The value of retirement plans for many Americans has been dropping due to the falling stock market. People, especially those who were and are planning to retire within the next several years, are worried about what this means to their retirement plans.
As important as the decline has been, there has been greater concern for those looking to retire within the next few years. Those people are concerned with how they’ll be able to replace the income lost due to retirement.
The landscape of retirement planning changed in 1986 when congress acted to establish Defined Contribution Plans. The Defined Contribution Plan, including 401(k) and 403(b) plans, replaced the Defined Benefit Plan, traditional pensions for many workers.
This was the most significant change in retirement planning since 1875, when the first U.S. corporate pension plan was established. This change also shifted the retirement income responsibility from the employer to the employee, meaning that the employees select the investments that will eventually fund their retirement.
Because of this shift, many in the “baby boomer” generation (those born between 1946 and 1964) will be among the first to retire and not receive traditional pension checks since the late 19th century. People are concerned due to the -38.5 percent return of the S&P 500 in 2008.
“The main concern for all investors is the substantial drop in their account values,” says James C. Kaiser, an insurance and financial advisor with Brentwood Advisors.
Smart Business spoke with Kaiser about how to work with your bank and financial adviser on what to do if you are looking to retire within the next few years.
How can retirees and soon-to-be-retirees work with their banks and financial advisers to make the best of these changes?
Banks and financial advisers can be great resources. Because the retiree already has an established relationship with his or her bank or financial adviser, there is a comfort level. This relationship should lead the retiree to ask if and when he or she can retire and what approach should be taken. There must be a close relationship between the client and his or her financial adviser. The more the financial adviser knows about the client’s needs, goals, desires and fears, the greater the client can be served. Communication is the key ingredient in the financial planning process.
How can you make up for the income lost to retirement?
By working closely with your financial adviser. Because each client is individual and unique, each solution must be tailor-made for each client. The adviser must understand the client’s investment needs, goals, risk tolerance and time horizon. For some retirees, the need may be current income for themselves. Others may need to protect the income for their spouses, children and grandchildren. Solutions may include investments, long-term care, disability insurance and life insurance.
What advice would you give those looking to retire this year to make sure they get the most out of their retirement plan?
The approach should be holistic and multifaceted. There are six key areas to focus on:
No. 1, because the needs in retirement will be the same as past generations, work closely with your financial adviser to establish a budget so essential needs (housing, transportation, utilities, insurance, health care, personal care, food/meals and taxes) will be met.
No. 2, budget for discretionary needs (vacations, travel, family/friends, education and charities).
No. 3, have emergency funds available for unforeseen expenses.
No. 4, invest for growth as a hedge against inflation. Take this statistic, for example: If a married couple retires when both people are age 65, there is a 90 percent probability that one of them will live to the age of 80, and a 50 percent chance that one of them will live to the age of 90. Therefore, you need to plan long term.
No. 5, it is important to monitor and review all aspects of the plan on a regular basis, especially in these volatile markets. Meet or speak with your financial adviser accordingly.
No. 6, your plan should be flexible. This allows for changes as your needs and goals change.
What are the benefits of working with a financial adviser to deal with retirement planning and market changes?
Your financial adviser is your financial doctor, and it is his or her job to to help replace the income lost due to retirement. The more information and communication between the client and financial adviser, the better he or she is able to help with your short-term, intermediate-term and long-term goals. Remember, retirement is a stage of life, not the end of life.
JAMES C. KAISER is an insurance and financial advisor with Brentwood Advisors. Reach him at firstname.lastname@example.org or (412) 409-9100.