Boomers and Beatles:
Planning for “When I’m 64”
Boomer Planning
By: Martin M. Shenkman,
CPA, PFS, AEP, MBA, JD
General Disclaimer
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The information and/or the materials provided as part of this
program are intended and provided solely for informational and
educational purposes. None of the information and/or materials
provided as part of this power point or ancillary materials are
not intended to be, nor should they be construed to be the basis
of any investment, legal, tax or other professional advice. Under
no circumstances should the audio, power point or other
materials be considered to be, or used as independent legal,
tax, investment or other professional advice. The discussions
are general in nature and not person specific. Laws vary by
state and are subject to constant change. Economic
developments could dramatically alter the illustrations or
recommendations offered in the program or materials.
Boomers and Beatles:
Planning for “When I’m 64”
Introduction to the
Boomers
Boomer Estate Planning
“When I get older losing my hair…Will you still need me, will
you still feed me
When I'm sixty-four?”
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Retiring baby boomers will change the face of estate
planning just as they have changed the face of so
many other characteristics of society as they have
aged.
There are 75 million boomers in total.
Boomer Retirement
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An estimated 5 million baby boomers are retiring every year.
The baby boom generation is about to retire, and it has vastly
different wants, needs, likes and dislikes than the generations
before them.
Some 82 percent of working Americans over 50 say it is at least
somewhat likely they will work for pay in retirement.
Boomers plan to retire on average at age 71.2, up from 66.3 in
2007 and 68.6 in 2011.
Thirty percent expect to retire later than they had planned.
This will provide planners a growing stream of potential clients.
Boomers and Beatles:
Planning for “When I’m 64”
Alzheimer’s Disease,
Chronic Illness and
Other Challenges
Boomer#
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Fear of Alzheimer’s disease is high on the list of concerns of
many boomers.
While health concerns generally are a legitimate concern,
unless the client has a unique family history or current medical
issues suggesting it, Alzheimer’s disease is only one of the
many challenges that any boomer might ace as they age, but
the perception of the typical boomer seems quite different.
Preparing for health challenges that statistically increase with
later ages, as well as any challenge the client’s background
might suggest, should all be part of the planning process.
Health Challenges of Aging
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By 2030 it is estimated that 1/5th of all Americans will be age 65 or
older.
26% of those ages 65-74 are living with a chronic illness that has a
significant impact on their lives.
More than 5 million Americans are estimated to have Alzheimer’s
disease.
125 million Americans (45% of the population) have at least one
chronic condition.
60 million people (22 percent of the population) suffer from multiple
chronic conditions.
Approximately 400,000 Americans are living with Multiple Sclerosis
(“MS”).
Approximately 1.5 million Americans are living with Parkinson’s
disease (“PD”).
How can Planning for these
Boomer Clients be Modified?
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In addition to durable powers, health proxies and living
wills, more robust living trusts to protect the clients
through a long term disability could be used.
Living trusts should be funded today, not done as a
standby vehicle to merely avoid probate on death.
The terms of the living trust should be modified and
tailored to better address the issues of aging. Greater
consideration should be given to naming an institutional
successor trustee and providing succession/disability
provisions for the settlor that better address the realities
of chronic disease and acute illness.
How can Planning for these
Boomer Clients be Modified?
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Build in a monitor relationship to a power of attorney or
the client’s planning generally. For example, a CPA could
be sent copies of all monthly statements to create reports
and review them for obvious signs of financial abuse or
other problems.
Client’s finances can be consolidated to few institutions to
facilitate simpler management if the client faces health or
cognitive challenges.
A care manager can be integrated into the planning team.
Boomers and Beatles:
Planning for “When I’m 64”
Later Life Planning
Aging and Boomer Later Life
Planning
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It is anticipated that by the year 2050 nearly
20 million Americans will be age 85+. These
are issues and steps that many boomer
clients should take now, or when feasible, to
empower them to deal with what is almost
assuredly inevitable consequences of aging.
Yet many clients don’t address these matters
and most practitioners have not viewed these
discussions as part of their expertise.
Boomer Later Life Planning
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Later life planning is the future of estate planning for
the aging Boomer not subject to a federal estate tax.
It will also become a more important component of
the discussion for even wealthier clients given the
different attitudes and goals of aging Boomers as
compared to prior generations of clients.
What steps can the client take to assure that he or
she will remain in control over his or her assets for
as long as possible?
As a client ages, what can be done to minimize the
risks of elder financial abuse?
Boomer Later Life Planning
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While the prior generation of estate planning clients
was focused on saving estate taxes on the wealth
they spent a lifetime accumulating, the Boomer
clients who are the next vanguard of estate planning
clients are focused on assuring they will have
adequate cash flow for the duration of their lives.
This is not only a result of the demise of the estate
tax but more so as a result of increasing longevity
and the goal that those later years remain active.
Boomer Later Life Planning
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Most if not every estate plan includes the preparation
and execution of a durable power of attorney to
name an agent to handle financial matters in the
event of the client’s disability. Yet it is rare that
anything is done to address the practicalities of an
agent actually using a power of attorney.
Many boomers expect to live as much as 20-30
years after the traditional “retirement” age. Boomers
hope for those later years to be active.
The estate planning “conversation” has to be much
broader to remain relevant.
Boomer Later Life Planning
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What steps might help make those later decades
more secure so your client can enjoy them as much
as possible? These entail not only estate planning
steps, but financial planning, home design, personal
organization, and more.
Downsizing
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Downsizing: With aging and health challenges for many
boomers “less is more.” Less space means less to care
for, less time demands, etc.
Downsizing can eliminate family fights, protect your client
from an array of physical and other problems.
For those boomers expecting to remain very active in
their later years, their budgets may be more hefty than
prior generations of retirees. Downsizing, to the extent
that it is also “down-costing” with lower costs for a smaller
residence, may make those active later years more
secure.
Downsizing
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For boomers with less financial security, the downsizing
might well be an essential step in reaching towards
financial security in their later years.
Often moving out of a long time home is looked at as a
defeat and loss of independence. In reality, it can be the
opposite.
Moving to a home that is appropriately suited for the
client’s current and likely future health and other
challenges can be incredibly empowering, safer, and
foster the more active lifestyle many boomers seeks.
If a care manager (see below) is not yet involved, who
can guide the client?
Scanning
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Scanning: Many older clients have attics or basements
full of boxes brimming with old tax returns and financial
records.
It can be an impediment to downsizing, and a risk for
elder financial abuse.
The process of going paperless is daunting for most
clients.
Practitioners can guide or help with the process, proffer
advice as to which documents to retain (e.g., tax basis
documents, key legal documents, and so forth), and
which to shred.
Consider the reduction of the risk identity theft.
Digitizing
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Digitizing: Many boomer clients have scores of boxes in
our attic stuffed with bins of old 35mm slides and the
required videos of toddlers waving (and the parents
usually sporting clothing and haircuts that are presently
quite embarrassing).
Those priceless home videos degrade over time.
Once all this is digitized your client can then easily share
it.
Home Safety and Automation
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Home Safety: What safety features might or should the
client have in his or her home? Is it feasible to modify the
existing home or is relocating to a different type of home,
advisable?
Most people tend to ignore the realities of health
challenges and aging, often until an event occurs that
forces a change. For example, grab bars are essential in
bathrooms, but properly installing them requires blocking
in between the wall studs. To add this in an existing
bathroom can be incredibly costly.
Automation: Home automation can empower those
facing the challenges of aging or disability.
Minimize Elder Financial Abuse
Risks
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Checks and Balances: Building in
safeguards to the plan and legal documents
will grow in importance. These steps should
provide some protection from elder financial
abuse. Each year, it is estimated that 7.4% of
older New Yorkers experience elder abuse,
neglect, or financial exploitation, a huge
number that will likely grow as the population
ages.
Boomers and Beatles:
Planning for “When I’m 64”
Quicken
Quicken as a Tool for Later Life
Planning
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Guide clients to use Quicken, or any of personal checkbook
program, to address many of the critical and practical issues of
later life planning that otherwise are ignored. In coming years
this will represent a growing practice opportunity for the local
practitioner. It will fill a planning void many clients need
addressed.
Reminders can easily be set in Quicken so that clients don’t
overlook important bills.
A financial plan requires a realistic budget and an investment
plan built on financial targets. Once a client’s checkbook and
other financial transactions are computerized, it becomes a
simple task to generate current and prior year expenditures by
category and develop a realistic budget.
Quicken as a Tool for Later Life
Planning
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Boomers, plan active post “retirement” years. The term
“retirement” is in quotes because many Boomers plan to
continue working in some manner after the traditional
retirement age of 65. So if an active Boomer is on safari, how
will bills be paid? In the event of disability, who will handle
payments? Automating recordkeeping and bill paying can
facilitate this.
Once a client’s finances have been automated periodic
monitoring of Quicken records can provide protection.
The best guide to facilitate anyone serving as a fiduciary,
whether as agent under a durable power of attorney, successor
trustee under a revocable living trust, or in many other
capacities, are the Quicken reports any accounting practitioner
can readily assist the parent setting up.
Quicken as a Tool for Later Life
Planning
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A common provision in many powers of attorney is to
permit the agents to make gifts. Many standard forms as
well as attorney prepared documents have language that
in some form permits the agent to make gifts to
individuals or charities that the client has historically
made gifts to. How can one determine who gifts were
historically made to? While a Form 1040 might be useful
for purposes of charitable gifts, Quicken reports should
provide a comprehensive listing of all gifts to all people
that can support the actions of an agent.
Boomers and Beatles:
Planning for “When I’m 64”
Investment and
Financial Planning
Boomers Need Cash Flow
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Boomers will require adequate cost flow for a long
“post-retirement” period. For boomers with
inadequate savings this will be a tough challenge,
but essential. But even those wealthier boomers that
have saved may well remain concerned about cash
flow in light of the many post-retirement (however
that is defined) years, fear of Alzheimer’s disease,
and the desire for an active or charitably involved
later life.
Investment Returns
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The average investor's 20 year annualized return is
awful. The average investor earned 2.1% over the
twenty year period ended Dec. 31, 2011. How did
this compare to other asset classes? The S&P 500
returned 7.8%, while the Barclays Capital US
Aggregate Bond Index returned 6.5% over the same
time period. A 50/50 blend of these two asset
classes would have yielded a nominal annualized
return of 7.2%.
Asset Allocation
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What portion of a client’s portfolio should be allocated to
equities versus bonds? “The old rule of thumb used to be
that you should subtract your age from 100 - and that's
the percentage of your portfolio that you should keep in
stocks. For example, if you're 30, you should keep 70% of
your portfolio in stocks. If you're 70, you should keep 30%
of your portfolio in stocks. However, with Americans living
longer and longer, many financial planners are now
recommending that the rule should be closer to 110 or
120 minus your age.
Spending Levels
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The critical issue for many clients, however, is
determining an appropriate rate of withdrawal from their
savings to support their standard of living. At a given
withdrawal rate what is the probability of running out of
money before the end of the client’s lifetime? What ages
should be used for this calculation? How large a
probability of running out of funds is acceptable? 5%?
Higher? Bear in mind that an estimate for the client’s end
of life, not life expectancy, should be used. Too often
canned financial projections assume either life
expectancy or an arbitrary age that may not be relevant
to the particular client.
Spending Levels
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What allocation between different asset classes is reasonable
to support the desired withdrawal rate? While 4% was
considered a reasonable withdrawal rate by some is that really
a realistic rule of thumb?
Overall, the initial withdrawal rate that would work for a 60/40
portfolio over any particular 30-year time horizon has varied
between 4% and 10%, with the median close to 6.5%. But since
we don’t know whether the next 30 years will be a period of
high, low or average returns, the idea is simply to treat every
time period as though it might turn out to be the worst. A 4%
spending rate is too conservative in most cases. Spending can
be increased by 10% any time the portfolio rises more than
50% above its starting value.
Boomers and Beatles:
Planning for “When I’m 64”
Charity and
Volunteerism
Boomer Charitable Giving
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But for many boomers, their unique manner of
charitable giving, quite different from prior
generations, may have little tax planning import.
Millions of boomers are following the model of Bill
Clinton or Bill Gates and starting a post-retirement
“encore career,” using their skills in the service of
some higher cause -- education, health, the
environment, social welfare -- for little or no pay.
Questions of what expenses can be deducted for
these efforts, rather than how to structure a donation
of appreciated stock, might be more common.
Boomer Charitable Giving
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The client can include in his or her durable power of
attorney the right to make charitable gifts.
In some instances the client might leave a personal
letter to the heirs to make the charitable gift so that
they will benefit from the income tax deduction.
Likely boomers will endeavor to structure charitable
giving to meet personal as well as charitable goals.
Gift annuities may become more common to satisfy
the dual goals of charitable intent and desire for
certainty of cash flow.
Donor Agreements
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Boomers might want more input to how their
charitable dollars are used rather than
merely making a donation to their designated
charity’s general fund. Assuring that a
specific charitable intent is carried out will be
enhanced by a carefully crafted donor
agreement between the client and the target
charity in advance of the gift being
consummated.
Boomers and Beatles:
Planning for “When I’m 64”
CRTs
Boomer CRT “Retirement” Plan
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A CRT plan can be tailored to mimic something
analogous to a retirement plan. This is a technique
that might find a lot of interest amongst boomers
seeking to assure cash flow for what they might
anticipate to be decades of later life.
A NIMCRUT may be the ideal CRT for a baby
boomer client/donor planning for retirement because
it addresses the issue of a time lag in selling
property and provides upside protection against
potential (perhaps likely) future inflation.
CRT IRA
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Combine IRA planning and CRUT planning.
The planning focus for IRAs has generally
been to stretch out payments for as long as
possible to defer income tax. Under current
law, a beneficiary may defer distributions
over his or her remaining life expectancy,
which often runs to about age 83+.
CRT IRA
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Name a CRUT as beneficiary of their IRAs. This approach may
be ideal for baby boomers in their second or later marriages,
and who have some of their 1970s idealism intact. Many
taxpayers named a bypass trust as beneficiary to use up their
estate tax exemption, benefit their surviving spouse, and assure
that the value would not be taxed in the survivor’s estate.
Naming a two-generation charitable remainder unitrust (CRUT)
as beneficiary may be a preferable option. The surviving
spouse could receive an annuity for life, e.g., 5% of the value of
the trust each year. This might be quite similar to what the
surviving spouse might have received from the payment of
income from a bypass.
CRT IRA
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When the surviving spouse dies the annuity stream could
then be paid to the children (e.g., to children of a prior
marriage – boomers have a higher divorce rate than all
preceding generations) for their lives. There would be no
income tax triggered by the transfer from the IRA to the
CRUT as a tax exempt trust. PLRs 199901023 and
9820021. On the death of the last child whatever assets
remained in the CRUT would pass to charity. That might
be consistent with the charitable objectives that may
become a more common goal of estate planning in the
same manner that boomers redefined every other social
institution over their lifetimes.
Boomers and Beatles:
Planning for “When I’m 64”
Conclusion
Conclusion
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Boomers will represent an increasing portion
of estate planning clients.
Planning will be different.
Not only are tax laws different but goals and
objectives are different than prior generations
of estate planning clients.