Jeffery Smith, a hard-charging attorney in Inverness, Fla., is 64 and starting to think about retirement. He spent his career split between private practice, as a criminal attorney handling homicides and narcotics cases, and as a prosecutor for the state. While he has thought about retiring, he has kept pushing back the date. Now, Smith says, he's got two cruises planned, and figures on retiring next year, or in 2014 at the latest.
But don't count on Smith to cut back his lifestyle, which includes boating, fishing, hunting, and traveling, as well as visiting the grandkids, once he quits working. "My wife says if I retire, it'll interfere with her social life," he says with a laugh. "I intend to do a lot more traveling, and some huntin' and fishin'."
Like an increasing number of well-heeled baby boomers, Smith figures on living la dolce vita throughout retirement. Unlike the average American retiree, whose difficulties have been well documented, Smith is in the sweet spot financially: Spurred by his own parents' financial struggles — his dad was an Edsel dealer — he has contributed the maximum to his retirement accounts for years, building a solid seven-figure nest egg. And because he has been gifting money to his kids and grandkids for years, too, Smith isn't really worried about how much will be left for them when he goes. "I intend to enjoy my retirement," he says.
Smith's attitude toward spending in retirement, rather than cutting back to leave a bequest, reflects a broad shift in the attitudes of wealthy baby boomers, compared with older and younger generations. In a recent study by U.S. Trust of people with at least $3 million in investable assets, just 55% of the boomers surveyed said they believed that it is important to leave a financial inheritance for their children, compared with more than 70% of both the older and younger generations. Among the boomers who disagreed, 57% argued that each generation should earn its own wealth; 54% said they preferred to invest in their kids as they were growing up.
"It's been a paradigm shift," says Mark Sear, a partner at Luminous Capital in Los Angeles, who works with many wealthy boomers on their financial and retirement planning. "Ten years ago, leaving money to the kids was the most important. This generation is a little more comfortable with spending that money, and how much is left over comes second."
This may reflect both shifting attitudes among what has sometimes been termed the Me Generation, as well as the baby boomers' financial realities four years after the 2008 crash. Not only did most people's portfolios take a hit, but today's low interest rates have made living off investment income (plus Social Security and any pensions) in retirement much tougher. Add a volatile stock market, rising medical costs, and a weak economy, and fewer people of any age can count on having cash left at the end of their lives.
"Ten years ago, everyone talked about the multi-trillion-dollar transfer of assets to the next generation," says John Rafal, founder of Essex Financial Services, in Essex, Conn. "It's not happening, or if it is happening, it's not in the trillions of dollars."
For baby boomers staring down retirement, the upshot is that even those with seven-figure portfolios must make choices. Go to Italy on a bike trip at age 65, or put the cash aside for the grandchildren's college educations? Buy a boat, or donate to charity? Work a few more years to delay tapping those retirement assets, or take more risk in the portfolio?
The array of potential choices — combined with better health and longer life spans — means a new way of looking at retirement. And while that has been an incredibly tough thing for many Americans to handle, for baby boomers lucky enough to have saved a substantial amount of cash, it can be quite liberating.
"When you think about the baby-boomer generation — and I am part of it, in full disclosure — it's the 'forever young' generation," says Keith Banks, U.S. Trust's president. "And the interesting thing when you talk to the baby boomers is that they never talk about retiring. They talk about the next chapter or the new beginning or the next endeavor. They don't think about themselves as retiring."
Back in 1997, Stephen M. Pollan, a financial advisor on New York's Upper East Side, and Mark Levine wrote a book called Die Broke that argued for rethinking retirement. "Creating and maintaining an estate does nothing but damage the person doing the hoarding," they wrote. "It will force you to put the quality of your death before the quality of your life. You'll be forced to choose not to spend on something for yourself, so your kids can use the money."
By giving up on the goal of bequeathing an estate to the next generation — which, Pollan argued, made sense in an era of tangible assets, like family farms, but not financial ones — you could focus on helping your children while they were young and needed it most, stop worrying about the dysfunctional family dynamics that can happen when money and inheritance is involved, and live a richer life yourself. At the time, it might have been a radical argument — akin to saying that the traditional rules of retirement planning no longer applied — but today the idea of working longer, giving money away while you're alive, and reinventing retirement has gone mainstream.
In one high-profile example of a die-broke strategy, Chuck Feeney, founder of Duty Free Shoppers, has been working his darnedest to give away a roughly $8 billion fortune through his foundation, the Atlantic Philanthropies. Feeney, now 81, told the New York Times recently that he wants his last check to bounce.
While Feeney's billions are rare, his decision-making has become more commonplace. More of the wealthy (ranging from George Soros to Michael Bloomberg to Pierre Omidyar) are giving away vast sums, rather than hoarding the money until they die. And more baby boomers are looking to have it all in retirement — just as they did before they stopped working.
"The generation before the baby boomers was more afraid of running out of money," says Kathy Roeser, a wealth advisor in the Chicago office of Morgan Stanley Wealth Management. "They just hoarded their money and didn't spend it. It was the Depression-era mentality. The baby boomers have a higher standard of living and are used to spending more. They have the attitude of, I want to make sure I take care of myself before I take care of my kids."
These attitude shifts mean there are more options for those who are thinking about retirement sometime in the next decade or who have recently retired.
For some people, the traditional retirement strategy remains the best option: Build a big nest egg, and plan to withdraw 4% a year — or less, given today's extraordinarily low interest rates — so as not to touch the principal. If you expect to live to 100, or you want to leave a bequest, that's the best way to conserve funds with the least risk.
For others, who don't care about leaving cash behind, starting with a low withdrawal rate and increasing it over time (perhaps after age 75 or 80) will allow a better lifestyle in retirement and more control over assets. Even in this scenario, however, you can't start with too high a withdrawal rate or you'll risk running out of cash. But you could wind up with a double-digit withdrawal rate in your 80s or 90s.
A third option, increasingly popular with boomers who work for themselves or have greater control over their careers, is somewhere in between: Work a few more years, perhaps part-time, so as not to touch the retirement portfolio until later, creating more flexibility for both spending and having the funds to donate to charity or give to the kids. Even one additional year of part-time work can make a big difference, as it both allows your portfolio to compound and lets you delay taking Social Security. Waiting longer to collect benefits, for now, means higher monthly payments down the road, though that could change if payout levels become keyed to net income.
These options can play out in a myriad of ways. For three strategies that a baby boomer couple approaching retirement might employ, see the scenarios on this and the following pages, developed with the help of Luminous Capital.
In each, our hypothetical couple, both age 58, start with a $4 million nest egg and $300,000 in yearly income. But by tinkering with their spending or pushing back retirement, the size of their portfolio varies greatly when they stop working, from $5.5 million to $6.6 million. And the amount of savings they'll have left after 30 years varies widely, too, from $3.1 million (worth an inflation-adjusted $1.2 million in current dollars) to $6.9 million (worth $2.8 million). In one scenario, for example, they cut their budgeted after-tax spending from $220,000 a year to $180,000, allowing their withdrawal rate after 30 years to ratchet down from 14% to 6%. In another, working part-time after age 65 gives them an added safety net, which lets them keep their spending at $220,000 throughout retirement, yet still have $4.9 million left after 30 years.
In each of these scenarios, the spending level is set first (and adjusted upward each year by 3% to account for inflation) and the withdrawal rate follows, rather than vice versa, creating a smoother ride for their standard of living. However, we've picked a spending level that should let them spend till the end.
No one's retirement will play out like a financial model, given the curveballs that life (and the markets) can throw, and you may find that you have to recalibrate along the way. But the scenarios show the impact — larger than you might think — that small changes to any one variable might have on your retirement, simply because of the sheer number of years the planning involves.
"I cannot plan for you to run out of money because I don't know how long you'll live," Roeser says. "So we'll never run your portfolio to zero. Taking it to zero means taking too much risk."
Bill Cooperman, a classic serial entrepreneur, who lives in West Hills, Long Island, embodies the new ethos. A one-time schoolteacher, Cooperman, now 66, has developed four businesses, including a summer-study program, a student tour company, and a funeral-home business. Retirement? He's not ready. "Have I thought about retirement? No, not really," Cooperman says. "I have been so active my entire life in business that I don't think I have the wherewithal or the personality to say, 'OK, I'll get up in the morning and have nothing planned for the day.' "
Already his job gives him the flexibility to travel — and even requires him to go to Paris each year — and he has the cash to do what he wants. He recently joined a country club, so he'd take more days off work, and bought a pied-a-terre in Manhattan so that he can go to the theater more often. His two daughters are grown and settled, and he has already set aside funds for his five grandchildren's education. Cooperman doesn't really think he'll go through his savings, but he's not focused on it, either. "In the last 15 years, I've never thought 'I'm not going to spend money on myself because I want to leave it to the kids,' " he says. "I really don't short myself . . . If I lost it all, my kids would be OK."
There are two big shifts that could derail such happy retirement scenarios: increased longevity and historically low interest rates. No one is complaining about living longer (and staying healthier for more of those years), but it does complicate financial planning. As for low rates, they have made it harder to save and live off savings without taking additional risk.
The key, if you have saved well over the years, is to understand your priorities and to make the right choices early, not just about your portfolio but about the way you want to live. "It sounds so mundane, but cash-flow analysis is really the beginning of portfolio construction and financial planning. You work backward from the budget to what will be the solution with the least amount of risk," says Nathan Bachrach, a managing partner at the Financial Network Group in Cincinnati.
Financial advisor Sear says that when new clients come to him, the first thing he does is build an Excel spreadsheet to lead them through the big decisions. "You can spend less, work longer, take more risk in your portfolio, or earn more money. What's the most realistic? Even successful people don't understand the levers and the math," Sear says.
Rather than talking about "the number," the elusive dollar amount that you need, many financial planners talk instead about ways to create a reliable income stream. The idea of "consumption smoothing," popularized by Boston University economist Laurence Kotlikoff, is to arrange your financial affairs so that your spending stays level at all points of your life. Kotlikoff has argued for using annuities, which provide a monthly income stream.
While annuities often get a bad rap for their high fees and complexity, the idea of creating an income stream for life is favored by many academics. One simple option is so-called longevity insurance, a deferred annuity that pays out long after your retirement has begun. You could buy one at 65 and start the payout at 85, with no extras such as death benefits, and guarantee that you won't run out of cash in retirement for relatively little upfront cost. By creating such a safety net for your later retirement years, you also might be able to take more risks with your investment portfolio and increase your withdrawal rate at an earlier date.
Roeser, who uses variable annuities for some of her well-heeled clients, argues that such income protection is valuable, given both longer life spans and market volatility. "They know they will get an income stream for life," she says.
For those who prefer to steer clear of annuities, the key is to get their portfolio's asset allocation right. The difficulty here is that the older you are, the more your holdings should tilt toward bonds, in order to preserve capital. Yet interest rates today are so low that it's hard to make the numbers work. "The Federal Reserve leaning on interest rates is crushing retired people," Sear observes.
For most retirees and near-retirees, a balanced portfolio probably is a better bet than a conservative one (rates are too low) or a growth one (too risky). A balanced portfolio with 50% stocks, 45% bonds, and 5% cash should return nearly 5% a year after tax, according to calculations by Luminous Capital based on historical returns, while a more conservative portfolio, with 25% stocks, would return less than 4%. A growth portfolio, with 70% equities, would give higher returns, but with higher risk: In 2008, when the S&P 500 returned negative-37%, that growth portfolio would have fallen 28%, versus 21% for the balanced portfolio.
To bump up returns, advisors say, they're moving toward more aggressive investments within the allocations (replacing high-quality bonds with higher-yielding ones, for example) or adding an allocation to alternative investments, rather than tilting more toward equities. Frank Marzano, managing principal of GM Advisory Group in Melville, N.Y., generally uses a model portfolio of 30% stocks, 35% fixed income, and 35% alternatives.
The bigger planning differences come from the noninvesting decisions. For a traditional retiree who wants to have money left over and worries about eating into principal, the drawdown rate needs to stay at 4% or less. But that number can rise a bit for those who feel comfortable spending till the end and are willing to take on more risk — particularly for those boomers who delay retirement by a year or two.
For wealthy boomers who want to enjoy their retirement, another possibility may be to turn the withdrawal strategy on its head — starting with drawdowns of 5% or 6% and decreasing them later, as their spending patterns shift. "Someone retiring at 65 is probably at their peak for what it is going to cost to maintain their living expenses," Marzano says. "If you're 65 and healthy and spending $300,000, it is practically impossible that you'll spend the same amount of money at 90."
Those who want to increase their drawdowns must take more risk in the fixed-income portion of the portfolio, Marzano says. Options include increasing the yield or reducing the bond allocation in favor of alternatives or equities. Either way, there's a limit to how much you can draw down in the early years of retirement because of the problem of timing: A high return followed by a low one is OK, but if a poor year happens first, there's no time to recover from the loss of principal. If you increase drawdowns too much early in retirement, "it's very difficult to manage the money because you can have a bad year the first year," Marzano says.
For anyone facing retirement, the single biggest decision arguably isn't about money, but time: what to do when you retire. Put off retirement to age 70 from 65, and your savings can compound for an extra five years while your Social Security benefits will be higher. And for many boomers, the work itself is a plus.
"A lot of people are looking for some intellectual challenge," says Rafal, 62, who says he hopes to keep working until 70 and do advisory work after that. Among his retired clients, he figures about one-quarter have returned to work due to boredom. "I had a very high-performing CPA who retired cold," he says. "He called and said, 'I'm walking the dog six times a day. It's not working.' I've had surgeons retire and go back to work three months later."
That's typical of the boomer attitude, says U.S. Trust's Banks. The majority of boomers accumulated wealth, rather than inheriting it, and work is integral to their identities. "It's what they do, and what they know how to do," Rafal comments. "They don't think, 'I'm going to go sit on a beach somewhere and watch the calendar because I am done here."
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Originally published November 12, 2012
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