A BRAVE NEW FINANCIAL WORLD FOR BABY BOOMERS

On any given day, you will find not one but several studies that examine the current state of affairs for Baby Boomers, the 77 million Americans born between 1946 and 1964 that are now slowly approaching retirement. And what’s emerging is an interesting, though at times bleak, picture of one of the most analyzed groups in America.

Here are some of the highlights of that research and the financial planning implications.

Retirement security: The 2006 Employee Benefit Research Institute's annual retirement confidence survey recently reported that just 25 percent of workers are very confident about having adequate funds for a comfortable retirement. In some ways, that should come as no surprise given that half of all workers say they've saved less than $25,000 toward retirement, and even among workers 55 and older, more than four in 10 have retirement savings under $25,000. The implication for workers is that they will need to start saving more money toward retirement, with some financial planning experts suggesting that workers might need roughly 20 times their annual pre-retirement spending set aside toward retirement.

What’s more, workers are underestimating the percent of retirement income they might need in retirement. At present, many financial planners suggest replacing at least 75 percent of pre-retirement income in retirement, if not 100 percent given longer life expectancies and increasing healthcare costs.

Retirement is a state, not a date. A new MetLife Mature Market Institute study indicates that 78 percent of respondents age 55-59 are working or looking for work, as are 60 percent of 60-65 year-olds and 37 percent of 66-70 year-olds. Across all three age groups, roughly 15 percent of workers have actually accepted retirement benefits from a previous employer, and then chose to return to work or are seeking work. These employees, who have become known as the ‘working retired,’ represent 11 percent of 55-59 year-olds, 16 percent of 60-65 year-olds, and 19 percent of 66-70 year-olds. Their motives for doing so are mixed, with 72 percent of those age 55-59 (and 60 percent of those age 60-65) citing the need for ‘income to live on’ as a primary reason for working, but among 66-70 year-olds, 72% percent of employees cited the desire to ‘stay active and engaged’ as a primary reason to work, followed by ‘the opportunity to do meaningful work’ (47 percent) and ‘social interaction with colleagues’ (42 percent). Of note, many financial planning experts suggest that working part-time or full-time during retirement years is one way to make up any retirement income shortfall. But odds are high, about one in two, that some workers will be unable to work during retirement because of an illness or disability, corporate downsizing and restructuring, or the need to provide financial support to a family member of loved one. And it’s also important to understand the tax issues of working during retirement.

In the meantime, much has to change in America to make the workplace of the future “work” for boomers. According to AARP’s “Reimagining America,” pension and other laws need to change for older workers so they don’t get penalized for working longer. Employers need to accommodate the needs of older workers, providing flex-time schedules or low-stress jobs, and older workers need to invest in education and skills-training to meet the demands of a constantly changing market for skills, knowledge and experience.

Healthcare costs: A recent Fidelity Investment study suggests that a 65-year-old couple retiring today will need about $200,000 set aside just pay for healthcare costs in retirement. The 2006 estimate, which assumes that the individuals do not have employer-sponsored retiree healthcare, includes expenses associated with Medicare Part B and D premiums (32 percent), Medicare cost-sharing provisions (co-payments, coinsurance, deductibles and excluded benefits) (36 percent), and prescription drug out-of-pocket costs (32 percent). It does not include other health expenses, such as over the counter medications, most dental services and long-term care. And many employers who offer (or had offered) some level of retiree healthcare benefits, are now phasing out or significantly constraining such benefits because they feel they can no longer afford them in the current competitive global environment. While it is uncertain exactly how much of a burden will be placed on the shoulders of retirees for these costs, it appears likely that the costs will “eat up” an expanding portion of retirees’ savings and investments during their golden years.

Given that the average balance in a 401(k) retirement plan for a Baby Boomer turning 60 is now $100,000, financial planning experts suggest that workers will need to plan on funding retiree healthcare expenses in a variety of ways, such as health savings accounts. In addition, those who are able may need to continue working for employers that provide health insurance or retiree health insurance plans.

Volunteerism: Half of Americans age 50 to 70 want jobs that contribute to the greater good now and in retirement, according to a MetLife Foundation/Civic Ventures New Face of Work Survey. According to that survey, Baby Boomers will invent not only a new stage of life between the middle years and true old age but a new stage of work. “Boomers may give back as volunteers, but this survey suggests that their most important contributions to society will likely be through work,” said the study’s author. The planning implication is that Boomers should consider volunteering now, if able, to get a sense of what sorts of work and organizations will best suit them in retirement.

The reality for Baby Boomers is that they’re living longer, fuller lives. They need the help of planners now more than ever.

April 2006— This column is produced by the Financial Planning Association, the membership organization for the financial planning community, and is provided by Hillebrand Financial Planning, LLC a local member of FPA.

A NEW APPROACH TO SELECTING A FINANCIAL PLANNER

Selecting a financial planner has never been an easy task. Yes, experts have long advised checking such things as a person’s experience and education, as well as their regulatory record. But in recent years, selecting a planner has become especially difficult given so many financial professionals, including stockbrokers, insurance agents and bankers, often provide similar services, such as comprehensive financial plans and investment products.

Resolution of an upcoming court case involving the Financial Planning Association® (FPA®) and the Securities and Exchange Commission (SEC), may soon make it easier to tell the difference between a financial planner and other types of financial and investment representatives.

In the meantime, however, experts say there are a number of ways to distinguish a financial planner from other types of financial professionals.

Consumers should focus on the following issues: regulation, fiduciary responsibility, disclosure and values. First, the issue of regulation. The SEC regulates the actions of registered investment advisors (RIAs), some of whom are financial planners and some who are also investment advisers who do no financial planning. By contrast, NASD regulates the actions of registered representatives, or what are more commonly called stockbrokers, and insurance agents who deal with securities and mutual funds.

The SEC regulates the actions of financial planners, who must comply with the Investment Advisers Act of 1940. Under that Act, financial planners must provide—and periodically update—clients and the SEC (or state securities regulators) with information about themselves and their records; brokers are required to provide much less information. Financial planners also perform more comprehensive services for clients, including recommendations of appropriate asset allocations. Brokers need only recommend (and handle orders for) securities purchases and sales, being careful to limit recommendations to those which they consider “suitable.”

In short, RIAs who are financial planners are obligated to place the clients’ interests above their own. Stockbrokers were traditionally exempt from registering under the 1940 Act and were exempt from fiduciary responsibility when buying and selling securities on behalf of their clients, including non-discretionary accounts. Therefore stockbrokers need not place their clients’ interests above their own but merely meet the standard of “knowing their customer” and making “suitable” recommendations. In many cases, stockbrokers or insurance agents who provide a financial plan or investment plan do so as an “incidental” service. According to FPA, the current SEC rule presently allows stockbrokers to avoid the fiduciary and disclosure standards of the 1940 Act while being able to provide the same services as financial planners. The SEC presently prohibits stockbrokers from calling themselves financial planners, although it allows them to use similar titles such as financial consultant and financial advisor, and to provide fee-based advisory services such as retirement planning under more lenient broker-dealer sales regulations.

As for disclosure, financial planners who are registered as RIAs with the SEC are required to disclose conflicts of interest and their qualifications.

Of note, financial planners (and others) registered under the Investment Advisers Act face the risks of higher liability for violating fiduciary and disclosure standards; brokers registered only under the Securities Exchange Act of 1934 are not considered fiduciaries and do not have to disclose as much about themselves and their businesses. Insurance agents who call themselves financial advisers may face even less regulatory oversight than brokers.

When searching for a financial planner, consumers might consider asking whether the financial planner is legally required to act in the client’s best interest, and whether the broker’s recommendations are “solely incidental advice” or not. This is especially important given that both financial planners and stockbrokers may derive compensation from fees based on percentages of assets managed and/or hours of consultation and related services. Brokers offering fee-based advice must also provide a consumer warning statement to new clients that the account is a brokerage, and not an advisory account.

When searching for a planner, it’s typically a good idea to take advantage of resources that provide access to financial planners. FPA’s PlannerSearch, which can be found at www.fpanet.org/public, is one such service. In addition, FPA has several consumer publications designed to help people choose the right planner to meet their needs. FPA suggests that consumers request a written disclosure document from the planner, such as the Form ADV. Consumers can also review the NASD Web site to find disciplinary action taken against registered persons. The Form ADV answers many questions, including those regarding a planner’s work, disciplinary actions, experience, compensation, method of planning, areas of specialization, and business relationships the planner has that might present a conflict of interest. Consumers may also want to ask whether a potential planner will provide an Agreement of Engagement Letter documenting and describing all services to be provided and all fees that will be paid by the client -- and/or all compensation to be received by the planner from “outside” sources.

Some further issues to consider when selecting a financial planner:
Experience with the client’s issues
Credentials and education
Price and methods of compensation
Investment philosophy
Approach to financial planning

Since trust is at the heart of any working relationship with a planner, it’s important that the consumer work with someone whose actions and words are consistent with the letter and spirit of laws and rules related to financial planning.

April 2006— This column is produced by the Financial Planning Association, the membership organization for the financial planning community, and is provided by Hillebrand Financial Planning, LLC a local member of the FPA.

ALTERNATIVES TO TRADITIONAL INVESTMENTS

Investors sometimes get bored with traditional investments, such as U.S. stocks, investment-grade bonds, and the mutual funds that are invested in those asset classes. Especially when such investments fail to generate adequate returns as they did in 2005. And when that happens, investors often tend to hunt for what some refer to as “alternative” investments, investments with exotic names that hold out the promise of higher returns.

Alternative investments are, in simple terms, nothing more than investments that offer investors the chance to diversify their portfolio with instruments that may reduce overall risk of the portfolio and potentially improve returns. Typical alternative investments include hedge funds, commodities (futures and options), direct ownership of real estate, REITS (public and private), limited partnerships, private-equity funds, venture capital or angel investing, mutual funds (absolute return funds, long-short funds, and covered writing funds) and managed futures.

Besides the potential for higher returns and lower portfolio risk, alternative investments also have these general characteristics: higher fees, higher investment minimums, minimum net worth and income requirements for investors, and illiquidity (3 to 5 year commitments are not uncommon). In addition, investors may find it difficult to find appropriate benchmarks against which to measure performance and risk, unlike, for example, using the Dow Jones Industrial Average or the S&P 500 to measure the performance of stocks.

As with all investments, alternative or not, it would be useful to remember what the Romans used to say: “caveat emptor” - or “let the buyer beware” – when researching such investments.

So, if you are considering adding alternative investments to your portfolio be sure to get a sense of your current assets’ combined potential for return and risk and consider whether it would be realistic to make changes that could significantly enhance your potential return without an excessive increase in your potential risk. Often, a major benefit of adding alternative investments is that it tends to reduce the overall risk of a portfolio because the value of such investments doesn’t always follow that of stocks and bonds. In other words, traditional investments and alternative investments are not “correlated.”

Here’s a closer look at some of the more common alternative investments out there:

Hedge Funds. Hedge funds are nothing more than investment partnerships and, as such, are often precursors of mutual funds. Some do nothing more than allow the investor to share the results of the expertise, experience and talents of a respected manager. Others may pursue very conservative strategies focused on principal protection. The key thing to recognize, according to financial planners, is the focus on absolute returns as opposed to relative returns and benchmarking. That said, it’s important to note that hedge funds may resemble mutual funds but are far from identical. For instance:

The costs of owning them are a lot higher because they not only charge annual management fees (around 1-2 percent), they also commonly charge performance fees of 20 percent of the funds’ profits.
They may use speculative techniques, such as borrowing money to supplement investors’ money and investing in illiquid securities that can make them more risky.
Neither the funds nor most hedge fund managers are required to register with the SEC.
Because of their higher level of risk and little or no SEC oversight, hedge funds tend to be made available only to the wealthy—those who have net worth of at least $1 million.
They may only accept redemption requests quarterly, as opposed to daily, and may impose “lockup” periods of a year or more during which no shares may be redeemed.

Futures and Options. Futures contracts commit you to buying or selling something for delivery in the future at a certain price while options contracts give you the right—but not the obligation—to do so.

Once primarily used for agricultural commodities, futures contracts now are also available in a growing variety of markets from metals and fuels to financial instruments including foreign currencies, U.S. and foreign government securities, and U.S. and foreign stock indices.

Prices can be highly volatile to reflect ever-changing balances between supply of and demand for the underlying assets.

Precious Metals. The volatility of the price of gold, for example, the most widely watched metal worldwide, illustrates why it is, at best, a speculative asset when not purchased for actual use. Now trading near $600 an ounce, it remains far below its all-time high of around $1,000 about 25 years ago—but more than double its most recent lows around $250 at the end of the 1990s.

Anyone who bought gold 25 years ago as a long-term investment and held it would have lost a lot of money if he or she sold today—not to mention the missed opportunities for capital gains in securities. The lesson to be learned is that alternative investments are available for those who want to diversify their portfolios, however, they should be fully understood before you invest in them.

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April 2006— This column is produced by the Financial Planning Association, the membership organization for the financial planning community, and is provided by Hillebrand Financial Planning, LLC a local member of FPA.