirees (people within 5 years of retirement) feel that they are not prepared for retirement. There is a great opportunity to help these consumers identify their financial needs in retirement and develop a sound plan to address them."
LIMRA’s study, Advisor Perspectives on Retirement Planning, found that for 4 in 10 advisors, retirement planning constitutes half or more of their business activities. More seasoned advisors tended to advise more clients regarding retirement planning.
Similar to prior LIMRA research, six out of ten advisors deem longevity to be the greatest risk facing their clients. More than half of advisors listed paying for long term care costs as a top concern.
While there was no consensus on the retirement income strategy that will be used most often in two years, advisors often favor systematic withdrawal plans or a "buckets" approach* due to their flexibility, control and retention of assets. In contrast, strategies in which guaranteed income sources are used to cover non-discretionary expenses (like housing, food and health care), and non-guaranteed sources are used to cover discretionary expenses (like entertainment and travel) were less often expected to increase in popularity. These findings suggest that manufacturers of guaranteed income solutions must demonstrate how their products fit into other retirement income strategies in order to broaden their appeal.
Formal written retirement plans play a critical role in most advisors' practices. Six in 10 advisors say that formal written plans are well received by their clients. Earlier LIMRA research reveals that only three in 10 pre-retirees who have worked with an advisor have a written retirement plan.
For the advisor, the formal written plan offers a variety of benefits to their clients as well as their overall business.
Overall, advisors agree that written plans offer:
- An easy way to discuss product solutions (83%)
- Better understanding of their clients goals (82%)
- Higher client retention (81%)
- The ability to obtain more rollover assets (72%)
- The ability to attract more referral business (71%)
"As retirement income planning continues to increase in prominence among advisors, they and their firms are seeking ways to position themselves to offer more of these services," said Drinkwater. "Advisors need to address the expanding scope of retirement planning that their clients might need, and assess the capabilities and expertise required to meet the growing demand for these services."
About the Survey
The findings are based on an online survey of 1,042 financial advisors (registered investment advisors, registered representatives of broker-dealers, dually-registered representatives, bank professionals, and other advisors) who had been in their field for more than one year, and spent at least 10 percent of their business activities providing financial planning for retirees or pre-retirees. Institutional investors and life insurance agents who receive at least 85 percent of their product sales through one company were excluded. The survey was fielded in December 2011.
* 'Buckets' approach involves a plan in which short-term/fixed-return investments are used to generate current income; intermediate-term investments are gradually converted into short-term; and long-term investments are gradually converted into intermediate-term investments.
Innovations in Retirement Planning
W&S Financial Group Distributors Helps Financial Professionals
Target Retirement Plan Rollovers
'Rollover Central' Expands Commitment to Addressing $365 Billion Opportunity
CINCINNATI - W&S Financial Group Distributors (W&S Financial Distributors), wholesale distributor of annuities and life insurance from Western & Southern Financial Group (Western & Southern) member companies, has launched Rollover Central. The multi-stage, multi-platform initiative aims to help financial professionals build their business by serving the needs of the $365 billion retirement plan rollover market.1
"Workers are changing employers and careers as never before. In fact, a 2010 survey from the Bureau of Labor Statistics found the youngest baby boomers, those born from 1957 to 1964, have held nearly 11 jobs on average," said Mark E. Caner, AEP, ChFC, CLU, CFP, president of W&S Financial Distributors. "These job changes mean that workers may own a variety of retirement plans from former employers. W&S Financial Group Distributors is leveraging its expertise with retirement plan rollovers to help financial representatives target the rollover business to better serve these clients."
Elements of the Rollover Central initiative include:
- Sponsorship of the InvestmentNews Retirement Income Summit in Chicago April 30 to May 1, 2012. The summit for financial professionals examines new ways to generate, increase and protect retirement income. W&S Financial Distributors will exhibit at the event and share information it has developed regarding strategies for retirement plan rollovers.
- Sponsorship of InvestmentNews webcast 'Tax-Wise Ways to Draw Down IRAs and 401(k)s' on May 15, 2012. The webcast for financial professionals will examine rollover considerations, retirement distribution planning, tax diversification, tax incentives for different assets types and matching assets to account types. Presenting will be Robert Keebler, principal of Keebler & Associates, LLC.
- Enhanced Retirement Rollover Content Online at new Rollover Central section of WSFinancialPartners.com. Both financial professionals and consumers will find valuable information regarding retirement plan rollovers on the site. For consumers, information includes strategies and considerations for plan consolidations. For financial professionals, Rollover Central includes information about a product designed specifically for rollover monies. VAROOM (Variable Annuity for Roll Over Only Money), issued by Western & Southern member companies Integrity Life Insurance Company (Cincinnati, Ohio) and National Integrity Life Insurance Company (Goshen, N.Y.), is the only variable annuity offering subaccounts investing in individual ETFs.
- Conversation Starter Presentations and Collateral. A compilation of materials designed to aid financial professionals in discussing retirement plan rollover considerations with clients and identifying business prospecting opportunities among job changers.
"From the launch of VAROOM in January 2011, to the introduction of resources for job changer rollover prospecting in August 2011, to the commencement of the Rollover Central initiative and all it encompasses, Western & Southern continues to demonstrate its ongoing commitment to helping financial professionals build their business by targeting the rollover market," said Caner.
Nearly Half of Americans Take a Casual Approach to Financial Planning
People continue to be risk-averse, but more than 20% say they can't afford to be too cautious
MILWAUKEE, WI - Northwestern Mutual released today the Planning & Progress Study, the first in a series of research studies exploring the state of planning in America. This study found that about half of Americans take an informal approach to financial planning- if they have a plan at all- and the majority (59%) feel their planning needs improvement.
To view the details of this study, visit here.
When asked what type of planner they are, more than one-third (38%) of Americans described themselves as "informal," meaning they have a general sense of their goals and how to meet them, but no specific plan in place. An additional 7 percent said they have no specific goals or plans in place.
"This research reflects that most Americans see the value in setting financial goals, but a large number don't know how they'll get there," says Greg Oberland, Northwestern Mutual executive vice president. "Developing a plan to reach your goals is just as important as having a goal in the first place, whether it pertains to your health, your career or your financial security."
Slow and steady wins the race (unless you're too far behind)
The Planning & Progress Study, conducted by Ipsos, also explored Americans' approach to saving and investing and perspectives on priorities for improvement. The findings reinforce that finances are very likely top of mind for many Americans, and that people continue to be highly cautious about risk. Interestingly, one-fifth of respondents would like to take a more cautious approach to their finances, but feel they have too much catching up to do.
"The unpredictability of the market is reflected in the fact that people continue to be risk-averse," continues Oberland. "A solid financial plan can help put risk in perspective, and allows people to navigate uncertainty better by providing flexible options over time."
Other findings from the research include
- The number one approach to saving and investing is "slow and steady wins the race" (36%). Yet more than one-fifth (21%) indicated, "I'd like to be more cautious but I have a lot of catching up to do."
- Among priorities for improvement in 2012, finances (43%) jumped seven percent from 2011 and came second only to personal health (48%). This was well ahead of spending time with family and friends (31%), career (12%) and education (5%).
- Americans appear to be risk-averse; 40 percent of respondents show a strong preference for safer but lower returns with very low risk versus only 25 percent who strongly prefer the opportunity for higher returns with higher risk.
- The majority of Americans are taking steps to pay down their debt (62%), develop a budget (61%), save a portion of their paycheck regularly (58%), build up an emergency fund (58%) and organize financial documents (56%).
About the Research
Northwestern Mutual sponsored the Planning & Progress Study to evaluate the state of financial planning in America, and people's progress toward reaching their long-term financial goals. Independent research firm Ipsos conducted the online survey of 1,015 Americans aged 25 or older between February 2 and February 13, 2012 via a systematic random sample of U.S. adults. Results were weighted as needed to U.S. Census proportions for age, gender, marital status, household size, region and household income. A full methodology is available on request.
About Northwestern Mutual
The Northwestern Mutual Life Insurance Company – Milwaukee, WI (Northwestern Mutual) – among the "World's Most Admired" life insurance companies in 2012 according to FORTUNE magazine – has helped clients achieve financial security for more than 155 years. As a mutual company with $1.2 trillion of life insurance protection in force, Northwestern Mutual has no shareholders. The company focuses solely and directly on its clients and seeks to deliver consistent and dependable value to them over time. Northwestern Mutual and its subsidiaries offer a holistic approach to financial security solutions including: life insurance, long-term care insurance, disability insurance, annuities, investment products, and advisory products and services. Subsidiaries include Northwestern Mutual Investment Services, LLC, broker-dealer, registered investment adviser, member FINRA and SIPC; the Northwestern Mutual Wealth Management Company, limited purpose federal savings bank; and Northwestern Long Term Care Insurance Company; and Russell Investments.
Count Down to 2013
Uncertainty Requires Flexibility In Estate Planning
By Scott Malin
Mr. Malin is a Partner with Lathrop & Gage, in the St. Louis office and is a member of the wealth strategies practice area. He can be contacted at smalin@lathropgage.com or 314.613.2807.
In the world of estate planning, the last ten years have been a roller coaster ride. The estate tax exemption has ranged from $1 million to $5 million, with no estate tax at all for the year 2010, and the estate tax rates have ranged from 35% to 55%. After the estate tax was repealed for one year in 2010, the IRS had to spend an inordinate amount of time to publish regulations to deal with this one year anomaly, which of course were not issued until well into 2011.
The current law provides for a $5 million estate tax exemption, a $5 million gift tax exemption and a 35% estate and gift tax rate. Of course these rules are in place only until the end of 2012, at which time they are scheduled to 'sunset'. If Congress does not take action prior to January 1, 2013, the estate and gift tax exemptions will return to $1 million, and the estate tax rates will return to a range of 41% to 55%.
Although most people think it is unlikely that Congress will allow the estate tax to return to the 2001 levels, most people did not expect Congress to allow the estate tax to be repealed for one year in 2010, or to raise the gift tax exemption to $5 million for 2011 and 2012.
In addition to the rapidly changing estate tax laws, the volatility of the stock market and the depressed value of real estate have made planning very difficult.
As an example of this difficulty, historically it was important to fund the revocable trusts of both a husband and wife in order to utilize both of their estate tax exemptions. If assets were titled in joint names and passed to the spouse upon the death of the first spouse, all of the assets would end up in the spouse's estate for estate tax purposes, and some or all of the estate tax exemption of the first spouse to die would be wasted. In 2010 Congress passed a new law referred to as 'portability,' which allows a husband and wife to use two estate tax exemptions regardless of which spouse owns the assets. However, this law is also set to expire at the end of 2012. Therefore, the funding of revocable trusts is still necessary to insure the use of both estate tax exemptions after 2012.
In addition, the significant swings in the stock market along with the drop in the values of real estate necessitate regular reviews of the titling of assets to insure that both a husband and wife have sufficient assets in their revocable trusts to utilize both estate tax exemptions. Further, with the exemption having increased to $5 million in 2011, high net worth families need to make sure the assets held in their revocable trusts are sufficient to utilize the current estate tax exemption.
A second issue relates to the 'equalization' of assets. Often, in planning an individual's estate, a couple will leave certain assets to one child (e.g., the child active in the family business receives the business), and other assets (usually liquid assets) to the children not active in the family business. With the volatility of the stock market, liquid assets may no longer sufficient to equalize for the illiquid assets. At the same time, the value that an individual intended to pass to the active child through a business or the ownership of real estate may now be significantly less than it was at the time the estate plan was developed.
The depressed real estate values may also raise an issue with respect to cash flow. Often times cash is needed to pay specific bequests, expenses or taxes. If an estate consists of mostly illiquid assets, a forced sale in a depressed market can reduce the value of the assets available to fund the distributions and pay the estate expenses.
There are also many opportunities for planning in the current environment. Interest rates are at an all time low, the values of real estate and other assets are relatively low, and the gift tax exemption is $5 million for the first time in history. Taking these factors into account makes this an opportune time for estate planning. There are several planning techniques that utilize the low interest rates to reduce estate taxes and effectively 'freeze' the current depressed values of property for estate tax purposes.
In this volatile environment, the most important things to remember are to maintain flexibility in your estate plan to and be sure that your estate plan is reviewed on a regular basis. The flexibility is critical to avoid getting locked into a decision that looks good today but does not make for a happy client a few years from now when assets, values, cash flow or tax laws have changed. Nobody can predict the future, and Congress has proven that, so the key to estate planning in this environment is careful planning, flexibility and regular reviews.
Client Resolutions:
On the heels of a year uncertainty, 2012 could be a call to action
by Katie Libbe
Ms. Libbe is vice president of Consumer Insights for Allianz. She can be reached at katie.libbe@allianzlife.com
By All Accounts, 2011 was Volatile Year for the Economy in the United States.
A number of global issues - including the earthquake in Japan and debt crisis in Europe - caused anxiety and aversion to U.S. markets. Then, the political stalemate in Washington, D.C. led to a downgrade of our national debt, the first such downgrade in the history of the country. On top of that, the housing problems we experienced throughout 2010 weren't getting any better. The U.S. stock market's ups and downs throughout 2011 provided no reason for sustained optimism either.
Although the S&P 500 index finished the year in nearly the same spot that it started (closing at 1267.64 in 2010 and 1267.60 in 2011) and the Dow Jones Industrial Average grew slightly, 2011 was actually one of the most volatile years on record for the U.S. stock market. On 35 trading days, the market closed with a gain or loss of 2 percent or more, demonstrating just how uncertain people were feeling about the overall health of the economy.
This uncertainty was reflected in a recent survey about New Year's Resolutions conducted by my company. The volatile stock market (10 percent), U.S. budget fiasco (23 percent), home prices (15 percent) and European debt crisis (5 percent) all registered as 'worrisome economic events' of 2011, but 'unemployment' actually came in as the top concern with 48 percent of the vote.
These statistics illustrate that, from an economic standpoint, people had to digest a lot of negative news last year, which we believe should have an effect on the way they plan to manage their finances in 2012 - including everything from setting the household budget to saving for retirement. It also begs the question of whether or not they're seeking help from a trusted financial professional to assist with their retirement strategies.
Sadly, it doesn't seem that 2011's headlines were enough to convince people that help with financial planning should be a top priority for the new year.
When asked if 2011's economic conditions made them more or less likely to seek the advice of a financial professional, 80 percent of respondents in the Allianz Life survey said they were either 'unsure' (49 percent) or 'less likely' (31 percent). Furthermore, when asked if they were going to include financial planning in their resolutions for 2012, that same 80 percent said 'no.' This lack of financial focus is at the highest level in the survey's three-year history, exceeding the 67 percent of Americans who chose not to include financial planning when making resolutions in both 2009 and 2010.
Barriers to Financial Planning
Although those responses seem troubling, a look behind the numbers is where there is truly cause for concern.
Respondents who answered 'no' were also given the opportunity to provide feedback about why they were not focusing on financial planning. Nearly a quarter (23 percent) noted that they already have a solid financial plan, which is certainly positive news, but the other responses should have financial professionals searching for ways to make connections with the disenfranchised majority.
Although some felt that financial planning was 'too complex' (6 percent) or said they would rather spend their money on 'fun activities' (5 percent), the biggest reason cited for avoiding financial planning was the feeling that they 'don't make enough (money) to worry about' financial planning (35 percent). This attitude that financial planning is only for the wealthy is alarming not only because it puts planning on an unnecessary pedestal - it also stunts the process and makes it challenging for real financial planning to ever begin.
This all comes at a time when Americans are expected to generate a bigger portion of their retirement income than ever before. The traditional three pillars generating retirement income in the U.S. - defined benefit plans (pensions), Social Security, and personal savings - are rapidly changing, forcing people to re-evaluate how they plan to fund their retirement and where they can look for guarantees. Defined benefits plans have declined substantially in the past 15 years as employers have determined these plans are too costly and carry too much long-term financial risk for the company. Longer life expectancies and the decreasing ratio of workers to beneficiaries will likely change how Social Security pays out in the future.
Thus, what's left is personal savings. People are now being required to shoulder the weight of saving money for the future. They must ensure their savings grows along with things like inflation and rising health care costs and turn those assets into income they can't outlive.
You'd think that reality, along with the shaky economy we experienced in 2011, would have more people looking for help with their financial plans. But when asked in the survey about the most important focus area for 2012, a majority of Americans (45 percent) said that health/wellness was their top priority. Financial stability came in a distant second with only 30 percent of the vote.
Health and Fitness are Still the Focus
Diet and exercise was also the top resolution that people said they are most likely to keep this year. Forty-nine percent of respondents felt more confident in their ability to stay fit than to 'manage money better,' which came next at 43 percent. While getting in shape and living a healthier lifestyle will always be a part of New Year's Resolutions, this time of year is also a great opportunity to think about financial stability and preparing for the future. Physical fitness is certainly important, but fiscal fitness needs to play a bigger role in how people plan to make improvements in their lives.
Given everything that happened from an economic standpoint in 2011 - on both the macro level with the U.S. budget standstill and volatility in Europe, and the micro level with people affected by high unemployment and decreasing value of their homes - it's surprising that financial planning is not a bigger priority for Americans in 2012.
Seeing health concerns grabbing more attention - despite all that happened in 2011 and the changing retirement landscape - shows our belief that many people are feeling powerless about managing their finances.
So what can financial professionals do to make an impact and demonstrate the value they can bring during these uncertain times?
Financial Planning Starts with You
It seems there is still some uncertainty about working with a financial professional and people see barriers that may not actually exist. There are many financial models that can work with a variety of budgets, so our industry needs to do a better job of promoting those options to different types of potential clients.
Free financial tools that people can access online also provide a way to start the process. That first step could be crucial in getting these holdouts to start thinking more proactively about managing their money, and eventually, about the wisdom of working with a professional that can help them navigate through the ins and outs of the financial world.
The key is to help them get started now. Just because a majority of Americans are saying they'd rather not spend time on financial planning this year doesn't mean you have to accept their lack of interest.
This industry knows the dangers of ignoring financial planning, and we have the talent and resources to help people plan for a more secure retirement. It's time we take the situation into our own hands and resolve to make a difference in 2012 - because if we don't, it seems that most will lack the motivation to take action themselves.
Equipping the Retirement Advisor
Providing Income to Retiring Boomers
by Elvin Turner, JD, MBA and Larry Cohen
Elvin Turner, JD, MBA is the President of Turner Consulting, LLC and Director of Research for the Retirement Income Industry Association (www.riia-usa.org). He can be reached at Turnerconsult@sbcglobal.net
Larry Cohen is the Director of Consumer Financial Decisions, and he can be contacted through lcohen@sbi-i.com
Boomers face major challenges with retirement. The pensions that sustained their parents are fast disappearing or uncertain. Health care costs are rising and will continue to rise. The challenge for advisors is: What products or services should they recommend that will enable Boomers to meet their income needs during retirement.
As one of the largest cohorts to ever grace the globe, Boomers are wildly diverse. This guarantees that no one product or service will be right for every Boomer. To facilitate understand some of the larger differences, in the 2006 RIIA report The Topology of Retirement, we divided households into four segments and looked at some key characteristics of each. These segments are:
Retired - Age 65+ living on a fixed income, enjoying retirement pursuits (travel, hobbies, grandchildren), and managing resources.
Pre-retired - Age 50-65 retirement is a looming concern.
Builders - Age 35-50 focus on family, career, and other opportunities.
Starters - Under Age 35, just starting, retirement is not a concern.
Each of these life stages have different financial priorities that translate into different approaches to retirement. Each use different products, accept different levels of risk or loss aversion, and have different views of what is retirement.
In addition to life stages we must consider household resources, so each life stage segment is divided into four 'markets' based on assets. Those in the wealthiest segment are likely to retire, those in the poorest segment will not. For households in-between, we divided them into those who, with reasonable guidance and assistance, should be able to have some form of retirement from those that even with significant help, may have difficulty retiring. These four levels of wealth roughly correspond to how many financial institutions divide the retail market. They are:
Wealthy - Households in the top 5% for their life stage cohort.
Affluent - Households in the next highest 15% for their life stage cohort.
Mass Market - Households in the next 50% for their life stage cohort.
Marginal - Households in the bottom 30% for their life stage cohort.
Based on data from the 2010-11 SBI MacroMonitor, the size of these life stage and market segments is displayed in the figure below. The bulk of the Boomers are pre-retired.
The figure below shows the average total financial assets held by each life stage in each market. Clearly the Wealthy Pre-retired are the best prepared for retirement of any of the typology's segments. The Wealthy Retired, Wealthy Builders, Affluent Retired and Affluent Pre-Retired have the next highest average amounts of financial assets. However, from a total market perspective, this is not a rosy picture.
Note that in the (green segments) pre-retired Mass Market and Marginal households are totally unprepared for retirement. When we consider the fact that Marginal and Mass Market households combined represent 80% of pre-retired households, that means that only 20% of pre-retired household have anywhere close to the amount of assets to support retirement income.
Even the Affluent and Wealthy Pre-retired households' prospects are not entirely bright. Affluent and Wealthy pre-retired households average $600,000 and $1.9 million in asset respectively, to generate retirement income. However given the current typical rate of return, even that level of assets is insufficient to generate a level of income anywhere close to the incomes that they earn during their working years. The figure below shows household income from all sources for the segments.
Even the Affluent and Wealthy Pre-retired households' prospects are not entirely bright. Affluent and Wealthy pre-retired households average $600,000 and $1.9 million in asset respectively, to generate retirement income. However given the current typical rate of return, even that level of assets is insufficient to generate a level of income anywhere close to the incomes that they earn during their working years. The figure below shows household income from all sources for the segments.
Note that 2010 annual household income for the Affluent and Wealthy pre-retired averaged $140,000 and $196,000, respectively. If these households withdraw an amount equal to 4% of their assets as income in their retirement years, their retirement investment income as compared to their pre-retired income will be as follows:
Age-Wealth Segment Pre-Retired Income Estimated Retirement Investment Income Estimated retirement investment income as a % of Pre-Retired Income
Affluent Pre-Retired $140,000 $24,000 17%
Wealthy Pre-Retired $196,000 $76,000 39%
With Affluent and Wealthy Pre-retired households only receiving 17% and 39% their pre-retired income from their assets, even many of these households will be looking for additional sources of income.
Pre-Retired households still have a number of years to save, so those lacking assets now can save, continue to work, and alter how they plan to live in retirement (including continuing to work). The key for these households is to rely on the help of their trained, knowledgeable advisors. Consider the following seven strategies.
Strategies for Advisors:
1) Segment your customer base
Only 20% of pre-retired households have the assets to provide meaningful retirement income. Even within that fortunate 20% of households, many clients will need additional sources of income. How many of your households are within the 20% of households? How many in the 5%? Devise strategies for each and try to rebalance your practice to include more affluent and wealthy households.
2) Expand your view to the whole household
In most pre-retired households today, there is more than one person. The retirement of one income provider transforms that character of that household but may not introduce all the freedoms and obligations of retired life across the entire economic unit. For example, means tested benefits under Medicare look at the modified adjusted gross income of both spouses when calculating the monthly Medicare premium for either spouse. Advisors need to look at the entire household as one unit. Impress on the client that the issues you are discussing, the analysis that you are running, the recommendations that you are making are their spouse's business as well. Further the spouse's goals, needs, assets, income and obligations should be included in the analysis.
3) Be an "Income Detective"
For most households, every income source is important. If investments only provide 30% of income, 70% of their income needs to come from other sources. Social Security helps but you will need to search further. Check the resume and ask about each job. Was the client on a job long enough to vest in a pension? Six or seven years on a job may only give them a $300 per month pension per job. Doing your homework may add more monthly income.
4) Match product and services to segments
Just like no two households retire in exactly the same way, no one product or service is right for every household. Even within life-stages, households have different objectives, timings, and approaches to retirement. Each is comfortable with different amounts of risk, loss, complexity, and view retirement with a different level of priority. The key is to talk to your clients and listen to what they say. Read between the lines. Match your professional expertise and knowledge to products that your client needs- thinking about the entire household and the duration of their retirement. Over time, your clients needs will keep emerging- succession planning, medical expense management, etc.- anticipate the needs, design suitable products to meet them, and adjust your practice accordingly.
5) Identify Segments that are Profitable for You
You may discover that you have developed a niche offering that is effective and important to a group of your customers. Their willingness to pay you to perform this professional service suggests a capability you could leverage beyond your base. For example, you may work with a valuation vendor and have developed an expertise in helping business owners value and sell their businesses. If Boomer business owners are a profitable segment for you, go with it, build it and make it a part of your brand. Leverage this niche to gain more customers with the same needs and leverage these customers by filling other key needs, specifically their retirement income. The Retirement Income Industry Association (RIIA) offers a Retirement Management Analyst designation (RMA) that provides advanced training, credentials, credibility and branding in the retirement income market. Programs like this give you cutting edge expertise that helps establish a new offering in the retirement market.
6) Disengage from Unprofitable Clients or Those Who Just Don't Get It
Some clients will never be profitable, because of insufficient assets or reticence to pay for the level of service to meet their needs. Clients with tremendous needs do not always require extensive planning, whereas others with minimal needs may demand constant hand-holding. Consider your core group of clients as those that will work with you. Your time is better spent building these relationships that fit and move your practice forward, spin off additional revenue opportunities, and enhance your brand through word-of-mouth referrals for the more profitable services that you provide.
7) Integrate Clients' Human and Social Capital
As RIIA's RMA teaches, the majority of households solve their retirement income riddle by integrating their human, social and financial capital. In other words, they find a way to make it work together. Advisors who recognize the multidimensionality of clients' needs and provide solutions that go beyond the financial capital to take advantage of the client's human and social capital will soon find clients flocking to their door. The only way many Boomers will be able to engage in a dignified retirement is by taking advantage of all three types of capital. The advisors that enable these Boomers to accomplish this will find plenty of clients, profits, and satisfaction from helping people who otherwise might not have been able to retire.
Elvin Turner, JD, MBA is the President of Turner Consulting, LLC and Director of Research for the Retirement Income Industry Association (www.riia-usa.org). He can be reached at Turnerconsult@sbcglobal.net.
Larry Cohen is the Director of Consumer Financial Decisions, and he can be contacted through lcohen@sbi-i.com.
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