Creating a lasting wealth management plan is like creating a great music playlist — it’s highly personal and can contain lots of different themes.
For those of us in the business, the ability to connect with clients and bring a deep understanding of their goals, preferences and concerns is critical and will transform relationships beyond the numbers and the returns.
As advisers work with clients from different generations, it is important to start with a recognition of the unique needs and perspectives of various age groups, and then craft personalized strategies that align with clients’ goals and values.
This four-part series — with headline credit to Pete Townshend and The Who — aims to provide foundational guidance for each generation: Baby Boomers, Generation X, Millennials and Generation Z.
This first article focuses on the biggest chunk of the U.S. population — the Baby Boomers — born from 1946 to 1964. Indeed, The Who’s prime market!
This generation’s members have accumulated significant wealth over their lifetimes, and their current focus tends to be on retirement planning and preservation, tax-efficient income distribution, estate planning and effective communication with the next generation. By understanding this generation’s financial landscape and preferences, we can help navigate wealth’s complexities more effectively.
Retirement planning and preservation
Baby Boomers might not want to admit it — but they are in, or on the brink of, retirement, and are transitioning from the wealth accumulation phase to the wealth preservation phase.
Ensuring financial security and sustainability takes center stage. Retirement planning isn’t just about the numbers, it’s about security and peace of mind, where longevity risk, rising health care costs and inflation are all huge concerns.
Here are some essential strategies to ensure that the funds Baby Boomers realized from decades of hard work last throughout retirement:
- Stress testing. For retirement to be a time of less stress, introducing a little pre-retirement stress testing is key. With rising costs, the notion of “living off the income from a nest egg” is no longer a given. Financial plans and expected investment performance need to be reviewed and stress-tested to see how well they might hold up during economic downturns or other unforeseen events. The plan needs to be resilient against market volatility and unexpected expenses.
- Re-evaluating risk. The appetite for risk tends to decline for Baby Boomers — many of whom were quite happy with a high level of risk throughout their careers. With a need for a steadier income stream, re-evaluating risk and making necessary adjustments to portfolios become paramount. Allocating a portion of investments to more conservative options — such as fixed income and annuities — may provide a steady enough stream of income to cover essential expenses. Take note, though — it remains essential to balance this approach with some growth-oriented investments to maintain purchasing power over decades of potential retirement.
- Addressing health care costs. With longer life expectancies, allocating sufficient funds for health care expenses is crucial. Long-term care insurance and utilizing health savings accounts (HSAs) may mitigate potential financial burdens.
Tax-efficient planning
Many Baby Boomers have built a diverse group of assets, thus generating income from different sources with varying tax consequences. Optimizing tax efficiency is key to maximizing disposable income. Some ways to accomplish that include:
- Understanding tax implications. All income is not created equal. Depending on sources and timing, income can be subject to multiple tax rates, which affect after-tax returns. For example, income from an investment portfolio can be tax-exempt, taxed at the ordinary income tax rates, or taxed at a dividend rate (qualified and non-qualified), depending on the nature of the investment. A sold asset can generate capital gains, either at a short- or long-term rate depending on the timing. In contrast, an income stream from retirement accounts in the form of required minimum distributions (RMDs) is taxed at your ordinary income tax rate. Therefore, when making withdrawal decisions, it is important to work with an adviser to minimize your tax liabilities.
- Realizing geography matters. Many retirees choose to downsize and relocate to tax-friendly states. This can significantly affect overall income tax rates after factoring in the different state tax considerations. In the year they relocate from a state with higher taxes to a lower-tax state, retirees should know that timing income generation may make a meaningful difference.
- Mitigating surprises. During working years, income typically arrives predictably through paychecks or business returns with taxes withheld at the source. However, during retirement individuals will largely have to manage their tax obligations more proactively. Large fluctuations in investment returns could further complicate matters as they could generate “bumps” in income that could affect tax estimates. Therefore, it is important — especially in the beginning years of retirement — to work with a tax professional to properly review tax estimates and avoid unwelcome surprises during tax season.
The Great Wealth Transfer
Many Baby Boomers are at a stage with their families where they are contemplating transferring wealth to the next generation.
Ensuring these transfers are well-planned is a big consideration for this group … as it is for their potential heirs. The basics of estate planning include:
- Setting up a proper plan. Having a properly structured will and establishing trusts so that inheritances can be passed on in a tax-efficient and organized fashion are critical in building generational wealth. Using a trust may also offer the benefit of asset protection.
- Balancing gifting and financial security. While generous gifting to children and grandchildren may be a nice idea, maintaining your assets to fund a well-earned retirement is also a must. Advisers should ensure that clients do not give away too much, too early.
- Collecting essential documents. In addition to a will and trust, having a health care proxy and power of attorney is also important. In the event of unforeseen health issues, having these documents in place will ensure that your properly named agent will be able to handle your health, financial and legal affairs should you become incapacitated.
Communicating clearly
Open and honest communications play a critical role when helping Baby Boomers navigate financial complexities, especially early in retirement.
These discussions are also much easier to have earlier in retirement, versus later, when the specter of more stressful moments — such as age-related memory concerns, debilitating health events or death — could make measured discussions more challenging.
Understanding financial values and preferences is essential to develop and execute personalized financial plans. Generally, Baby Boomers have valued hard work, financial independence and charitable giving. They also have preferred maintaining control over their finances and are cautious about potential economic uncertainties.
Therefore, the above-mentioned stress tests will help smooth any concerns over unforeseen circumstances and provide assurances of financial strategies and priorities.
Very often, headline news items can be a distraction: Who will the next U.S. president be? What is the Fed thinking? Will Congress change tax laws? So, staying focused on the plan, making tactical adjustments as needed, and keeping clients focused on their “North Star” is essential.
When it comes to estate planning, Boomers often welcome our help to begin an open dialogue on wealth transfer and financial responsibilities with the next generation — helping them prepare to be the next stewards of a family’s wealth.
Navigating the complexities of wealth management for Baby Boomers requires a comprehensive understanding of their financial goals, values and challenges. By focusing on retirement planning and preservation, tax-efficient income distribution, estate planning and effective communication with the next generation, advisers can help Baby Boomers create a happy and financially confident retirement.
Up next in this series: We move from The Who to Nirvana and explore tailored strategies for Generation X, those like me, born from 1965 to 1980.
Investing involves risks, and you may incur a profit or a loss. Prices of fixed income securities rise and fall in response to changes in the interest rate paid by similar securities. Generally, when interest rates rise, prices of fixed income securities fall. Diversification cannot ensure a profit or guarantee against a loss.
Wilmington Trust is a registered service mark used in connection with various fiduciary and non-fiduciary services offered by certain subsidiaries of M&T Bank Corp.
This material is provided for informational purposes only and is not intended as an offer or solicitation for the sale of any financial product or services. This material is not designed or intended to provide financial, tax, legal, accounting, or other professional advice since such advice always requires consideration of individual circumstances. There is no assurance that any investment, financial, or estate planning strategy will be successful. Wilmington Trust is not authorized to and does not provide legal, accounting, or tax advice.
