For almost the next 15 years, every day more than 10,000 baby boomers will retire or consider retiring. The first wave of retirement for this Boomer generation already began about five years ago. And for those already retired, it may be time to revisit the changing financial and economic landscape that is influencing their retirement income planning.
Let’s address a few common challenges to retirement cash flow. What amount of income is specifically needed in the “Golden Years” to maintain cost of living in an inflationary and uncertain economy? Inflation reduces the buying power of money, meaning more dollars in the future will be needed to replace what one dollar can buy today. Traditionally, previous retirees, such as those in the Greatest Generation and Silent Generation, relied on a certainty of fixed income (pensions, Social Security and the like). They believed their expenses would be less in their retirement years. However, the typical baby boomer has no corporate pension and faces ever-increasing expenses relative to their life-style choices, as many boomers view retirement as a time to reinvent themselves.
The first thing to do is create a personal income and expense sheet. Uncover what is being spent today. Once that is completed, consider future, recurring obligations that will need addressed without the benefit of having predictable employment income. The first transition every retiree faces is: “income will no longer come from employment; cash flow during retirement has to come from the return on the total assets that have been accumulated and how long that capital will last.” The foundation for a solid retirement plan is built on managing expectations within a financial and life-plan goals relative to income sources, assets, liabilities, liquidity and overall net worth.
Boomers have more than just their own expenses to consider, however. Known as the “sandwich generation,” they still have obligations to children and heirs, and they may eventually have to deal with aging parents and relatives as well.
Are boomers prepared? Here are a few other facts to consider:
- The global economic volatility of the financial markets, the ever-increasing rise of consumer debt, and other issues — such as medical expenses, sustainability of Social Security/ Medicare/Medicaid, just to name a few — has resulted in the virtual disappearance of any “standard” retirement age. The new trend among boomers is to delay formal retirement.
- Americans now owe more than $1.5 trillion on student loans.
- U.S. credit card debt is more than $620 billion.
- At the end of 2017, total consumer credit had risen greater than $3.84 trillion according to the Federal Reserve. This includes credit-card debt, auto and student loans, but not mortgage-related debt.
What if the boomer has co-signed and/or guaranteed college loans or has assumed other debt to help children’s education or an immediate family member’s financial burdens? How will that impact cash flow during retirement years? What if children/relatives become dependent on the retiree for an extended period? What emergency reserve is available?
With the bulk of boomers’ savings and investments allocated within IRA(s), 401(k)s and other similar pre-tax accumulation vehicles, the current gross value of those accounts is all subject to federal and state income taxes. So, retirees must be mindful that each dollar withdrawn will require taxes paid if those proceeds are used to cover unexpected obligations. A well-designed strategic and tactical financial and life-plan would identify and anticipate the most appropriate way to address these cash flow commitments.
Baby boomer business owners have an additional retirement cash flow “wrinkle” if they have not properly addressed creating a successful continuation and succession plan. Successful business continuation and succession planning is a combination of art and science, not just a series of contracts, numbers and documents. Business assets/obligations are interrelated with the family’s other assets/liabilities, and the emotional needs of the business-owner family must be addressed within the succession plan.
In advance of retirement, start by securing the services of a credible and unbiased business valuator, and understand clearly the basis for the valuation. Not only will accurate business valuations allow a seller to strategize income potential, it will also provide the buyer with financial metrics to accurately price the current market value of the enterprise. The business valuation should also address the disposition of and/or the impact of existing liabilities on the future business performance and on cash flow from the sale of the entity.
Put aside personal feelings and expectations about tradition and keep succession planning about finances and business. Identify family members’ interest in being involved in the future business and accordingly incorporate their roles (or their lack thereof) in the succession plan. Boomer business owners should recognize how much personal worth is the business and realize the impact it will eventually have on total net worth and cash flow. A business is another portfolio asset that will be integrated within the holistic financial and life plan to help ensure maximum cash flow for a comfortable retirement cash flow.
Work with your financial advisor now to determine strategies that can strategically integrate your business plan into your personal financial plan and retirement income scenario.
Contact Robert A. Valente, CFP®, AEP® for more information on this topic.
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