This Month:
Retirement income uncertainty reaffirms advisors' vital role
Retirement Redefined
Stand Alone Living Benefits emerge
'RMDs' and the '70½ Tax Trap'
Saving for retirement just got easier
It's 2010, do you know what your estate tax is?
2008 retirement plan participation declined; full impact of economic downturn yet to be measured
Roth Conversions 2010: A "Once in a Lifetime" Opportunity
The Personal CFO: Fact-finding system puts clients in charge of their own portfolios
Time to retrain retirement savers
Few fully understand retirement savings plans
Don't allow small business clients to overlook retirement planning
Media, internet influence attitudes towards saving



Retirement income uncertainty reaffirms advisors' vital role

by John Diehl

John Diehl, CFP, ChFC, CLU, is senior vice president of the Investments and Retirement Division of The Hartford Financial Services Group, Inc. He can be reached at john.diehl@planco.com.

It's no secret that the financial turmoil of the past few years has created havoc with America's retirement readiness. Financial professionals know this better than most because they are now trying to help their clients pick up the pieces of their seemingly shattered retirement dreams.

There is no doubt that many people, after watching their retirement savings erode by as much as 50 percent after the market meltdown, have been left disillusioned. Recent research by my company bears this out. A survey of 750 people ages 45 and older found that the number one financial concern in retirement, simply meeting day-to-day expenses, now dominates all other concerns about retirement readiness:

This research shows that America's confidence about its financial wherewithal has continued to decline over the past few years and, along with it, its optimism about the future, especially retirement. The study also shows that Americans overwhelmingly accept that they are primarily responsible for their own financial security and comfort in retirement. This is certainly a positive given the realities of fading pension plans and the uncertain financial stability of both Social Security and Medicare.

But many people say they lack financial acumen. They worry that they may slip through their traditional safety nets for retirees. And they realize that their financial power to live comfortably in retirement is waning.

UNCERTAINTY REIGNS

The correction of the financial markets, despite a pronounced rebound during the summer and early fall, has created uncertainty over the future. Nearly a third of all people (31.6 percent) who responded to the Web-based survey this summer say they have no idea as to when they will be able to retire and 19.3 percent indicated they will have to postpone retirement for up to two years or more.

Directly related to this uncertainty is the public's relatively low level of confidence about having enough money for retirement. Nearly four in five people (78.3 percent) are less than confident that all of their sources for retirement income, including employer-sponsored pension plans, government-sponsored pension plans and personal savings and assets, will be adequate to maintain their standard of living in retirement.

Underscoring this lack of confidence is the finding that few people are certain about how much income they will need in retirement. Most people (56.3 percent) say they are unsure or have no idea about how much income it will take to live in retirement.

THE PLANNING PRISM

On the surface, much of the news is chilling. But some survey respondents were decidedly more optimistic, better prepared and in a better place financially, if not emotionally, than others. The difference, in a word, was "planning."

Survey respondents were asked to describe how, or if, they had taken any steps to plan their financial future. Those two prisms or lenses, those who had done some planning vs. those who had not, were used to examine some of the financial issues that bubbled up to the surface:

That's the bad news. But there are some positives to come out of this year's survey for those who dig deep enough for the gold underneath the gravel:

THE PLANNING IMPERATIVE

Our research goes a long way towards affirming the positive role that financial professionals play in their clients' lives. Those clients who planned for their financial future are decidedly more optimistic, more confident and better prepared financially to retire compared to those who have done little or no planning.

Financial professionals should take heart. But they should also realize that they have both a tremendous opportunity as well as a tremendous responsibility in reaching out to clients and helping them prepare for the future.

The best place to start is always the beginning, as in beginning a conversation with clients about their goals and dreams. What do they fear? How well-prepared do they think they are as opposed to how well-prepared they actually are? Remember, a financial advisor is often more of a financial therapist, someone who holds his or her clients' hands, listens to their concerns, and helps them through tough decisions and difficult times.

The next step is to take inventory. Perform a gap analysis, taking account of the difference between what clients have accumulated for retirement and what they need for retirement. Take account of all of their assets, retirement investments, savings, home and other property, in calculating what assets are available for retirement.

Make sure to take stock of all sources of guaranteed retirement income. Does the client have a traditional defined benefit pension plan? Does he or she qualify for Social Security, how much and at what age? Depending upon what assets are available and how liquid they are, it might be a good idea to convert a portion of a client's retirement savings into a guaranteed source of income by purchasing an annuity.

Don't forget to talk about expense management. Living in retirement is as much about decisions about income and revenues as it is about reducing and managing expenses. Clients that are most successful in retirement start managing expenses before they retire, reducing unneeded or duplicative expenses. For instance, does your client need to pay for both premium cable channels and Netflix? Could he or she eliminate their health club membership by working out at home? Can they eat at home more and eat out less?

Of course, the most important part of this equation is for clients to continue relying on professional financial advice. Receiving professional advice, whether it's about the latest stock tip, an asset allocation strategy or a complete financial review, is invaluable.

But financial professionals also need to help their clients sort through the financial information that seemingly gushes at them from a fire hose daily. Increasingly, clients need someone to help provide perspective, to bounce ideas off, to obtain encouragement. Sometimes, they just need someone to listen to them.

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Retirement Redefined

When did 'hanging it up' come to mean 'just barely hanging on'?

by Wright Edler

Wright Edler is vice president, divisional sales manager, and national spokesman for ING Financial Solutions, based in West Chester, Penn. He can be reached at Wright.Edler@us.ing.com.

Retirement Today

Sit back for a second and envision the retirement earlier generations were fortunate enough to have attained. What comes to mind? An man teeing off a few days a week? His wife basking in the glory of entertaining friends and family at their vacation home in Boca Raton? The couple then jaunting off on yet another breathtaking European trip?

It's probably best for us all to stop looking back fondly on that scenario as a reference point for all things retirement. Unfortunately, that idealistic life-after-the-work-place existence previous generations were fortunate enough to have experienced is just a fleeting memory. It's a reminder of a short, but glorious, period in employment history filled with pensions and a well-funded Social Security program. For Baby Boomers, the path to a retirement, any kind of retirement, will not be as smoothly paved. It's also a road that we, more often than not, must walk down on our own.

To make matters much worse, people still believe they're going to have a better retirement than they can afford. They imagine that idealistic retirement, the one their parents enjoyed, and there's a sense that an equally romantic one awaits them. It doesn't quite work that way anymore, someone's just forgot to tell them. The next generation of retirees may face the challenge of saving, sacrificing and working beyond the age of 65.

Retirement Yesterday

To appreciate the difficulty of giving up work and entering retirement, you first should understand how far we've deviated from where contemporary retirement began. Historically, workers worked until they couldn't work anymore. Have you ever wondered how 65 became the significant mile marker we hold so dear? According to the Social Security Administration, it was just an arbitrary age picked by German Chancellor Otto von Bismarck for one of the first retirement plans in the mid-1800s. What was the average life expectancy in the mid-1800s? It was in the mid-40s. So, in order to realize retirement benefits, you had to outlive your life expectancy by approximately 50 percent.

When the Social Security Act was created in the 1930s, life expectancy had jumped to about 62, according to the Social Security Administration. It was an actuarially flawless plan; the average person would not live long enough to realize any benefits from the program. It was designed to take care of those few people who, in effect, lived too long to work. With the economic expansion in full swing just a decade later in post-World War II America, there were tremendous inflationary pressures. Federal wage controls were instituted to prevent workers from being poached by other companies with higher wages. Employers needed a new value proposition to offer prospective employees: "If you put 20 years on the clock, I will pay you not to work here any longer." Thus, modern corporate pension plans came into being.

It was a pretty safe bet most workers wouldn't make it to retirement age anyway, and if they did, they'd only have a few years left to enjoy their retirement. The difference today is that Americans have much greater longevity. By the standards of yesterday, we would begin to offer benefits today at around age 90.

This economic quandary has confronted modern corporations, and the cost of defined benefits has become unsustainable in a competitive global marketplace. Thus the creation of the 401(k): it allowed corporations to put the responsibility for saving for retirement back onto the employee. Additionally, there is very little formal education on managing personal finance for the millions of workers who hope to retire. They know they want to, but they do not know how to do it. Therein lies the rub. Our industry has done a reasonably good job of helping people with money, but has done a miserable job of teaching the average worker. The goal now is to teach those who hold the dream of retirement to save themselves from themselves.

Retirement Tomorrow

With the onus put on the worker to fund their own retirement, the question is how do we all move forward? Naturally, there's no single solution for everybody. Most of the next batch of retirees will rely on their 401(k) savings almost exclusively; especially when you consider that Social Security and Medicare continues to be underfunded and the chance these programs will become more robust in the years to come are slim to none.

One of the most corrosive effects on Americans' retirement savings has been their own behavior as they own investments through complete market cycles. According to DALBAR, over the last 20 years, the S&P 500 has delivered an annual average return of 8.3 percent, through the end of 2008. Yet, according DALBAR, the average investor in the funds returned approximately 1.8 percent. The economic consequences of that are significant; a $10,000 investment in the S&P 500 over that same 20 year span would have approached $45,000, but the individual investors account grew to approximately $14,000. That's not even keeping up with inflation. The rate of inflation change during that time was 82 percent.

This is predominately due to the average investor's emotional reaction to volatility in the equity markets. The average investor will only purchase a stock and after it has done well, and they tend to only sell when the investment has approached the trough of the investment cycle. Put simply, it's the reverse of the traditional adage of buy low, sell high. In fact, this may be the only industry that when goods and services are put on sale, people return the goods they bought at full price in exchange for the sale price that is now offered.

Americans who were planning on retiring this year looked at their assets, contemplated the lengthy life they still had to live and said, "I don't think I can do that now." People still expect to retire, it's just being pushed back. According to the Employee Benefit Research Institute's 2009 Retirement Confidence Survey, 28 percent of future retirees expected to postpone retirement, while 21 percent plan to work into their 70s today. Guaranteed income solutions, whether they are built into 401(k)s or managed accounts, or sold through annuities, will need to be a part of the solutions for those who don't want to outlive their savings.

Yes, an investment professional has been trained since their embryonic stages in the business to avoid the use of the word guarantees at all costs. However, over the last 10 years, the insurance industry has finally begun offering guaranteed living benefits that allow people to guarantee outcomes on their finances, it could be retirement income or it could be a specific amount in the future. For the first time, the insurance companies' clients didn't have to die for something good to happen to them. It was a brilliant marketing plan because it allowed for repeat business. More importantly, it gave people guarantees through one of the most violent investment periods in modern history.

These living benefits were considered to be expensive, complicated and unlikely to have any real economic value at the turn of the century because everyone was heavily invested in growth funds. All anyone wanted was the latest technology funds that were going to grow at 70 percent each year. Five or six or seven percent guarantees seemed anemic by comparison. Having been just through one of the strongest 10-year economic downturn in U.S. investment history, the American investor now may be seeking high-benefits and high-guarantee annuity solutions, which also happen to be high-cost, at precisely the time they probably need them the least.

The biggest concern our clients should have today is with "fee drag" of the cost of these benefits at a time they're probably not necessary. If stocks experience the typical reversion to the mean that occurs after most bad periods, the next period to come will likely to be much more benevolent than what we have just been through. That doesn't mean it's safe to invest with no insurance at all. Like most important irreplaceable assets, retirement future should not be left unsecured, but over insuring it is a complete waste of money. A reasonably-priced effective guarantee, that allows someone to assure their retirement income, may give the American retiree the greatest opportunity of achieving their retirement goals.

Will most Americans spend their latter years hitting a ball off a tee daily or gallivanting around the globe? Chances are slim that more than an elite set of the wealthiest can afford that scenario. However, educated investors who understand that a shift in retirement reality is occurring may be better equipped to end their career, yet still maintain a quality of life they've earned.

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Stand-Alone Living Benefits emerge

Concept puts assets outside of annuities in play

by Tamiko Tolland

Tamiko Tolland is Managing Director of Retirement Income Consulting at New York-based Strategic Insight, an Asset International company. She can be reached at ttolland@sionline.com.

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Americans need guaranteed retirement income, and the time is ripe for the insurance industry to come up with new ways of meeting retirees' needs. While we continue to see the evolution of existing products, we are now also seeing new ideas that add to the arsenal of choices for advisors and clients. One recent innovation is the marriage of the popular living benefit guarantees available on variable annuities (VAs) with either an individual mutual fund or managed accounts.

We have been tracking what we call the standalone living benefit (SALB) since its inception. Although it is new, it also leverages existing products. The primary advantage of the SALB is that it allows clients to purchase a living benefit guarantee on assets outside of an annuity, a structure that may be more advantageous for tax reasons or simply because of personal preference.

Many people like the idea of retaining complete control of the assets rather than having them remain within an annuity, although this freedom is limited if one wants to retain the full value of the guarantee. Furthermore, these contracts are sold completely separately from the guaranteed assets and therefore have no commission associated with them, though there is a fee, usually assessed quarterly.

The reason the SALB has real market potential because of powerful retirement demographics and trends that speak to an ever-growing pool of retirees in need of solutions. Retirement income needs are arriving at a critical juncture with the impending retirement of millions of Baby Boomers. Boomers are growing in number and as a percentage of the population. The U.S. Census Bureau projects that there will be 46 million Americans aged 65 and over by the end of 2010; by 2040, that figure will more than double to nearly 96 million.

In fact, the number of older Americans as a percentage of the overall population will increase rapidly and, as a percentage of the working aged population (18 to 65), will grow at an even faster pace. By 2040, current projections estimate that people aged 65 and over will constitute 35.3 percent of Americans of traditional working age. With our current pay-as-you-go Social Security system, the burden on younger workers of paying for benefits for retirees becomes overwhelming in the coming decades.

Even without uncertainty regarding the future of Social Security, the concept of "traditional" retirement is fading fast. Many Americans today face the need to engage in work in order to supplement other retirement income, either to support day-to-day needs or stretch future retirement dollars. However, even a dramatic shift towards extending work life will not alone address the challenge of meeting Baby Boomer retirement demands. On the contrary, it further stresses the need for innovative approaches to retirement income planning and deployment.

Like VAs, SALBs are registered with the SEC and the states and require both insurance and securities licenses in order to be sold. Many advisors who are interested in SALBs do not hold the licenses necessary to sell them, but some companies conduct the insurance transaction through a separate broker/dealer. It is expected that most advisors who plan on integrating SALBs into their business on a regular basis will ultimately get the appropriate licenses.

Generally speaking, the guarantees are similar to guaranteed lifetime withdrawal benefits found on VAs, though not as rich or complex as the mainstream offerings. So far, there is no approved SALB with a roll-up bonus; at best, we see annual step-ups. Also, there are few investment options and it may not be possible to switch from one portfolio to another. Pricing is based on the risk tolerance of the associated portfolio.

Each individual SALB contract is associated with a particular product partner, an asset manager, investment platform provider, or distributor. The alliance between the insurer and product partner is especially strong and goes beyond a simple distribution deal. However, availability of these products is limited more than it typically is with other retail investment or insurance products.

There are currently three insurers with products on the market, Genworth, Nationwide, and Phoenix. Allstate had introduced a guarantee associated with its new target date funds but discontinued both in June. Great-West Life recently filed for an SALB, and there are a number of other insurers that have filed for products that have not yet been approved by the SEC, including Allianz and Transamerica.

All of the SALBs that are currently available guarantee assets in managed accounts, mostly managed portfolios of mutual fund or ETFs. Nationwide has two different product offerings, one covering a selection of unified managed accounts with Citigroup/Smith Barney. Although it is certainly possible to attach the guarantee to individual mutual funds, this comes with different administrative challenges. Furthermore, with smaller account values in mutual funds than managed accounts, it is less appealing for many providers to start with this approach.

Although the idea of the SALB seems straightforward, the reality is that it is not so simple to take the living benefit from an annuity and apply it to other assets. For one thing, securing regulatory approval has not been seamless, and the New York State Insurance Department has explicitly forbidden these new products. Although a coalition of insurers is trying to introduce legislation to legitimize SALBs in New York, these efforts will take time.

It is also important to recognize that the risk management is much trickier because the assets are outside of the control of the insurer, even when they are managed by a subsidiary. Therefore, SALBs include contractual elements that cover the insurer in the event that the investment management strays outside of the boundaries of what the insurer can reasonably hedge.

Not surprisingly, contracts include clauses related both to policyholders' need to conform to certain requirements and the consequences of changes made by asset managers. Unlike VAs, where it is easy for insurers to control the allocation of assets and either prevent or be aware of violations of allocation requirements, the covered assets of SALB are fully under the control of the investor.

The SALB does not necessarily reduce the overall cost to the investor relative to a VA with a GLWB, but it serves as a valuable option that may be preferable to certain advisors and investors. Retirement income innovations are important, not because they replace existing solutions, but because they add to the choice available to the investing public.

Thus, we do not see the SALB replacing VAs; in fact, in our survey of broker/dealers, the prevailing opinion was that these new products are likely to drive more sales toward VAs, which generally offer more investment options and a richer guarantee.

We currently see the biggest impediment to the growth of SALBs is the appetite of insurers to take on more living benefit risk. The financial crisis has underscored the value of guarantees but also increased the cost and awareness of the need for meticulous risk management. This does not mean that SALBs will fail to thrive, but it does mean that, as we have observed so far, the industry will progress cautiously in this market.

Despite the perils and uncertainty created by recent economic instability, there is tremendous opportunity for insurers to gain new business and provide a valuable service to retirees. It is an exciting time to monitor the new ideas that are emerging and see the various ways that the industry seeks to meet the needs of advisors and their clients.

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and the nominees are....

'RMDs' and the '70½ Tax Trap'

Strategies that can help high-income wage earners

by David G. Freitag, CLU, ChFC, CRPC

David G. Freitag, CLU, ChFC, CRPC, is Vice President at Impact Technologies Group. He can be reached at dave.freitag@impact-tech.com.

This year's Motion Picture Academy Award nominations will be announced on February 2, 2010 amidst glitz and glamour. For the first time in Oscar history, 10 movies will be nominated for Best Picture honors. It is also award season in the financial service industry for issues that affect retirees and people nearing retirement or age 70½. Based on the blitz of media exposure and press attention in the financial news, two of the leading, high-profile celebrity contenders for this year's top award in 2010 have to be:

For sure, these interrelated subjects of Roth Conversions and increasing tax rates will be on the red carpet as the nominees for best performance in a leading role. For many people, the new ability to convert traditional, qualified money balances into tax-free balances represents a tax diversification strategy, a tax shelter strategy and a gift-giving legacy strategy that must be considered.

Yet, for high income tax payers, perhaps more attention should be paid to the powerful, yet dark and sinister supporting role played by required minimum distributions (RMDs).

Dark role played by RMDs

RMDs have been well-documented requirements of traditional qualified retirement accounts for a long time. When considered in a vacuum, and particularly when assisted by software tools, they are easy to understand. The government does not want these tax-deferred accounts (Traditional IRAs, 401(k) and 403(b) plans) to escape income taxation after age 70½. Therefore, the IRS requires that the combined balances of traditional qualified retirement accounts be totaled together at age 70½. The aggregated account balance is then divided by a life expectancy formula. The result is the Required Minimum Distribution.

The RMD withdrawal payment can come from any of the traditional accounts if they are not aggregated into one holding account. For example, at age 70, the government life expectancy factor for most couples is 27.4. To calculate the RMD withdrawal, simply divide this factor into the balance of the combined accounts. If the account balances total $1,000,000, the RMD is $36,496 for that year.

For the higher income tax payer with $1,000,000 in qualified money, the $36,496 might not be a lifestyle altering number. However, consider the ramifications of a married couple with $3,000,000 in qualified money as they approach 70½. The $36,496 RMD becomes $109,489 in required distributions.

Furthermore, it is important to remember that this RMD force-out is imposed by the IRS every year after the required start date. (It was voided by Congress, for one year in 2009, due to the market collapse.) It is also critical to understand that Congress is not looking for less money in the future; rather it is looking for a great deal more. Real money is needed to pay for the war in Iraq and Afghanistan, to pay for the TARP program, to pay for the Cash for Clunkers program, to pay for the mortgage restructuring program, to pay for Medicare, to pay for Social Security and on and on.

Nasty tax trap lies in wait for high-income earners

As if directed by Alfred Hitchcock himself, the IRS has baited and set a nasty tax trap to snare the unsuspecting and unprepared high-income wage earners as they reach age 70½. At this point, the RMDs will force a successful couple into or near the top marginal tax brackets. In addition, large RMDs could expose up to 85 percent of their Social Security benefit to be subject to ordinary income taxes, taxable at the maximum marginal rate. The 70½ tax trap is easy to see graphically when illustrated in concert with pension income cash flows, Social Security payments and other post-retirement income payments. In the example below, the unsuspecting couple who will need $310,000 in income in 2014 to support their life style(see arrow on graph) will see their taxable income jump to over $419,000 in 2015 because they are forced to take the RMD after reaching age 70½.

If Congress allows the Bush tax cuts to expire at the end of 2010, the RMD of $109,489 will be taxed at the top marginal rate of 39.6 percent which would increase their underlying tax bill by $43,358. This higher tax bill is a conservative estimate because it does not consider any health insurance surtaxes or deficit-correcting higher income tax rates that may come in the future.

Three planning strategies for high income clients

Here is the good news. At least three proven planning strategies exist to help high-income wage earners mitigate the 70½ tax trap:

As a tax-diversification strategy, the presence of RMDs offers a powerful reason for higher-income wage earners to consider moving some portion of their qualified money into Roth IRA accounts. There are web calculators that may be generally helpful to illustrate this concept. However, in order to tailor your recommendations to a specific client's needs, a more comprehensive system may be needed. Be sure the analysis system can consider all sources of income for the client (like pensions, Social Security and the liquidation of non-qualified assets) that it can project income and asset growth into the future, and that it can graphically illustrate Roth Conversions so you can show the before and after impact of RMDs on your clients' plans for retirement income security. When these projections expose the 70½ tax trap, Roth conversions become increasingly meaningful and urgent. Roth IRA plans have no required minimum distributions so, by default, they can play a key role in a retirement tax diversification strategy.

A second strategy to make RMD payments tolerable is using them to buy new life insurance, especially if it is held in an irrevocable life insurance trust (ILIT). This is a sound strategy if the RMD payments are not required to support lifestyle needs in retirement. In the above example, $106,000 in RMD payments will buy a $3,150,000 permanent policy on a 70-year-old male in good health. The RMD payments are used as the source to pay the premiums. Income tax-free death benefits are paid to his family upon his death. This is a perfect way to systematically convert tax-toxic, qualified assets into tax-free life insurance death proceeds. It's also an effective technique to systematically remove tax-qualified assets from the client's estate. Placing the policy in an irrevocable life insurance trust may cause the policy's death benefits to avoid estate taxes as well. Again, when choosing software to illustrate this strategy for the client, be sure to look for tools that can illustrate income and estate tax consequences, as well as income in respect of a decedent (IRD) income tax ramifications.

The third strategy that might reduce RMD payments and avoid the 70½ tax trap is to simply start spending qualified assets well before age 70½. By holding the non-qualified assets in reserve and using taxable distributions earlier in retirement to support lifestyle needs, the client might be able to lower his/her RMD payments or eliminate them entirely. Although this option seems to run counter to accepted logic of �always defer taxes�, the presence of large or looming RMDs can change the game-plan rules.

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Obama endorses self-reliance

Saving for retirement just got easier

by E. Thomas Foster Jr.

E. Thomas Foster Jr., Esq., is The Hartford's national spokesperson for qualified retirement plans. He can be reached at tom.foster@hartfordlife.com.

Earlier this year, when President Obama announced several new initiatives to make it easier for Americans to save for retirement, supporters in the retirement industry were ready to sing, "Hail to the Chief."

The great, noble call that President Obama made is to encourage Americans to become more self reliant when it comes to providing for their financial security in retirement.

"This recession has not only led to the loss of jobs, but also the loss of savings," President Obama said during his announcement, noting that Americans have lost about $2 trillion from their retirement accounts because of the economic downturn. He said he was proposing "several common-sense changes that will help families put away money for the future."

The Automatic Decision

Perhaps the most exciting idea that President Obama outlined is his administration's efforts to make it easier for businesses to automatically enroll employees in 401(k) programs. Instead of making 401(k) plans a benefit that a worker must opt into, businesses can automatically enroll employees into accounts at the date of hiring unless the worker opts out.

Automatic enrollment is already available in the retirement plan marketplace and has proven to be a highly effective way to encourage workers to participate in employer-sponsored retirement plans such as 401(k)s, governmental 457(b)s and 403(b)s. Employee participation in 401(k)s rises from 70 percent to 90 percent when plan participants are automatically enrolled, according to a White House fact sheet.

Auto enrollment may be the wave of the future, something that most employers will eventually embrace. And why not? Automatically enrolling employees into a retirement plan not only helps workers, it helps many employers as well. Automatic enrollment may help retirement plans pass nondiscrimination tests. Highly compensated employees, including business owners, may find it easier to accumulate assets for retirement because they have fewer concerns about whether or not lower-compensated employees are contributing enough to the plan to avoid discrimination issues.

There are some requirements, and some new opportunities. One of the requirements is that employees must be notified annually of the auto enrollment and they must have the opportunity to opt out. Other requirements vary based on whether or not the retirement plan includes an automatic contribution arrangement, an eligible automatic contribution arrangement or a qualified automatic contribution arrangement. The latter two arrangements were added by the Pension Protection Act of 2006.

On the opportunities front, defaulted employees can now withdraw their automatic contributions from the plan within 90 days from their first deferral. The withdrawals are permitted only for plans amended to include an eligible automatic contribution arrangement. Some plan designs may not allow employees to withdraw their deferrals, a point financial advisors and their clients should consider before implementing auto enrollment. Employees who opt out and withdraw their 401(k) contributions within the 90-day window may have to pay taxes on their pre-tax deferrals. However, the 10 percent federal tax penalty that typically applies to withdrawals before age 59½ of pre-tax deferrals is not applicable in this instance.

The President's initiative presents an outstanding opportunity for financial advisors to review the participation rates for their business clients' retirement plans. Non-discrimination tests are becoming an increasingly difficult hurdle for many employers. Unfortunately, this is happening with growing frequency. The 401(k) Profit Sharing Council of America (PSCA) reported that 58 percent of all non-safe harbor plans failed their non-discrimination test in 2008, an increase of 20 percent from the previous year. If your clients are struggling with this issue, it could be an opportune time to suggest employing automatic enrollment.

Saving Tax Refunds

Another positive idea announced by President Obama is the modification of tax forms by the Internal Revenue Service to allow federal tax refunds to be used to purchase savings bonds. Tax refunds, which the White House reports average more than $2,000 for more than 100 million families annually, have been viewed in the past by many people as "found money." Little thought may have been given to how to put it to good use.

The prevalence of sales flyers for flat-screen TVs, new cars and vacation packages during the spring tax return season provides some clues as to how at least some of this money is spent. Making it easy for taxpayers to save their tax refunds by purchasing a savings bond may put a damper on big screen TV sales but it could certainly give a boost to the savings rate.

Reach out to your clients early, before they head off with their tax refund to buy the latest and biggest flat-screen, and help them make a financially sound decision about their retirement.

Unused Sick and Vacation Days

Another potential source of retirement savings, the president pointed out, is the cash many employees receive for unused vacation or similar time off when they leave their jobs. In some instances, those payments are made to existing employees at the end of the year.

The administration has clarified the rules about workers putting pay for unused sick and vacation days into their employer's retirement account. This may prove to be a boon for some workers' retirement savings but implementing these changes creates some complexity for employers. They will have to determine how much time can be credited to a retirement account based on employee contributions, again being careful not to exceed current limitations. The federal government could further encourage retirement savings by waiving or relaxing some of the contribution limitations.

The Internal Revenue Service has issued two Revenue Rulings addressing this issue. The first ruling, Revenue Ruling 2009-31, addresses annual contributions of payments employees would receive for unused vacation or other similar leave to an ongoing defined contribution plan, whether as employer contributions or elective 401(k) contributions. A second ruling, Revenue Ruling 2009-32, addresses similar contributions at termination of employment. Reach out to your clients now, point out these new revenue rulings, and start a conversation about this opportunity.

News Rules Expected

The IRS has issued detailed rules addressing President Obama's retirement initiatives. The new revenue rulings and notices can be found at irs.gov. Financial advisors who take the time to review these new retirement savings initiatives will readily realize the tremendous opportunity they present to promote the importance of retirement planning as well as the benefits of sound financial planning. The president's initiatives provide yet another opportunity to help employers and their employees make the most of their retirement plans.

Financial advisors should work closely with clients who own or run businesses to help them better understand how the new rules can be applied and, in turn, help employees understand how they can boost their long-term retirement savings. This is definitely an education opportunity, one that should not be ignored.

According to research from The Hartford, one in three (34 percent) Americans say they have little or no understanding of their retirement plan and three in four (74 percent) say they have less than a complete understanding. Employers need to make sure the new rules are implemented correctly and communicated fully to employees.

But the opportunity for education goes beyond the new rules. Every financial advisor should offer to meet with retirement plan participants to conduct a "gap analysis" to determine how much each individual investor has accumulated for retirement, including assets within an employer-sponsored retirement plan, personal savings and investments, the value of their home and real estate, and any other assets they may have. The total value of those assets should then be compared to how much each person actually needs to reach his or her retirement goals. The difference or "gap" between these two calculations is often bigger than most people suspect.

A study by McKinsey & Co. in October verified this suspicion. McKinsey's "Retirement Index," which was widely reported in the media, found that the average American family faces a 37 percent shortfall on the income they will need in retirement � a savings gap of $250,000 per household at retirement. That "gap" takes into account expected payouts of Social Security, pensions and personal retirement savings from accounts such as 401(k)s and other retirement plans, according to McKinsey.

Reaching out to retirement plan participants will help uncover dozens of financial planning opportunities and can ultimately be a boon to any financial planning or wealth management practice.

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It's 2010, do you know what your estate tax is?

by Herbert K. Daroff, J.D., CFP

Herb Daroff is associated with Baystate Financial Services in Boston. He is a contributing editor for LIFE&Health Advisor. Daroff can be reached at hdaroff@baystatefinancialplanning.com.

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According to the law passed in June 2001, there will be no federal estate tax in 2010.

I remember speaking in Chicago the week after this law passed. The very first question I received was, "What specific planning changes should we make?" I said, "The health care declarations should indicate that in 2010, pull the plug." I then cautioned the group not to take any trips with their children during 2010, or at least be sure that they bought a round-trip ticket.

Now, on the eve of 2010, I think it is unlikely that the estate tax will be repealed for one year, or longer. The current bills in the House and Senate appear to continue the current $3,500,000 federal exemption into 2010. In 2011, that exemption could drop to $1,000,000 (or $1,300,000, the original $1,000,000 increased for inflation, just like the $10,000 annual gift exclusion has increased to $13,000).

One benefit to estate planning contained in these bills is the portability of the death exemption. Without portability, each spouse needs to own assets individually. Estate planners are constantly moving assets between spouse, or hoping for successful disclaimers in the nine months after the death of the first spouse to die. With portability, if one spouse dies with say $1,000,000 of assets, the surviving spouse would then have a $6,000,000 exemption.

RETIREMENT PLANNING

Under current law, in 2010, the income limit for making Roth Conversions is removed.

Tax professionals traditionally advise, "defer income and accelerate expenses." Given a choice of, "pay me now or pay me later," opt for later whenever taxes are involve

However, many planners and clients are anticipating the ability to pay their taxes now instead of later (deferring them). What? That seems quite counter-intuitive. It might be, except in an economic environment where we believe that income tax rates may be increasing.

The retirement paradigm, that you will be in a lower tax bracket when you retire, may be a myth for many taxpayers. Anticipating that during at least some of their retirement years they may be in a higher tax bracket than the current 35 percent, they plan to pay the taxes on some or all of their retirement savings now.

There may be one significant flaw in their thinking. The Congress has already talked about increasing the tax bracket for incomes over $250,000. Most people assume that the new top tax bracket will not adversely affect them. However, converting Traditional IRA assets to a Roth IRA results in additional taxable income. Unless the Congress specifically excludes the Roth Conversion income from the over $250,000 tax bracket, many more taxpayers will have income in that bracket.

Another concern is making sure that the taxpayer has sufficient assets outside of their retirement accounts to pay the tax bill. I presented a CPA seminar just after the October 15th filing date. They all experienced the same problem. Business owners did not have the cash flow to make the retirement plan contributions that they expected to make and therefore owed much more in taxes than originally anticipated. And, both business owners and individuals did not have the cash flow to pay the income tax bill.

Many plan to take advantage of the opportunity to shift the Roth Conversion taxes into 2011 and 2012. That may work to keep more out of the top brackets. However, remember, without an Act of Congress, the top income tax rate in 2011 will be 39.6 percent, not 35 percent, and we may also have that new tax bracket for income over $250,000.

INVESTMENT MARKETS

The mantra for 2009 was, "too big to fail." Obviously, we have no idea what the mantra will be for 2010.

The biggest planning failure for 2009 was not having funds in the stock market for the second and third quarters, which were very positive. Estimated billions of dollars rolled over from one CD to another CD in October at interest rates under five percent, and taxable.

The good news is that another estimated billions of dollars will be coming due in April 2010 (and again in October). Variable annuities with lifetime benefit riders can provide five percent or more tax deferred return for future income. Not a good idea for funds needed for liquidity.

Another advantage of these hedged returns for future income is that they enable investors to allocate larger portions of their retirement portfolios into volatile asset classes, such as small-cap and international. These funds have the potential for substantial returns. With the lifetime benefit riders, investors can reap the potential benefits with substantially lower risk.

LIFE INSURANCE

Life insurance death benefits provide replacement income. Many people look to reduce the amount of coverage as they increase their personal investment portfolios (hopefully considering the net after tax value of these accounts). People should also look to increase their life insurance protection when their investment portfolios are reduced, and/or when their income tax brackets are increased. Cash value held in life insurance policies operates like a Roth Look Alike account.

Term insurance plus a Roth (or 529) is Whole Life, Universal Life, or Variable Universal Life. After tax dollars accumulate without erosion due to taxes and are available tax-free (provided the policy does not lapse and that the life insurance policy does not become a modified endowment contract).

For 2010, be sure that you and your clients have four pools of assets:

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2008 retirement plan participation declined;
full impact of economic downturn yet to be measured

Participation in employment-based retirement plans decreased by small amounts for most categories of workers in 2008, but those with the strongest connection to the work force experienced the smallest decline: 0.5 percentage point.

According to a study by the Employee Benefit Research Institute (EBRI), additional decreases are possible in 2009�2010, depending on economic trends, the study adds.

The percentage of all workers participating in an employment-based retirement plan decreased from 41.5 percent in 2007 to 40.4 percent in 2008, while the percentage of full-time, full-year wage and salary workers ages 21 to 64 (those most likely to be offered a retirement plan at work) decreased from 55.3 percent in 2007 to 54.8 percent in 2008. The overall decrease in participation was also reflected in virtually all categories of workers in 2008, the study reported. In 2008, wage and salary workers ages 21 to 64 had the biggest decrease, at 1.4 percentage points.

Worker participation in a retirement plan is strongly tied to macro economic factors such as stock market returns and the labor market. Better conditions of the late 1990s resulted in higher levels of participation, while worse conditions of the 2000s led to lower levels of participation. "The economic crisis of 2008 clearly had an impact on the most recent participation data, and the full effect on participation from the recent downturn in the economy has yet to be measured," said Craig Copeland, senior EBRI research associate and author of the study.

Other underlying factors also will affect future participation trends, such as the decline and freezing of defined benefit pension plans in the private sector, and automatic enrollment provisions of the 2006 Pension Protection Act (PPA) for defined contribution (401(k)-type) plans, which became effective only in 2008, Copeland adds.

The study reports that about 56 percent of all working-age (21 to 64) wage and salary employees work for an employer or union that sponsors a retirement plan. Among full-time, full-year wage and salary workers ages 21 to 64, just under 63 percent worked for an employer or union that sponsors a plan, and just under 55 percent participate in a plan.

Here are some additional study findings:

Trend: The 54.8 percent participation level for 2008 was virtually unchanged from just over 55 percent in 2007. Participation trends increased significantly in the late 1990s, and decreased in 2001 and 2002. In 2003 and 2004, the participation trend flattened out. The retirement plan participation level subsequently declined in 2005 and 2006, before a significant increase in 2007.

Age: Participation increases with age (62.7 percent for wage and salary workers ages 54 to 64, compared with 29.4 percent for those ages 21 to 24).

Gender: Among all workers, men had a higher participation level than women, but among full-time, full year workers, women had a higher percentage participating than men (56.2 percent for women, compared with 53.7 percent for men). Female workers' lower probability of participation in the aggregate results from their overall lower earnings and lower rates of full-time work in comparison with males.

Race: Hispanic wage and salary workers were significantly less likely than both white and black workers to participate in a retirement plan. The gap between the percentages of black and white plan participants that exists overall narrows when compared across earnings levels.

Geographic differences: Wage and salary workers in the South, West, and Southwest had the lowest participation levels (Florida had the lowest percentage, at 44 percent) while the upper Midwest and Northeast had the highest levels (Iowa had the highest participation level, at approximately 68 percent).

Other factors: White, more highly educated, higher-income, and married workers are more likely to participate than their counterparts.

Overall in 2008, 78.0 million workers worked for an employer/union that did not sponsor a retirement plan and 94.1 million workers did not participate in a plan, the study also finds. But looking only at workers who work full-time, full-year, make $10,000 or more in annual earnings, and work for an employer with 100 or more employees, only 4.9 million workers (or seven percent) would be included among those working for an employer that did not sponsor a plan, adds the study, which is based on Census Bureau data.

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Roth Conversions 2010

A 'Once-in-a-Lifetime' Opportunity

by David G. Freitag, CLU, ChFC, CRPC

David G. Freitag, CLU, ChFC, CRPC, is Vice President of Marketing Impact Technologies Group. He can be reached at Dave.Freitag@impact-tech.com.

Coming on January 1, 2010 is a "once-in-a-lifetime" opportunity for every person in the United States who has retirement money saved in traditional IRAs or other qualified plans. Without earnings limits they can convert to a Roth IRA.

This conversion opportunity allows for tax-free growth of their retirement investment dollars while spreading their tax liabilities across 2011 and 2012. Yet, when considering whether your clients should convert traditional IRA dollars to Roth IRA dollars, it is really all about tax rates.

If taxes are high, there is one major advantage with the traditional IRA, or any other type of pre-tax retirement savings plan. The money is tax-sheltered from those high rates. When the money is withdrawn and the rates are low, income taxes are paid at the lower rate. The inverse is true if the rates are currently low, but increase in the future. Retirement savings invested in a Roth IRA at today's low tax rates are immune from future income tax rate increases, forever.

Clues to Indicate Rising Tax Rates

How does one know if tax rates will go up or down in the future? As people approach retirement, or are already in retirement, what clues might indicate that tax rates could be on the rise in the near future?

CLUE 1

The 35 percent top marginal tax bracket today is the lowest since Ronald Reagan was president and just a little higher than the rates in effect when Calvin Coolidge was in office. The sunset provisions in the current tax law, with no Congressional votes needed, will force the rates to revert to those effective in 2000. The 2000 top bracket rate was 39.6 percent. Today, a married couple earning $200,000, filing jointly under the existing 35 percent rate structure, would pay an estimated $44,264 in federal income tax. That same couple, filing jointly after the sunset of the Bush tax cuts, would pay an estimated $55,049 on the same $200,000 of earned income. What appears to be a small tax rate increase of only 4.6 percent actually results in a whopping tax payment increase of 24.3 percent.

CLUE 2

The bias in the tax code between married couples filing jointly and single tax payers has never gone away. Assuming that the Bush tax cuts do sunset, a single tax payer would pay $60,051 or $5,002 more than a married couple. In retirement planning, it is important to remember that eventually all joint-filing tax payers will become single-filing tax payers.

CLUE 3

The following Federal Budget items have been well documented in the national press over the past few months:

CLUE 4

The top marginal tax bracket during the Kennedy administration was an eye-popping 91 percent. The top marginal income tax brackets have traditionally averaged above 60 percent in the United States.

CLUE 5

In 2009, the amount of the federal deficit will approach $2 trillion dollars. The deficit in 2009 is the largest in the history of this country.

The Higher-Income Taxpayer Paradox

Lori Montgomery, in her Washington Post article dated September 9, 2009, quoted Timothy Geithner in a statement on ABC News: "We have to bring these deficits down very dramatically and that's going to require some very hard choices."

In the Washington world of political rhetoric, when it comes to taxes, "hard choices" usually mean that tax rates are going up. When you look at the clues, and these clues do not even consider the impact of health insurance reform, it is virtually impossible to believe that the current 35 percent top bracket will last into the foreseeable future. The people who are going to be paying those tax increases are those with high incomes. The people with high incomes have a target painted on their chests that will invite a series of unwelcome visits from Uncle Sam.

This leads to something called the "Higher-Income Taxpayer Paradox." This paradox assumes that wealthy people who have saved money in qualified plans at low tax rates will, at retirement, take money out of qualified plans at high tax rates. This great strategy for the government is not a very good strategy for higher income retirees.

The best solution to this tax-rate savings paradox is the Roth IRA. The Roth IRA requires that taxes be paid up-front, and for this up-front payment, the Roth IRA offers great flexibility to the taxpayer. With the Roth IRA, there are no required minimum distributions at age 70½, and the money in the Roth IRA grows tax-free. Generally, there is no income tax on the withdrawals from a Roth IRA. Plus, there are no IRD taxes imposed on beneficiaries of Roth IRAs. In addition, contributions can be made to a Roth IRA after age 70½ when there is still earned income. Ideally, Roth IRA contributions are made when taxes are low, and withdrawn tax-free during retirement when taxes are higher.

In a word, the Roth IRA is a great deal. It is such a great deal that higher income retirement savers were prohibited from participation by the government. If individuals had modified adjusted gross income (MAGI) of over $100,000, participation in the Roth world was either restricted or not available at all. The legislative thinking was that the very liberal, tax-friendly, Roth tax-advantaged savings plans should only be extended to lower-income wage earners.

2010 Roth Conversion Event Opportunity

Here is the good news. On January 1, 2010 the $100,000 MAGI restriction for Roth Conversions is eliminated. All taxpayers can convert their existing Traditional IRA accounts, their 401(k) plan balances, and their 403(b) plan balances into Roth IRAs. Although new contributions to Roth accounts are still subject to earned income limits, for the higher income taxpayers, this new conversion opportunity may be the only way to get into the Roth arena.

What's the catch? The catch is that income tax must be paid on the withdrawals from traditional tax-qualified accounts to make the conversion. The good news is that the tax on conversions in 2010 may be at one of the lowest tax rates in recent history. The better news is that the tax burden created by the withdrawals in 2010 can be spread over 2011 and 2012 equally. The government is here to help, after all, or is it? There might be some urgency to pay all of the tax due in 2010. The downside to spreading the tax over two years is that the tax rates could be incrementally higher in those years than they are now.

The Roth conversion is a tax-diversification strategy that injects flexibility into a retirement plan. The Roth conversion creates an excellent pool of capital that can be passed along to children or grandchildren, income-tax-free. Unfortunately, according to an online study of investors made by Fidelity between August 14th and August 28th, 2009, most people were not aware that the Roth IRA would be available to them in 2010. Of the 800 participants in the study, 88 percent said that they were unaware of the conversion opportunity and 34 percent did not understand the tax implications of the Roth IRA conversion.

As attractive as Roth conversions are for wealthy tax payers, the personal circumstances of each tax payer will ultimately determine if making a Roth conversion is a good idea. And, that's when the assistance of a qualified financial professional is critical to investors. When it comes to making this type of decision, it is helpful for financial professionals to "model" the conversions for their clients using software tools. A good software analysis model should project three scenarios:

If your clients hold assets in traditional tax-qualified accounts and you think that tax rates are going to rise, the time for action is now. An analysis based on these three scenarios will show if this conversion strategy is a fit for any of your clients. For those clients, you should begin to educate them today about the new rules which will position you to hit the ground running on January 2. Helping clients improve their retirement financial plan by making a Roth conversion is a "once-in-a-lifetime" opportunity that should not be missed.

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The Personal CFO

Fact-finding system puts clients in charge of their own portfolios

by James C. McClure, CLU, REBC

James C. McClure, CLU, REBC, is Managing Director at Lenox Advisor, Chicago, Ill. He can be reached at 312-347-1680 or jmcclure@lenoxadvisors.com.

Recently, scientists studying brain activity, while economic or financial decisions were being made, were surprised to learn that the inner or limbic system portion of the brain was more active than the outer or methodical brain. Apparently financial risks and rewards often cause us to behave emotionally, either overly aggressive or abundantly timid.

Now, examine the critical importance of behavior in determining real-life, long-term returns. One of the simplest, yet most compelling windows into the importance of behavior is the Lipper and DALBAR 20-year annual compound rate of return of the average large cap equity mutual fund in the United States versus the average return realized by the average equity mutual fund investor. For the 20 years through 2007, the average equity fund averaged a 10.81 percent gain while the average equity fund investor realized just 4.48 percent.

No one should use these figures as a recommendation for investor lobotomies. Surgery is not the answer. But these figures do show just how poorly average individual investors may fare on their own. And while we may never eliminate emotion as part of their investing equation, financial advisors must find ways to tamp down individual investors' urges to follow this or that trend, react only to the latest quarterly earnings report, or make buy or sell decisions based on a short-term market move.

I'm sure many advisors have clients who sold their equity holdings during the fourth quarter of 2008 or the first quarter of 2009 and went to cash. What did they say to your pleas not to overreact?

Whatever their rationale, it was all based on their emotional connection to their investments. So now what? Consider the client's values. As a tool to assist us in vetting the goals and values of a client, we developed a system we call the Personal Money Constitution. It is a detailed examination of the role of money in a client's life.

When working with our clients, this system is one of the key steps. For some, it's an actual paper document, incorporating the Personal Money Constitution questions into our initial fact-finding. After listing the numbers and other data, many of our clients get into a deeper consideration of the process:

These questions guide the client through the Personal Money Constitution process. They come out of the process with articulated goals and a document that will actually help them make better financial decisions. This allows us to more easily and accurately create a roadmap to encompass the client's personal and family financial goals.

In effect, we help to focus the decision-making process on the lifetime goals of the customer, to earn the returns needed to fund the client's most important goals with minimum exposure in time, energy and stress - maintaining a portfolio which is goal-driven as opposed to being economic or market viewpoint driven.

When the decision-making process is focused on the financial plan, the portfolio becomes the servant of the financial plan, helping to clear the way for more decisions that help work to control the variables that are controllable while avoiding the ones that are not. We believe this has a profound effect on long-term, real life returns.

This system works to impact the decision making process and in turn may help to re-capture a portion of these otherwise lost financial returns. When focused on specific measurable and meaningful goals, we avoid the traps of:

Consider a recent case-study:

Jane and Bob Smith' both age 60, were five years from retirement and they considered themselves to be moderately aggressive, having enjoyed nice gains in their portfolio the past few years. However, their portfolio was down 30 percent the last six months of 2008, and they had begun to panic.

They argued over what to do but decided to stay invested. The portfolio continued to decline and dropped another 25 percent into March of 2009. Jane and Bob decided to sell and went to cash with the portfolio, locking in significant losses. Since they liquidated their portfolio, the S&P 500 index had rallied 58.3 percent (through Friday, August 7).

They were referred to us by their accountant and came to us seeking guidance. The first thing we did was develop a Personal Money Constitution and found a glaring contradiction, they believed their risk tolerance to be "moderately aggressive" but their goals of principal protection for impending retirement and the need for significant income at retirement did not support that stance. Additionally, both of them came from middle-class backgrounds and had deep-seated fears of "never having enough."

Understanding their underlying values and integrating them into a financial plan gave Jane and Bob a better understanding of their investing needs and tolerances. The emotion was taken out of the equation because their plans reflected their personalities. Now that their finances are in tune with their goals and values, we believe they'll make better decisions going forward. (And will keep those scientists at bay.)

Investors need to know that performance is neither a financial goal nor a plan. And advisors need to dig deeper into their clients' values before developing a financial plan.

Together, clients and advisors will then be better armed to face the next market swoon.

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Time to retrain retirement savers

by Richard Barrington

Richard Barrington is a freelance writer and novelist, following a 20 year career in the investment industry. He is a financial consultant for MoneyRates.com.

The market decline of the past couple years has affected more than just portfolio values. It is going to force many people to change their whole approach to retirement planning. For a generation of investment professionals raised on Modern Portfolio Theory, it's also time to do some re-thinking before clients can be retrained on how to save for retirement.

Broken Models

There are dozens of different computer programs for retirement planning, but just about all of them rely on two key pieces of input: a return assumption based on long-term historical data, and a measure of risk based on beta or some other calculation derived from quarterly fluctuations. This classic approach did not adequately prepare investors for the recent market debacle.

Take the return assumption, for example. For years, conventional wisdom was that the stock market would return about 10 percent a year, because that is what it had done historically. Sure, individual years might be better or worse, but over time it was assumed that stock market returns would normalize around that 10 percent figure.

Things look different now. It's not just that the S&P 500 lost 37 percent in 2008; the real problem is that by the end of 2008, the stock market had essentially no progress to show for the prior 11 years. It's one thing for a retirement model to be off for a year or two, but falling that far short of a return assumption for more than a decade will put any retirement program dangerously behind schedule.

Return assumptions for bonds also have to be reevaluated. With 30-year Treasuries now yielding just over four percent, and most of the yield curve significantly lower, it would be unrealistic to expect long-term returns on bonds to be significantly higher than those yields going forward.

Besides shaking up return assumptions, the market environment of the past decade or so should also force a re-examination of risk. True risk is measured by sustained declines, and/or the failure to meet return assumptions over long periods of time.

Fixing the Model - Retraining Retirement Savers

Clearly, conditions call for a change in approach. The biggest challenge is with people who are approaching retirement within the next five to 10 years, but there are some steps that can help even this group. The biggest impact, though, will come from starting people off with a different approach from the very beginning.

The following are five steps a financial planner can take to retrain retirement savers:

Use lower return assumptions - It might seem counter-intuitive to downplay return expectations, but one of the problems is that the investment industry tried to outbid itself with higher and higher performance claims when times were good. The result was not only unrealistic client expectations, but that models with high return assumptions allowed clients to contribute less to their portfolios and still expect to meet their retirement goals. The truth is, it is better from a customer service standpoint to under-promise and over-deliver.

Look at risk differently - It's clear by now that quarterly fluctuations aren't the real problem. For a real-world sense of risk, look at how investment programs do during sustained market declines. Also look at how many years different types of investments can fall short of their long-term averages. Minimize those two forms of risk, and you will have a portfolio that does a better job of staying on track toward its long-term goals.

Downshift risk more decisively as people approach retirement - The recent bear market was especially devastating for people in their last few years before retirement, and that's especially a pity because that same generation benefited greatly from the tremendous bull market of the 1990s. It's always tempting to "let it ride" when times are good. Inevitably, clients express an interest in taking more and more risk the higher the stock market gets. One of the ways to combat this is to downshift risk more decisively as a client approaches retirement, by moving some money out of the active investment portfolio and into more conservative vehicles. If you can, even consider bringing the client's savings account into scope of your financial planning mandate. After all, it is part of the client's overall asset allocation.

Don't look at retirement as an endpoint - Perhaps the greatest hope for people within a few years of retirement who have been set back by the bear market is that retirement date is not the endpoint for their savings program. Indeed, the average American retiring at age 65 can expect to live to be nearly 84. That's another 19 years or so of time horizon to factor into a retirement model, or more if you account for the fact that roughly half of the population will live even longer than the average person. Ordinarily, funding more years in retirement would make retirement planning tougher, but under the current circumstances it also gives a portfolio a longer time horizon for recovery.

Reassess retirement goals in light of deflation - Retirement planning targets often have an inflation assumption of three percent or four percent. Even if you retain this assumption for the long-term, which is probably wise, it may be worth readjusting retirement targets for recent deflation. For example, projecting what it would take to have a portfolio in 20 years with the purchasing power of a million dollars today would require a target nearly $65,000 lower after you adjust for actual CPI figures in 2008 and so far in 2009. A lower target makes any gap caused by the bear market easier to close.

The past couple years have been tough on financial planners and their clients, both financially and emotionally. The net result though, is that clients now need insightful financial planning more than ever. The greatest opportunities await those financial planners who can provide fresh and practical insights.

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Few fully understand retirement savings plans

As Congress debates reforms for how Americans save for retirement, a new study shows that most workers do not understand their retirement savings plans as well as other employer-provided benefits, indicating an acute need for more education.

One in three (34 percent) Americans say they have little or no understanding of their retirement plan and three in four (74 percent) say they have less than a complete understanding, according to research from The Hartford Financial Services Group, Inc. Employees indicated they had a better understanding of other benefits provided through their employer, such as medical coverage and life insurance.

The research found differences in understanding by both gender and age. More men (75 percent) reported they needed little direction to understand their retirement benefits as compared to women (56 percent). Also, Generation X (ages 30-44) reported having the best understanding of their retirement plan, even higher than Baby Boomers (ages 45-65) who are chronologically closer to retirement.

Employers have a tremendous opportunity to help employees understand their retirement savings benefits and to encourage them take action to prepare for retirement, said Jamie Ohl, senior vice president of The Hartford�s Retirement Plans Group. The survey showed several factors that influence employee decisions when it comes to selecting employee benefits, including retirement plans, she said.

Employers carry the most weight, with one in five (19 percent) plan participants saying they look to their place of employment for guidance on retirement savings matters. Other key influencers were financial advisors (15 percent), spouses (13 percent), immediate family (12 percent), the Internet (nine percent) and program providers (seven percent), according to the survey results.

Age and gender also influenced who plan participants turned to for advice. Women trusted immediate family members and spouses more than men did, while men were more likely than women to gravitate to the Internet as a source of information. Employers ranked as the top influencer for Baby Boomers and Gen Xers while Generation Y (ages 18-29), the youngest group polled, was most likely to be influenced by their immediate family.

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Don't allow small business clients to overlook retirement planning

by E. Thomas Foster Jr.

E. Thomas Foster Jr., Esq., is The Hartford's national spokesperson for qualified retirement plans. He can be reached at tom.foster@hartfordlife.com.

As I have traveled the country during the last 30 years educating retirement plan sponsors and advisors, I am still struck by my impression that most small-business owners continue to focus on the day-to-day care and feeding of their companies and start planning for retirement later than most. They regularly plow their profits back into their business, have few liquid assets, and don't start thinking about retirement until it's right around the corner.

LIMRA International's 2009 Affluent Small-Business Owners study tells part of this bleak story: two in five small businesses with fewer than 100 employees have no retirement plan for either the owner or the employees. For businesses with fewer than 10 employees, three in five have no retirement plan.

For those small businesses that do have a retirement plan, LIMRA reports that the most common is a 401(k) plan. But there are tight restrictions on how much plan participants can contribute to a 401(k)s in any given year. That means even the most successful small-business owners can struggle with accumulating enough assets to continue their lifestyles once they leave the corner office.

One possible answer to this problem is a cash balance pension plan, which is becoming increasingly popular in the small-business and professional markets. A cash balance plan is a type of defined benefit plan that, in some ways, looks and feels like a 401(k) plan. Both types of plans express benefits in terms of an account balance, offer tax deferral advantages, and allow assets to be rolled over into another qualified plan or an IRA.

Cash balance plans must be funded by an employer annually, which can mean a significant financial commitment. Because of that commitment, a cash balance plan is not a perfect fit for every business. However, for highly profitable businesses and professional practices, cash balance plans offer highly compensated employees and business owners the opportunity to significantly accelerate the accumulation of retirement assets. Under certain circumstances, the benefits of a cash balance plan may also be weighted towards owners, key employees or both.

These newer defined benefit retirement plans are better known to the Fortune 500, where cash balance plans seem to be replacing traditional pensions. But the potential benefits of cash balance plans are just being discovered by smaller firms with fewer than 100 employees.

For many, this discovery can be a �eureka� moment because the benefits of cash balance plans can be significant. These pension plans can provide a steady, fixed stream of retirement income for a business owner and his or her employees. In addition, employer contributions to a cash balance plan are generally deductible by the business.

Barriers to Entry

Successful small-business owners with strong balance sheets and steady cash flows are ideal candidates for a cash balance plan. They find it most difficult to accumulate sufficient tax-advantaged assets for retirement through defined contribution plans such as 401(k)s because of their inherent limitations. For instance, contributions to a 401(k) are limited to no more than $49,000 in 2009 and cap eligible compensation at $245,000. Plan participants age 50 and older can save an additional $5,500 a year.

Those relatively low ceilings can become downright claustrophobic if the firm's lower-compensated employees contribute little or nothing to their 401(k). In such instances, the plan will be deemed to favor highly compensated employees such as the business owner and will therefore fail non-discrimination tests. Highly compensated is defined as anyone earning $105,000 in 2008 and $110,000 in 2009 or a business owner with a five percent interest.

Raising The Bar

Cash balance plans are designed to overcome restrictions or limitations associated with defined contribution plans. Business owners and other employees can accumulate as much as $300,000 or more annually within a cash balance plan and, fasten your seatbelt, contributions are generally deductible by the business.

The relatively large amounts that business owners can contribute to a cash balance plan underscore the importance of a participating business to be financially sound and to have the wherewithal to make a significant financial commitment over several years.

The available tax deduction provides an additional incentive for many business owners to make that commitment. Taxes are often a primary concern of many highly profitable businesses and professional practices. Affluent owners and professionals likely think they pay too much in taxes already and may worry that their tax rates will increase in the near future. The Obama Administration has proposed higher personal income taxes for taxpayers in the highest income-tax bracket.

For many small businesses such as sub-chapter S corporations and partnerships, business profits typically pass through to the owners at the end of the year and are taxed as personal income. Cash balance plans offer a way for these business owners to significantly reduce their company's taxable profits and, by extension, their adjusted gross income (noted on their 1040), while investing those dollars into their own retirement account.

Conservative Goals

Because the objective of a cash balance plan is to generate a fixed stream of income over the life of a retiree, investments are typically very conservative. The typical investment goal is calibrated at one year, a sharp contrast to the 10- and 20-year investment horizon of many defined contribution plans.

The interest crediting rate for a cash balance plan can either be fixed or based on a targeted interest rate, such as the 30-year Treasury Securities Interest Rate. The interest crediting rate is not dependent upon the plan's investment performance.

Overfunding a cash balance plan may reduce the amount a sponsor needs to contribute the following year but also reduces the tax deduction to the business or practice. Underfunding a cash balance plan will require additional contributions in future years to ensure it is fully funded. Additional contributions can generally be amortized over a seven-year period.

Other investments can be included in a cash balance plan, including stable value, money market, equity and bond options. Some cash balance plans have literally dozens of investment options with a wide variety of objectives, investment horizons and investment styles. But these options tend to be employed as a secondary rather than a primary investment. Unlike a 401(k) plan, these alternative investments are not directed by plan participants but rather by the plan sponsor. Because the plan sponsor is required to keep the plan funded at certain required levels, the plan sponsor will need to carefully select and monitor the plan's investments so as to minimize the risk of large losses that could result in additional required contributions.

Cashing Out

Based on U.S. Census data, LIMRA estimates there are 1.2 million small businesses in the United States with fewer than 100 employees. Between 40 percent and 60 percent have no retirement plan at all and those firms that do typically have a defined contribution plan with strict limits on contributions. That makes many business owners the wallflowers of the retirement dance. A cash balance plan can help these late bloomers get back on their feet and catch up in their preparations. Compared to a defined contribution plan, a cash balance defined benefit plan helps business owners to accelerate the accumulation of assets for retirement and make up for lost time.

Talk to your clients who own small businesses about their retirement goals and objectives. Successful entrepreneurs and professionals with steady profits are sure to appreciate the benefits of a cash balance plan: relatively high contribution amounts, flexibility in choosing who participates, guaranteed income and tax-deductible contributions.

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Media, internet influence attitudes towards saving

by Robert A. DiNardo

Robert A. DiNardo is 2nd Vice President of Marketing Annuities and Retirement Products for National Life Group. He can be reached at rdinardo@nationallife.com.

With trillions of dollars of wealth lost, historic unemployment and record foreclosures, Americans are reshaping the way they think about and save for retirement. The 37 percent decline in the S&P 500 in 2008 was the fourth drop in the S&P 500 this decade (-9 percent in 2000, -12 percent in 2001 and -22 percent in 2002),ushering in the first 10-year rolling period with negative returns since 1938 . Many people are losing their homes, living through unemployment and, thanks to Bernard Madoff, Allen Stanford and others like them, facing doubts about who they can trust with their money.

How people perceive and react to these trends is shaped in part by the sources of information they favor and the TV shows they watch. Bernie Madoff, the TV show South Park, and the Internet are all influencing the way Baby Boomers, Generation X and Generation Y think about and save for retirement.

In a 2008 Zogby International Poll, nearly half of respondents (48 percent) said their primary source of news and information was the Internet. Younger adults were most likely to name the Internet as their top source: 55 percent of those age 18 to 29 say they get most of their news and information online, compared to 35 percent of those age 65 and older. For Gen X and Gen Y, TV shows like South Park and The Daily Show with Jon Stewart, and the availability of online video excerpts and commentary, are shaping their views of current events.

One of my colleagues recently spoke to students at a national university, and found that just about every person in attendance had seen the Emmy Award winning �Margaritaville� episode of South Park. The episode is a satirical commentary on the global recession. In one part of the show, one of the children takes his $100 birthday check and makes an investment at South Park Bank. He gives his money to a bank employee who immediately invests it � �Annndd it's gone� � a millisecond after it's deposited, the money is lost. Others invest their money and lose it immediately at the bank as well.

Together, today's economic climate and the influence of the Internet and television are causing people to distrust the stock market and traditional financial institutions such as banks. The insurance industry has long been rejected by financial advisors, yet the value and safety of annuities are helping to push annuity sales to all time highs. With $2.3 trillion lost in retirement savings plans in 2008, choices that offer more security and less risk are looking very attractive to both Boomers and younger generations alike.

Boomers especially are looking for products and savings strategies that don't necessarily offer huge returns, but instead offer protection of principal and lifetime retirement income. Investors who took their chances with equities are now more interested in fixed and fixed index annuities (FIAs) due to the guaranteed principal and guaranteed minimum interest rate (GMIR). In fact, 2008 was the first time in many years that people actually saved more than they spent.

Many retirees and pre-retirement Boomers are also beginning to realize that it's not just how best to grow their retirement, but also how best to withdraw the funds. Guaranteed, protected income for life has clearly fueled the sale of guaranteed lifetime withdrawal benefits (GLWBs) in variable, fixed and index annuities.

From 2004 through the first half of 2008, the average election rate of Guaranteed Lifetime Benefits (GLBs) on VAs increased from 52 percent to 69 percent, and the election rates of Guaranteed Lifetime Withdrawal Benefits (GLWBs) for various carriers ranged from 61 to 93 percent. While GLWBs don't protect principal, they do ensure income for life.

For FIAs that offer an optional GLWB, the election rate is averaging 40 percent, with election rates as high as 71 percent depending on individual company results. In addition to ensuring lifetime income through GLWBs, FIAs also provide the additional benefit of protecting an individual's principal. For an ever increasing portion of Americans that don't have a pension through their employer and have seen their retirement accounts take four repeated hits in the 2000s, principal protection and income for life are more crucial than ever.

Current events and the prolonged financial crisis are impacting annuity pricing and product development in a variety of ways:

Insurers must also keep in mind the potential impact of rule 151A on fixed index annuity (FIA) product development, and how that impact will either limit or expand the choices available to consumers. Registered and prospective-crediting FIAs are some options under consideration.

The Boomer generation has paid the heaviest price in the economic meltdown, but the Gen X and Gen Y investors who bore witness will be the generations to try different strategies other than the stock market. The younger generations will benefit from a historical understanding of loss in the markets and from the breadth of information available to them about financial products. Insurance companies need a new approach and a new way of thinking about how they educate these generations about saving for and living in retirement.

There is an opportunity at hand for insurance institutions and insurance professionals to advertise to the generations who watch shows like South Park, Family guy, and The Daily Show, and to provide information via the Internet, not only on company websites, but through social commentary and viral web platforms. Most marketing and advertising is geared towards Boomers and retirees, but there is a need for Gen Y and Gen X to be educated about financial conservation, a need that annuity providers can expertly fill.

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Worksite Wellness

New trends can improve the health of your bottom line

by Elizabeth Halkos

Elizabeth Halkos is Vice President of Sales and Marketing for Purchasing Power, an Atlanta-based employee purchase program that helps workers purchase products with manageable monthly payments through payroll deduction. She can be reached at ehalkos@purchasingpower.com.

In the world of employee benefits, the trend of worksite wellness is becoming increasingly important to advisors, employers and employees. Wellness topics include health (physical and mental), retirement, financial, and work-life benefits. Employers, especially HR professionals, are focused on these topics because of their impact on not only employee satisfaction and performance but also the bottom line.

An economic downturn and increasing financial uncertainty brings a considerable amount of stress on employees. Research shows that 15 to 20 percent of employees have such severe financial problems that their productivity at work is negatively affected. In fact, such stress can cause productivity to decrease by as much as 20 hours per month per employee.

Additionally, according to AXA Equitable, more than 70 percent of employees believe that employers are responsible for their retirement readiness. However, only 19 percent of employers deem retirement planning as one of their most important employer strategies.

Clearly, there is an opportunity for employers to offer access to better financial planning tools that can support employees with their current and future financial situations. Increasing employees' financial stability can help them feel more confident and make them more productive at the worksite.

Employees with good physical and mental health can decrease health care costs for employers and also have increased satisfaction and performance in the worksite. According to the Centers for Disease Control and Prevention (CDC), the overall health of workers is influenced by factors both inside and outside the workplace, such as stress, unhealthy diet, limited exercise, smoking and chronic conditions such as hypertension, asthma, and diabetes. Just as workplace conditions can affect health and well-being of employees at home, activities and situations outside of working hours can substantially determine health, productivity, and well-being during work.

To help ease the burden for employees, many employers are responding to the rising costs of health care by sharing more of the costs. Employers are also implementing wellness programs. Not only does this have the potential to counteract future health problems that could increase healthcare costs, but these programs can also improve employees' productivity and satisfaction.

Companies both large and small are recognizing the importance of wellness programs. The 7th Annual MetLife Study of Employee Benefits Trends found that 61 percent of large companies (10,000 or more employees) reported having a wellness program in 2008, up from 47 percent in 2005 and 11 percent of companies that do not currently offer wellness programs plan to do so within the next 18 months.

Improving employees' mental health and stress at home can also improve productivity and satisfaction at the worksite. However, a diverse workforce, including people from Generations Y and X to baby boomers, can pose a challenge to HR professionals seeking to satisfy a variety of needs with benefits programs. One common solution for employers that benefits all employees throughout the workforce is increased flexible work arrangements and teleworking, which can meet needs from reducing employee time in the car to allowing for working parents to have flexibility in caring for children. Employees will save money on gas, parking and transit costs, as well as gain up to two more hours of work that might have otherwise been spent commuting on a traditional schedule.

Helping employees ease financial burdens faced at home is another great way for employers to build goodwill among their workforces. Forty percent of employees say they want a wider array of voluntary benefits and would welcome help for all of their financial needs. However, employers are focused on retaining employees and controlling costs for the company. Additionally, growing diversity in the workforce has increased the necessity for a variety of benefits options to meet these differing needs.

To increase employee morale and retention without additional costs, employers can turn to voluntary benefits to fill the gap between health and retirement benefits for the group and the additional worksite benefits that target these areas of wellness, physical, mental and financial. In fact, employees value attributes of voluntary benefits more than employers realize, touting advantages such as convenience of payroll deduction, assistance in disciplined saving, and appreciating the fact that employers have already screened products and services to only offer the best to employees, thus saving them time and money.

Voluntary benefits can range from gym memberships to vision care to being able to purchase items such as computers and appliances through payroll deduction, all of which provide financial discipline and guidance for employees in making these decisions. Allowing employees to be able to purchase a computer, for instance, can ease stress by giving them access to a much-needed item to benefit both themselves and their family, as well as provide a structured payment plan to pay for it. Investing in these programs to ease stress and support employees is just one more way for employers to position their company so it can emerge from these challenging times with a more focused and engaged workforce.

So, what does this mean for advisors? By providing wellness offerings to employers to help them meet the needs of today's workforce, advisors can not only provide a valuable service to employers and employees, but add revenue streams to existing accounts simply by offering more options. No matter the life stage, wellness offerings allow employees and employers reap the benefits of cost-savings, increased productivity, greater satisfaction and better physical, financial and mental health. And as a broker, you can open these doors. What are you waiting for?

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Navigating new economic risks and rewards

by Jennifer Warren

Jennifer Warren is managing director of the Retirement Security Institute, a Dallas-based research firm that develops education tools for retirement income planning. She is the author of the white paper Retirement Security in the 21st Century, from which this article is extracted. Warren can be reached at jwarren@retirementsecurityinstitute.com.

We are firmly planted in new economic terrain with changing contours, peaks, and valleys. As Alan Greenspan, former Chairman of the Fed, expressed in a late-August 2005 speech: "The paradigm on which we have settled has come to involve, at its core, crucial elements of risk management." The Fed will now have to construct forecasts related to changes in the global economic structure, considering the spectrum of the nature and magnitude of risks. Greenspan states that "the structure of our economy will doubtless change in the years ahead." Asset price changes like equities and housing will be monitored more carefully as signals, also in regard to the liabilities that finance them.

Ironically, the words of Greenspan have rung especially true with the recent bursting of the housing bubble and subprime market meltdown. A reality check has come to lenders and investors who are having to learn the hard way about managing risks.

As the balance sheets of companies and country become more important, so does the balance sheet of the individual household, especially the retiree with less opportunity to buffer economic tribulation with income from employment. Retirees need to have some understanding of how the economic environment impacts their individual level decisions and planning. There are new sets of risks to account for in such dynamic times: health care costs, global economic impacts, the potential for needing long term health care, minimizing the erosion of assets, and securing a sustainable income stream throughout retirement.

Risk management and prudent investment are imperatives for retirees. What is the new normal for a reasonable return? Have increasingly fluid global capital markets changed the paradigm on returns? In testimony before Congress, the nature of the forces which point to a decline in long-term interest rates (in spite of short-term interest rate hikes) were seen to be "surely global," according to Greenspan. In a recent paper, accounting professor Doug Hanna of SMU Cox School of Business says that in spite of the intelligent people running mutual funds, "there are few funds that are able to consistently beat the market." He also pointed to the rise in popularity of index funds, which generally offer a reasonable return and require little active trading (i.e., low transaction costs).

But financial markets tend to revert to the mean. Higher past returns are an indicator of low future returns; the opposite is also true. A French bank strategist calculated that when American shares have traded on low cyclically-adjusted price-earnings ratios (smoothing profits over previous 10 years), the next decade saw returns of eight percent in real terms. At high initial valuations, the average returns were three percent.

Stock market returns tell a part of the tale on returns. As of December 2008, the S&P 500 index was down 43 percent since its 2007 record high. S&P companies reported an average 18 percent decline in profits in third quarter 2008, with analysts expecting eight percent profits growth in 2009. Pre-downturn, the Russell 3000 index, measuring the top 3000 companies, returned 12.03 percent over one year; 10.02 percent over three; and 8.07 percent over 10 years. Factoring in the declines of 2007-08, one year returns were -40.39 percent; three-year were -10.26 percent; and 10 years returned -0.65 percent. The Russell Global index dropped in line with the US one-year but its five-year return was 4.86 percent and 10-year returns were 3.41 percent, reaping the global gains of the 2003-07 growth period. One sees how long it takes a portfolio's value to recover to the point it had been pre-downturn. If a person retired post-downturn, a financial hit was definitely taken.

Yale University economist John Geanakoplos suggests that "we should not rationally expect to see the same rates of return on investment as our parents." Another economic expert relays concern that the "economic hit" to retiree living standards may come from government payments not keeping up with retiree needs, the most vulnerable being those without any stock at all, that haven't saved much and will depend on the government for medical care and basic needs.

Unprecendented sums of global capital drove down returns over the period pre-downturn, and money managers were placing bets on riskier assets than they had done in the past. This distortion of risk-taking behavior is finally being curtailed with the bursting of the financial bubble, and a new regulatory climate looming. Fed Chairman Bernanke, in an August 31, 2007 speech about subprime and credit market woes, said, "More generally, investors may have become less willing to assume risk. Some increase in the premiums that investors require to take risk is probably a healthy development on the whole, as these premiums have been exceptionally low for some time."

With global investors playing a larger role in our U.S. financial markets, new issues are arising that should give pause. As the U.S. government borrows for our large budget and current account deficits with foreign money, a new vulnerability arises. We have benefited from lower interest rates because the demand for U.S. Treasuries has been high among foreign investors, particularly the governments of Japan, China, Russia, and oil-rich nations, to name a few. But in 2007, both China and Kuwait stated their preferences of shifting away from Treasury securities to higher-yielding assets; the Kuwaitis like higher yielding bonds, Chinese office buildings and Asian private equity funds. Less demand for holding our debt will raise interest rates in the U.S. and lower the value of the dollar. This will create different challenges in the economy, and force the government's hand to deal with our debts and spending habits. It will result in an overall reduction in standard of living when purse strings get tightened, as it already has during the economic crisis due to broad challenges.

Though foreigners are willing to hold U.S. debt today, a more sustainable fiscal management strategy will need to be adopted for future prosperity. "The US was the world's biggest debtor nation for a hundred years," said Harvard professor Jeffry Frieden. He adds that the difference is that the money was used to build our nation's infrastructure: railroads, canals, ports, factories, and our cities. Is our spending today, our investment in our future with over half of it on health care and Social Security, and another large chunk on war, going to enhance the prosperity of America in the 21st century? Are we building the "soft" infrastructure of retirement security needed to thrive in the 21st century?

Global interdependence applies more directly in retirement security in relation to asset prices. With boomer retirees and their flood of trillions of dollars of assets in stocks and bonds being sold over the next 20 to 40 years, what happens to asset prices from this type of sell-off? Professor Siegel of Wharton says it will take massive investment by people in India, China and other developing countries to prevent a U.S. market meltdown. Other experts on the subject reject this idea and worry more about those who have not saved enough period or will rely on government assistance which may get reduced over time.

How might demographics in the U.S. (and globally) change supply and demand aspects of the economy? Japan is already deep into the throes of a graying population, forcing changes to public policy and companies' policies on employment and benefits as well. Certainly more products, services, and innovation will present themselves to address the needs of retiring Baby Boomers.

A maturing America will alter the composition of consumption and the workforce in ways that are different than today. Employers will need to address greater flexibility, part-time work options, and re-formulated benefits to mirror upcoming demographic changes. Having said that, Greenspan warns on two occasions that U.S. budget deficits and the course of entitlement spending may put the federal budget on an "unsustainable path." Additionally, he confirms and re-affirms what many know, that the aging of the population will "markedly influence the policy milieu in years ahead."

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Grandparents to grandkids: $370 billion

Almost two-thirds of America's grandparents have provided financial support to their grandchildren during the last five years, 40 percent for general purposes and 26 percent for education. The average amount provided was $8,661, or about $370.7 billion total in the last five years.

One-quarter of those surveyed say the economic downturn has caused them to increase the help they give to their grandchildren, according to the MetLife Mature Market Institute's QuickPOLL, Grandparents: Generous with Money, Not with Advice.

The 2009 Grandparents Poll revealed that grandparents prefer to help their children and grandchildren while they are alive, rather than leaving a lump sum in a will.

In addition, the data indicates that those with less income and net worth are giving a higher percentage than they did before the most recent economic downturn, and some of them are feeling the pinch, with more than one in five (22 percent) overall reporting that their generosity has had a negative impact on their own financial picture.

Information gleaned from the 2009 Grandparents Poll includes:

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Uncertain about savings,
retirees tighten belts, seek advice

The number of retirees who say they are worried about financial security has more than doubled in the past year, and many are tightening budgets or seeking professional financial advice. Forty-nine percent of retirees said they felt less secure than when they first entered retirement, compared with 20 percent who said so last year.

The findings come from a survey of retirees aged 56 to 77 with $100,000 or more in investable household assets, conducted by LIMRA, the Society of Actuaries (SOA) and the International Foundation for Retirement Education (InFRE). The organizations released the findings today in a report titled What a Difference a Year Makes, highlighting changes in retirees' attitudes from 2008 to 2009.

Forty-three percent of the retirees surveyed said their tolerance for investment risk has gone down since last year, and many were concerned about the possibility of inflation.

The retirees whose investment risk tolerance declined in the past year gave the following main reasons:

In spite of the decline in sense of security, there are still gaps in retirement planning, as more focus needs to be spent on managing long-term retirement risks.

"Retirees are definitely feeling the effects of the 2008 financial crisis, and have begun changing their behavior," said Sally A. Bryck, LIMRA associate research director, who led the research project. "While seven in 10 respondents said they can still cover their basic expenses and afford a few extras, the number who said they spend money on whatever they want dropped sharply from 38 percent in 2008 to 22 percent in 2009.

"We also see an increase in the number of retirees who have personal financial advisors," Bryck added. "Today 61 percent say they have a personal financial advisor compared to 56 percent in 2008. Seeking professional help shows how severely things have changed and how unsure retirees are about doing things themselves."

The survey also found a significant decline in the number of retirees who feel very confident they have saved enough money to live comfortably throughout their retirement. Today, only one in four of the retirees are extremely confident they have saved enough, a 12 percentage point drop year over year.

One way to decrease concern over outliving money, risks of inflation, and other financial hazards is to use some financial assets to generate guaranteed lifetime income.

"Unfortunately, many retirees are not thinking long term. Even among retirees for whom Social Security does not cover their basic expenses, a guaranteed lifetime income, such as that provided by an annuity, is not a core focus of the retirement plans of the retirees surveyed," said SOA member Anna Rappaport, FSA, MAAA. "Among retirees whose core expenses are not covered by Social Security, 31 percent indicated interest in converting a part of their savings into guaranteed lifetime income."

"To make sure they do not outlive their assets, retirees need to take an actuarial perspective in managing retirement risks and focus on long-term goals and challenges," she said.

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Turn accumulated assets into lifetime income

by Wright Edler

Wright Edler is vice president and division sales manager for ING U.S. Annuities, based in West Chester, Penn. He can reached at wright.edler@us.ing.com.

There's been a shift to the retirement landscape that is impacting a new generation of retirees: the Baby Boomers. The retirement of the 21st century is different than anything that came before it. Americans are living longer and retiring younger. In a recent survey, 67 percent of respondents retired prior to age 65. Meanwhile, research indicates that a couple age 65 has a 50 percent chance that one or both of them will live to age 92. This could mean a 20 to 30 year retirement.

But yesterday's guaranteed sources of income are becoming obsolete. Fewer corporations offer pension plans than in the past. Similarly, Social Security will have a difficult time supporting so many retirees for longer retirements. It's estimated that by 2017, Social Security benefit payments will begin to exceed Social Security tax income. To complicate matters further, inflation continues to erode the value of retirement nest eggs. In 25 years, at just a three percent annual rate of inflation, expenses could more than double what they are today.

Americans are now challenged with funding retirement with personal savings. This requires a substantial nest egg. However, saving for retirement is more than just putting money aside from each paycheck. It also means investing that money so that it has the chance to grow. And once they retire, investors need to find a way to turn those assets into a steady stream of income that won't run out.

Maximize Growth Potential

Many Baby Boomers are behind on retirement savings. In order to maximize growth potential in the time remaining before retirement, they could consider stocks as part of their plan, since they provide the best growth potential over the long run. If $1 had been invested in large capitalization stocks over the last 82 years, that $1 would have been worth $2,049 by the end of 2008. (Hypothetical value of $1 invested at the beginning of 1926. This assumes reinvestment of income and no transaction costs or taxes.)

While investing for the long term provides the greatest growth potential, fear of losing money tempts investors to make buy and sell decisions at the wrong time. This is a costly trap into which too many fall. In fact, buying when prices are high and selling when prices are low is one of the leading contributors to investors underperforming the market. When we compare the 20 year return of the S&P 500 Index from 1988 until 2007, had an investor held it for the entire period, to the average investor return for the same 20 year time frame, the average investor underperformed the S&P 500 by more than seven percent and just barely beat inflation. The reason for this is a lack of discipline when it comes to riding out market swings.

What a Difference a Year Makes

The long-term average annual return of large company stocks is 9.6 percent. However, averages can be deceiving. The range of calendar year returns for this period is actually as low as -43.34 percent and as high as 53.99 percent. And since no one can predict what the stock market will do, a certain amount of luck comes into play when an investor decides to retire.

Retiring at the wrong time, when the market is negative, could be devastating to retirement savings. It turns out that the market's performance at the beginning of retirement can have a marked impact on the value of an investor's principal and the amount of income that can be taken throughout retirement.

Let's look at two hypothetical investors with diversified portfolios. One retired at the end of 1972 and the other retired one year later in 1973. Both began taking annual withdrawals of an inflation adjusted amount of $12,500 per year or five percent of the original $250k portfolio. However, the first investor immediately faced two years of heavy market declines. As a result, it took only 17 years, until 1989, for the first investor to deplete his portfolio. The second investor was spared the stock market's 1973 decline, although he otherwise experienced the same conditions. His portfolio continued to grow throughout retirement. As insignificant as this one year may seem, it made all the difference to these hypothetical retirees.

Turning Assets into Income

Your clients need a way to turn their accumulated retirement assets into lifetime income. Aside from Social Security and corporate pensions, which have their limitations, another way to provide you with a guaranteed income source in retirement is through variable annuities.

Variable annuities are long-term investments designed for retirement planning. They are contracts between an investor and an insurance company, under which the insurer agrees to make periodic payments to the investor, beginning either immediately or at some future date.

Variable annuities offer the opportunity to allocate premiums among fixed and variable investment options that have the potential to grow income tax-deferred, until an income stream begins. Optional benefits are available for an additional cost. Variable annuities can help your clients accumulate assets for retirement and provide a guaranteed source of income that can last for life.

Asset allocation is a good way to mitigate investment risk, however, working alone it can't eliminate this risk. For a successful retirement plan, you must look to investment vehicles that offer your clients protection against loss of assets or income.

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Health Care's Weight

Any discussion of retirement planning
must address the need for health care reform

by Jennifer Warren

Jennifer Warren is managing director of the Retirement Security Institute, a Dallas-based research firm that develops education tools for retirement income planning. She is the author of the white paper Retirement Security in the 21st Century, from which this article is extracted. Warren can be reached at jwarren@retirementsecurityinstitute.com.

The U.S. health care industry, one of the most sophisticated, yet arcane of industries, is in need of the surgery similar to other industries for which efficiency has been forced. Health care consumption in the U.S. comprises about 16 percent of GDP according to the most recent data, reaching 20 percent by 2016, or $4.2 trillion.

While wealthier countries tend to consume more health care, the U.S. market is unhealthy with high inflation rates. Health insurance premiums rose 7.7 percent in 2006, and 6.1 percent in 2007, with a 100 percent increase in premiums since 2000 compared to 24 percent cumulative inflation and 21 percent wage growth. The health care market is less efficient because of the deep pockets of government, business, and individuals, which are arguably becoming more shallow.

Medicare is a good program for retiree Americans, yet we simply cannot all have as much health care as we would want. Our health care utilization rates imply perhaps more than might be justified. Perverse incentives and opaque cost structures abound in health care, and particularly in Medicare.

Unfortunately, Medicare has been a target of opportunism by some health care providers, most notably in home health care services now under greater scrutiny. Medicare now pays for 38 percent of home health care services.

Additionally, from 1993 to 2003, hospital patient care costs increased 81 percent, but their charges went up by 181 percent (charges are now two and a half times costs). Said another way, mark up of charges were 63 percent in 1992 rising to 155 percent in 2003. This lack of transparency about pricing makes the system complicated and disentangling the real issues for system reform difficult.

Growth in the volume of physician services was considerably higher in 2004 in Medicare. Minor procedures increased 18 percent in 2004 over a six percent annual growth rate between 1999 and 2003. Volume growth was seen in imaging services at 18 percent versus 10 percent growth rates over the same period.

These and other Part B costs have grown nearly 10 percent annually over the last five years with no change in sight. The net effect will be a rise in Part B premiums for the beneficiary. The Medicare Payment Advisory Commission reports, "It is not clear whether volume growth contributes to better outcomes." The payment systems implemented by Medicare in the late '90s were meant to control post-acute care spending, but they have grown seven percent annually since 1999. And Medicare is now the largest single-payor of prescription benefits through Medicare Part D, growing 11 percent annually up to 2017.

In the recent Trustees report, a 4.8 percent GDP growth rate was expected; these calculations are now wrong and will result in funding shortfalls as tax receipts are less than expected, owing to slower growth from the current recession. Medicare has a history of benefit growth being difficult to control and providers finding ways to work around Medicare. When cost restraints are imposed, costs have a tendency to shift to other types of services, when Medicare plugs one hole another one starts leaking. The health care industry has a long, painful process ahead to heal itself with outside forces at its doorstep, the new Obama administration. Spending should be viewed as holistic policy choices, considering the population at large, and not just vocal voting blocs or special interests with good "supporting" data. Policymakers will have to go beyond a few good ideas and address the incentives inherent in the open checkbook phenomenon of Medicare with the heavy lifting involved. The Obama administration intends to bring down costs by utilizing information technology and better disease management.

ERISA, the industry group which represents major employers, recently developed a comprehensive plan intended to simplify health care and retirement benefits universally. They too note that "weak incentives exist for both providers and consumers in the current health care system." They mention that providers who consistently try to manage care efficiently get penalized, while those who provide unnecessary care or game the system often profit.

Beyond the health care benefits provided by Medicare, long term care (LTC) services, needed for medical care, personal assistance, and social support as we age, continue to escalate in cost. LTC services are generally not covered by Medicare. The caregiving burden of LTC imposes significant financial costs, emotional costs, and even costs in the workplace as working adult children try to assist aging parents.

More consumer-driven choices in health care were thought to potentially save the day. When people are shopping more prudently for their care, they will economize, the theory goes. Savings vehicles such as the medical savings account or health savings account are available to some groups.

The jury is still out as to how they will manifest over time. The new administration is giving the reform debate more momentum, but any actions taken may not translate into quick results for those needing to plan, system reform will take many years, if not decades.

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The Fabled Wealth Transfer:
Urban Legend or Reality?

by Steve McNaughton and Dennis Roberts

Steven McNaughton is a senior managing director of McLean, Markowitz & McNaughton, the market intelligence and competitive analysis division of the McLean Group, McLean, VA. Dennis Roberts is Chairman of the McLean Group. They can be reached at www.mcleanllc.com.

While economists fret over quantifying and apportioning the fabled $10 to $136 trillion baby boomer's wealth transfer wave, mergers and acquisitions (M&A) practitioners, business valuators and other professionals, as well as small business brokers, need to plan for this: over the next 18 months in excess of 1,000,000 privately held businesses will change hands and many of them will require the assistance of one or more of these professionals. And, that's just the first set of breakers to hit the beach. A tidal wave of businesses being sold will follow.

According to the Federal Reserve Survey of Consumer Finances, 50,000 businesses changed hands in 2001, which was about average. By 2004, the Federal Reserve Survey reported the number of companies sold increased to 350,000, and it goes on to project that by 2009, 750,000 will be sold. This can admittedly be a little misleading: while there are 23,343,000 businesses in the United States, only 5,697,759 actually have employees, obviously leaving a lot of very small and homebased businesses (a total of 17,646,000 of them in fact). Nevertheless, these too will usually require some sort of support services in transferring the business to a third party.

But to put the real middle market baby boomer business transfer opportunity into perspective, consider this. The U.S. Census Bureau in 2002 estimated there are a total of 5,697,759 businesses in the United States with one or more employees (usually many, many more) with sales totaling in excess of $22 trillion.

Assuming a conservative 50 percent value to revenue ratio, that equates to a market value of $11 trillion. While census data indicates that many of these are small mom-and-pop businesses (79 percent of them in fact with under $1 million in sales), almost 21 percent, or 1.2 million, are middle market firms with sales of $1 million to $1 billion annually. Collectively these 1.2 million firms had sales totaling $9.8 trillion and carry a conservative market value of $4.93 trillion. Most of these, based on population data, will be sold or otherwise disposed of (left to family members, for example) by the baby boomers who own about 67 percent of those middle market businesses. In fact, based on the assumption that most of these will be disposed of by their owners at around age 65, there will be over 800,000 middle market businesses with an estimated total value of $3.3 trillion disposed of between 2011 and 2029. On average, about 43,000 a year from 2011 until 2029, and that is just the baby boomers and . . . just the middle market.

Almost 3.3 trillion of anything is a staggering quantity to grasp. For instance, 3.3 trillion hours ago was 150 million years before the first dinosaur existed.

When a three percent growth rate is incorporated, these numbers become much larger. For example, at three percent inflation for the next 18 years, the value of middle market business transfers from baby boomers alone could well exceed $6 trillion.

Will all the companies be sold? Probably not. Historically, one third will be passed on within the family and about two thirds will be sold. Price Waterhouse published in a Trendsetter Barometer Survey that 51 percent of business owners surveyed planned to sell their business to a corporate acquirer, 18 percent planned to pass it on to family members, 14 percent anticipated a management buyout, and the remaining 17 percent (although the article did not specify) must plan to take it with them or not pass it on at all.

Clearly, the degree to which the "Me Generation" boomers voluntarily (or not) turn over their wealth to "Generation X," remains to be seen. But based on the Price Waterhouse study, 65 percent of them will be sold and those will have an estimated value of almost $2.2 trillion dollars. The study suggests 65 percent of those businesses-with an estimated value of almost $2.2 trillion-will be sold, the remaining, one must assume, split between their heirs and the grave.

Just looking at the baby boomer population bell curve leaves a fair approximation of the coming prospect flood. When the tidal wave of baby boomer wealth arrives, obviously, has as much to do with the economy and interest rates as purely age, but judging from the Federal Reserve Survey, the selling wave has already begun.

To say the baby boomers dramatically impacted every market they touched is a gross understatement. For the past 60 years, the boomers have been the market. Now, how boomers dispose of their pool of wealth creates waves. This legendary wealth transfer, the "holy grail" of the financial planning industry, of course goes beyond just business transfers and sales and touches everything from insurance, savings, stocks, bonds, and mutual funds to annuities. These financial products, however, represent only half of the projected wealth transfer. The boomers' equity in residences, land, farms, personal property, and privately held businesses doubles any number. Even the IRS is salivating over the prospect of the projected $16 trillion tax bill the federal government will take off the top.

Estimating the size and allocating the disposition of this fabled wealth has preoccupied planners and economists for years and confused M&A practitioners as well. It is not uncommon for casual observers to attribute the "$10 trillion opportunity" to sales of businesses. But that is wrong. What we have done here is segmented that part of the wealth transfer in an attempt to clear up at least that aspect of the urban legend.

As to the urban legend itself, it began simply enough in 1990 when Robert Avery and Michael Rendell, both Cornell University economics professors, projected the WW II generation would pass on $10 trillion to the baby boomers.

Over time, like all legends it seemed to self-embellish. In 1999, John Havens and Paul Schervish of Boston College, two economists wearing bull-market spectacles, built a simulation model based upon combining what baby boomers inherited and what they earned. Havens and Schervish's wealth transfer number soared to $40.6 trillion when projected over 55 years.

Other economists, perhaps fueled by the prospects of federal grants, criticized Havens and Schervish's estimate as being too conservative because it lacked both middle and upper-range growth scenarios. A two percent secular growth rate only equates to $41 trillion. A three percent growth rate scenario would equate to $73 trillion, and a four percent secular growth scenario projects to $136 trillion. To finally cap the legend, staff economists at the Council of Economic Advisors adopted the $41 trillion figure as the "official projection" by 2052, and most accepted a more conservative discounted present value estimate of $33 trillion.

Now that you have the facts, feel free to distort them at your pleasure.

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How's your portfolio?

by Steve Selengut

Steve Selengut has been with Professional Portfolio Management since 1979. He is the author of "The Brainwashing of the American Investor: The Book that Wall Street Does Not Want You to Read", and "A Millionaire's Secret Investment Strategy". He can be reached at 800-245-0494 or at sanserve@aol.com.

Before Wall Street and the media combined to make investors think of calendar quarters as "short-term" and single years as "long-term", market cycles were used as true tests of investment strategies over the long haul. Bor-ing.

There were four types of standard analysis used by most financial institutions, Peak-to-Peak, and Peak-to-Trough being the most common. There were also basic differences in purpose and perspective in the old days, and a focus on results vs. reasonable expectations for actual portfolios.

Portfolio performance analysis was intended to be a test of management style and overall methodology, not a calendar year horse race with one of the popular averages. The DJIA was originally conceived as an economic indicator, not as a market-performance measuring device.

No real-life, personalized portfolio should ever be a mirror image of any other, or comparable to any particular market index. Analysis should be of process, content and operating strategy; the objective should be fine-tuning of either the philosophy or the discipline.

If the portfolio market value, in a Peak-to-Trough scenario, fell by a greater percent than the benchmark(s) being used, the overall approach would be looked at for reasons why. Was there excess speculation? Did interim profits go unrealized? Was an issue or a sector overweighted?

Theoretically, portfolios with 30 percent or more committed to income securities would fall less in market value than 100 percent equity portfolios, they would also be expected to rise less than their more speculative brethren in a Peak-to-Peak analysis. Formulating valid expectations are important for long-term investment success, and sanity.

November 1999 to Mid-March 2009 would have been the ideal analytical period for a Peak-to-Trough review of WCM (Working Capital Model) portfolios, but the November to May time period illustrates the cyclical approach to market value performance evaluation just as well, and the data was easier to obtain.

Here are seven tests you can use to determine how your investment portfolios (or your clients' portfolios) have fared since the stock market peaked toward the end of 1999, using a 60 percent equity/40 percent income, WCM asset allocation as an expectation producing benchmark.

Here's to a return to the boring investment portfolio.

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Things we can - and cannot - learn from squirrels

by Alisa Singer

Alisa Singer is a practicing corporate lawyer and artist. She can be reached at asingerauthor@gmail.com.

Back in the days when we were all fat and comfortable, wrapped in the security of our bloated brokerage accounts (who knew then that it was bubble wrap), people would talk about the "Number". In Baby Boomer parlance the "Number" is the amount of money you need to have in the bank to be able to retire and still maintain the lifestyle you so richly deserve and to which you have become accustomed.

Of course that's all academic now since none of us will be able to retire, ever, but back then I tried to think whom else do we know that faces similar issues that might be able to provide a guiding philosophy for this thorny question. And I thought of squirrels because they are obliged to make decisions like this every year during their entire adult lives.

You see, when squirrels gather acorns and nuts for the long winter they hide them either in one huge hole or, as the common gray squirrel does, in several hundred different places, exercising behavior known as "scatter hoarding" (what investment advisors would call portfolio diversification). The purpose of the hoards is to allow the squirrels to rest quietly in their nests during the winter, leisurely cracking nuts while watching reruns of American Idol, without ever having to shovel the walk or put up with unpleasant commuting conditions. Snuggled together, they leave their nests only as necessary to "carry out" from their various food caches (presumably the ones that don't deliver).

The specific thing I wondered about squirrels is how they calculate their "number". In other words, how does a particular squirrel figure out how many acorns and nuts he needs to maintain his standard of living during his season of "retirement" and can we borrow this instinct to help us to calculate when we finally have enough "nuts" so that we can stop hoarding and head home to our own comfortable nests.

I proceeded to research the subject in the way all of the finest academicians do, I Googled "squirrels gathering nuts". The result was disappointing. Rather than relying on some extraordinary scientific phenomenon it appears, according to Almanac.com, that squirrels simply "...gather food until there's no more to gather. They are rather greedy." (Yet another parallel to humankind, but not what I was hoping to find.) Okay, so the squirrel doesn't know any more than we do when it's time to get out of the rat race, even though he is, more-or-less, a rat.

It's amusing to try to imagine how the squirrel might handle the unanticipated loss of a significant portion of his portfolio of savings as a result of a forest recession or other Act of God. Would he immediately cut back on berries and nuts and switch to fungi, twigs and bark? Put the second nest up for sale? And is there such a thing as a bailout for squirrels and, if so, what would that look like? Would "they" somehow replenish the caches of squirrels that had imprudently loaned their hoards to other squirrels who wanted to buy nice fur-lined nests they couldn't afford and, if so, exactly who would "they" be? (Those are trick questions. The truth is there is no "they" since squirrels have no federal government to fall back on, which is bad news for them but then again, they presumably keep 100 percent of their income.)

There are other interesting facts about squirrels that I came across in my research, and I found the comparisons between male squirrels and male humans to be especially striking. For example, it appears that, like men, male squirrels require twice as much time as females to groom themselves. (Squirrels are the cleanest of rodents.) I can just see the female squirrel now, front legs folded, tapping her little paws and swishing her tail irritably � "You ready yet Rocky? Mother's been waiting in the hollow of the tree for 20 minutes already!" And, this next tidbit will come as no surprise, the male squirrel also seems to be "commitment challenged", abandoning the female promptly after mating, leaving her to raise the young alone.

But the most impressive information I unearthed about the squirrel is that, though his brain is roughly the size of a walnut, when spring arrives he is generally able to locate approximately 50 percent of the hundreds of places where he hid his hoard of nuts during the previous fall! I'm sure you can guess where I'm heading with this. How can this rodent, with his teeny hippocampus, remember where he hid all those teeny nuts six months earlier when you and I can't remember half the time which section in the mall parking lot we left our giant SUV, even though it was only an hour ago and we didn't hide it under several layers of dirt.

But surely the squirrel's enhanced memory skills are not an indication that he is more highly evolved than we are, because if that were the case, he would not be leaping from one treetop to another, kamikaze-style, without the benefit of a net (or at least a bungee cord). But come to think of it, perhaps the average squirrel is slightly more intelligent than mankind. After all, his investment loss ratio is roughly equivalent to what mine has been over the last year, and his fees are definitely a lot lower.

At the end of the day, sadly, it does not appear there is much we can learn from the ubiquitous squirrels that share our backyards, parks and the occasional attic. But there is one pretty important lesson we humans could certainly teach those squirrels, and they would do well to listen up. It goes like this: when you're standing on your hind legs in the middle of a road and you see four large round black rubbery things rolling towards you at an alarming speed, don't just stand there staring, drop the nuts and run like hell.

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Retirement security in the 21st century

Considerations and risks in building the infrastructure

by Jennifer Warren

Jennifer Warren is managing director of the Retirement Security Institute, a Dallas-based research firm that develops education tools for retirement income planning. She is the author of the white paper Retirement Security in the 21st Century, which is extracted here. Warren can be reached at jwarren@retirementsecurityinstitute.com.

America is at a crossroads as the large baby boom generation heads toward retirement. Retirement security is not what it used to be. Retirement costs more, lasts longer, and has different risks than for generations past.

Armed with knowledge, Americans can develop the infrastructure to safely cross the bridge of retirement. For well over a decade, both public and private sectors have known that the time of reckoning was coming, a time when responsibility would be needed by both sides to relieve financial pressures and ensure greater security for Americans. The current path of entitlement spending is unsustainable and another path which might prove more realistic is not clearly visible for those needing guideposts to make decisions.

The key forces to consider include: demographics, the overall economic climate and outlook, the political aspects of budget and policy directions, and how these forces are interplaying and creating new scenarios. The retirees most vulnerable to these changing forces are the bulk of retirees, Middle America. And one's retirement outlook is largely fashioned according to which generation one belongs and how one has planned or been advised to do so.

DEMOGRAPHICS

Demographic trends illustrate significant changes with the Baby Boomers set to retire starting in 2010. Projections show the 65-year and older population nearly doubling to approximately 71.5 million in 2030 from approximately 37 million in 2006. They will comprise roughly 20 percent of the population compared to 12 percent in 2003.

The average age of retirement is 63, and at the turn of the 20th century it was 74. Although people live longer today, those that did live longer in the past also worked longer. The retiree population will be large relative to working-age groups that are expected to pay for the current system of public retiree benefits, Social Security. Longevity is one issue driving the changing retirement paradigm. In 1935, the average 65-year-old worked until age 69 and spent eight more years in retirement. Advances in medicine and improvements in health conditions overall are allowing people to live longer, sometimes 15 to 30 plus years longer in retirement. This adds pressure and insecurity for the retiree, needing an income stream throughout the rest of his/her life.

The trend of longevity has just started to reveal the needs of the market health care, financial and otherwise. And with technological developments, we really don't know what array of new products and services will emerge, only that the retirement market offers significant prospects for change.

The retiring population of today is wealthier than previous generations of retirees. According to an Age Wave study by Ken Dychtwald, a foremost authority on aging, 42 percent of current retirees have high net worth ($364,400), 22 percent modest net worth, and 32 percent are of low net worth ($213,600). The 2008 Federal Interagency Forum report states that median net worth of households has grown by 81 percent between 1984 and 2005, from $109,000 to $196,000 (in 2006 dollars adjusted for inflation), averaging roughly four percent per year. Those with some college education or more had average net worth of $412,000, about six times more than those without a diploma.

Some additional public sector data on retiree income follows. The income status of those 65 years and older varies according to the number of income sources beyond Social Security, age in retirement, and marital status. In 1974, median household income was $19,086 growing to $27,798 in 2006. Income came from four main sources: Social Security (37 percent), earnings (28 percent), pensions (18 percent), and asset income (15 percent).

According to the Bureau of Census, in 1999, average Social Security income for those 65 and older was $12,300; retirement income from other sources was $17,900 annually for comparable households who received this type of income. Income from employer pensions or other sources steadily reduces from nearly 50 percent for 65 to 74 year olds to 39 percent for those 85 and older that have other income sources beyond Social Security. For those 80 years and older, Social Security and asset income become more important.

In 2005, over 55 percent of married couples age 65 years and older had household income greater than $35,000; 30 percent had incomes between $20,000 and $34,999. Typically, married couples are better off with two Social Security paychecks versus singles, with single women having less resources (income) than single men. Thus, women must plan for the long tail in retirement, when they tend to outlive their male counterparts.

The educational attainments of Americans have risen. In regard to the retiring population, about 38 percent of those 65 years and older attended some college or held a degree; the 25-year and older population had a 52 percent attainment rate. Trends indicate that those retiring increasingly possess education beyond high school.

Additionally, nearly 30 percent of those age 65 and older are still in the labor force. But as one approaches 75 years of age, the labor force participation drops significantly, as expected. Net worth rises significantly with educational attainment. Financial and economic education will be tantamount for retirement planning in this new paradigm, with a credible delivery source necessary. To help improve security in retirement, having some degree of financial literacy or a credible source with reliable data can greatly reduce the risk of being blindsighted by events beyond one's control. While information about retirement planning is plentiful, the bias, position or motivation of the information provider should be considered.

Read the entire report at www.retirementsecurityinstitute.com.

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Keep the family business running through the generations

by Gene Siciliano, CMC, CPA

Gene Siciliano, CMC, CPA, is an author, speaker and financial consultant who works with CEOs and managers to achieve greater financial success in an ever-changing economy. He can be reached at gene@CFOforRent.com.

Family run companies are in many respects the backbone of American business. They are typically the most stable of small businesses, with a much lower failure rate than other small business models. Some of the largest and most successful companies in America are family owned and operated, yet 70 percent of family run businesses don't make it to the second generation; a full 90 percent never make it to the third generation. These statistics are not new, but appalling just the same.

So why the high failure rate? Most experts chalk it up to poor succession planning, as if a plan would somehow make it all better. No plan will correct fundamental weaknesses in a business unless its managers recognize and address those weaknesses. These weaknesses prevent many family owned businesses from realizing much of their real potential.

Please understand, this does not mean all family run businesses are fundamentally flawed. However, those that do have problems are often emotionally unwilling to acknowledge them or, having acknowledged them, are unwilling to make the hard decisions necessary to fix them. While family run companies have a far better failure rate than the average of small businesses as a whole, this is still a pretty dismal record given the advantages such businesses typically have: loyalty, strong family support systems, management continuity, long training periods for the next wave of managers, love and affection, etc.

So here are some of the problems that often occur. If you're the founder of a family run business trying to groom a son or daughter to succeed you, you don't need to accept this list as your own; simply consider the possibility that some of these pitfalls may apply to your company. For example:

  • Your son simply may not be a very smart business person. He may have blindly copied your approach over the years, without developing the ability to devise and implement his own approach to problem solving, which is not a good shortcoming for the boss to have. All the love in the world won't fix this one.
  • Your daughter may have a very different management style than the one you used to build the business, and she may be successful only if she can adopt a style that works for her. Of course, if you don't trust any style but your own, that won't seem like a very good idea.
  • Your son-in-law may recognize that your way of doing things successfully 30 years ago just won't work today with more demanding customers, more aggressive competition, Internet options at every turn, and the big box competitor just down the street. If he sees that clearly and you don't, trouble lies ahead.
  • Your daughter-in-law may not have some of the skills needed for your type of business, yet be a very bright, alert, communicative person who commands respect. For example, a Phi Beta Kappa lawyer who steps into a company where she must be the sales manager is in trouble if her brilliance is mostly manifested at the PC keyboard or in a research library. Worse, you may refuse to see those shortcomings, preventing them from being addressed openly. Still worse, you may see them only too clearly, and use them as an opportunity to prove time and time again that no one can do it the way you did. This will invariably prove to be a self-fulfilling prophecy.

If anything sounds familiar here, perhaps your spouse has mentioned it a few hundred times, and you still can't see it, it is possible your eyesight is not what it once was; don't worry, it happens to the best of us. Here are some ideas to help improve your ability to pass the business along intact:

  • Treat your children like any other senior manager. Evaluate their performance formally and objectively (as you do with your other employees), and help them work out action plans to correct deficiencies before they become excuses to fail. A child who thinks this is unfair may need to be employed somewhere else for a few years to get a flavor of life on the outside.
  • Make a detailed list of the skills needed to succeed in your business. This list should not only include the ones you used to start the company, but the ones that will help the company grow in the environment in which it now does business. You may need help from impartial but knowledgeable outsiders to complete this one, but it's worth it. Then, build your would-be successor's grooming program around that list.
  • Get formal training for your children in the areas they need strengthening. Seminars or workshops on topics such as managing and motivating people, business planning and managing money can build valuable skills for your company as well as enhancing the personal growth of your children.
  • Rotate the assignments your children get in the company - to give them a strong sense of the company from every direction, not just the functional area they are best in or most interested in. If one of them is to become the CEO one day, he or she must have a total company view to be successful. Each assignment should be at least a year, so they get past the possibility of just "riding it out" and actually get into the meat of the job.
  • Ask the honest opinion of others in assessing the performance and potential of your children. They may very well see things you can't see despite your sincere attempts to be objective. Consider a 360-performance review process as a tool that might help your company team grow in addition to being a good way to get others' views of your children's performance.

Your son or daughter could be a great future CEO for your business. He or she has tools available that you didn't have when you started. He or she has the benefit of living in the culture of the business that you built. And he or she has time to prepare before taking on the responsibilities and challenges of the job. Take full advantage of all that potential and help maximize their potential. You'll be helping ensure the future success of your company and a stress-free retirement for you. That's worth a little advance preparation, don't you think?

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Good news from bad

How will your clients re-focus on the future?

by Herbert K. Daroff, J.D., CFP

Herb Daroff is associated with Baystate Financial Services in Boston. He is a contributing editor for LIFE&Health Advisor. Daroff can be reached at hdaroff@baystatefinancialplanning.com.

Your Business and Your Clients' Businesses

This is a good time to reflect on what has made your business succeed in the past. Have your gotten away from your basic core talents? Everything I learned about business, I learned from The Godfather, by Mario Puzo. Michael Corleone said to Tom Hagen, "You were a great peace-time consigliore, but who would be better than my father now that we are at war."

It takes different kinds of leaders and different kinds of advisors to help businesses grow versus helping them get through tougher times, or even downsize. Sales forces need proper management. They need compensation that creates incentives. They need tracking systems. They need to be accountable. Have you been following the right business model? If your focus has become solely assets under management, then you have just experienced a steep decline in your income without any change in your fixed expenses. Should your practice be more diversified?

In our practice, we have assets under management, but we also sell products designed to protect income and the value of assets (insurance and annuities), and we charge fees for financial planning advice. In up-markets, income from assets under management increase. In down-markets, income from protection products and fees increase. The same is true for your clients" businesses. Do they have too many eggs in one basket? Is a large percentage of their total sales and total profit generated from a few customers?

Does your business have too great a focus on transactions, instead of lasting relationships? Especially today, it is even more difficult to focus on relationships when cash flows are reduced. But, are you working on the right situations?

As Jim Collins asked in his book, Good to Great, "Do you have the right people on the bus?" And, I like to add, "Are you traveling on the right road?"

Do you use the current economic conditions to streamline and become more efficient, cutting costs? Or, alternatively, do you see great opportunity to grow your business now that others are having financial difficulties?

Personal Planning

We are all under a great deal of stress. I think this stems more from a lack of trust and confidence in our elected leaders than in the decline of the financial markets. Yet, in this economic downturn, we have opportunity to transfer wealth at values significantly lower than they were just six months ago. I have referred to this many times as the perfect storm of opportunity. Low values, low interest rates, and low tax brackets create leveraged gifting.

BUT, Bad News from Bad News

What goes up must come down, but it takes a great deal of work to get what's down back up. That"s Physics 101. A decrease of 40 percent (a drop of 40 points on 100, from 100 to 60) requires an increase of 66.67 percent (a gain of 40 points on 60, from 60 to 100). A planned increase of eight percent for nine years requires 12.13 percent compounded recovery if a 20 percent decline occurs in the first year.


Keep your perspective and maintain your client's focus

During both up-markets and down, our responsibility is to help our clients maintain perspective. One of my all time favorite quotes is from Benjamin Disraeli who said, "There are three kinds of lies in the world, lies, damned lies, and statistics."

Today, so much attention has been given to the "lost decade". For years, investment wholesalers promoted the fact that no 10-year period had ever been negative. Well, that's not true any longer. But, what is so damned important about 10-years.

Based on the S&P 500 on January 16, 2009 (from Money magazine March 2009):

  • $1.00 invested 10-years ago has declined in value to only $0.81.
  • However, that same $1.00 invested six years ago is worth $1.23.
  • And, if you invested a dollar 12 years ago, it would now be worth $1.35

    • This is not the first down market many of us have ever experienced. There was 1973 and 1987 and 200½002 and now 2008/2009, so far. The DJIA dropped from 2,200 to 1,700 on one unfortunate day in October 1987, but it has now grown in the intervening 21 years to 7,100 in October 2008. That's not bad growth. An investment of $1.00 at the beginning of January 1973 is now $22.76 (based again on the S&P 500)

    Please note that these figures will differ if any other individual dates and timeframes are used. Past performance is clearly not indicative of future performance.

    All I am focused on is keeping my perspective and helping our clients to do the same.

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