MINNEAPOLIS, June 14, 2005 – As the leading edge of the nation's 76 million baby boomers turn 59 ½ beginning July 1, they will face a new set of opportunities, risks and investment decisions that will ultimately shape how well they fare in retirement, according to American Express Financial Advisors, a unit of American Express Company (NYSE: AXP).
Reaching age 59½, boomers gain access to their tax-qualified retirement savings - such as IRAs, 401(k) plans and other retirement accounts - without having to pay IRS tax penalties for early withdrawals. While some may be tempted to begin drawing down, others may be thinking of reallocating investments too conservatively. Advisors urge caution, warning that boomers need to manage their retirement savings for a new reality of financial risks.
"Whether boomers are planning to shift into low gear or pursue an active retirement, our advice is to plan carefully because your investments may have to last for decades," says Craig Brimhall, vice president of Retirement Wealth Strategies at American Express Financial Advisors. "This half birthday is a time to begin looking at retirement lifestyle choices and ways to fund them. Unlike their parents, many of whom had employer-funded pensions, boomers will need to make investment decisions to create their own ‘paycheck’ in retirement."
According to American Express Financial Advisors, as boomers migrate from accumulating assets to spending savings, they will need to hedge against the prospects of a long retirement and outliving their money. Among the new risks are:
• Outliving your assets: Even the most carefully laid out retirement income plan - one that manages inflation, investment and withdrawal risk - can be negatively impacted by the greatest unknown of all - longevity. Boomers are living longer and healthier lives, and that increases the possibility of outliving assets.
• Taxes: IRA and 401(k) withdrawals will be subject to income taxes. As most continue to work into their 60s, accessing the money at an earlier age could push many into a higher tax bracket.
• Inflation: Inflation reduces purchasing power and affects the "real value" of investments. Health care costs in particular, continue to rise at rates well above the rate of inflation. Investment strategies need to beat inflation over the next 20 - 30 years.
• Investment risk: Even though today's retirees are likely to live longer, they may not be able to rely on the luxury of time to recover from market volatility. Yet, an overly conservative investment strategy can expose investors to outliving their assets.
• Unforeseen events: Poor health or a former employer’s discontinuance of retirement benefits rank high on the list of risks faced by those planning for retirement.
"Retirement income strategies should involve investment and financial strategies that outpace inflation during retirement, mitigate risks, and account for unexpected expenses. Boomers who were once focused on saving for retirement should start thinking seriously about how they will preserve assets and generate income for retirement," Brimhall said.
For boomers faced with creating a retirement paycheck from their accumulated assets, he offered the following tips:
1. Maintain a long-term investment strategy. Don't underestimate your life expectancy. Americans in their early 60s, on average, can expect to live another 20 years past retirement age, according to Congressional Budget Office estimates, so your investment strategy needs to account for these years. The longer boomers keep savings invested, the better. Tax-deferred compounding is a powerful way to keep savings growing.
2. Withdraw no more than 4-5%. The best defense against outliving assets is to adopt a conservative annual savings withdrawal rate of no greater than 4-5% of your retirement assets. Withdrawing too much income from your portfolio, especially in the early years of retirement or in a down market, can put you at greater risk of running out of money.
3. Create a cash "bucket." Fill the bucket with the cash that you'll need for the next 2 to 3 years, and keep the rest of your portfolio invested for growth. Every 6 to 12 months, re-balance by trimming from the best performing assets to replenish the cash.
4. Keep your portfolio working. An overly conservative investment strategy can be just as unwise as investing too aggressively. A well-diversified, balanced portfolio that can produce current income and growth for future needs is vital for a long retirement.
5. Prepare for the unexpected. It’s always wise to create a financial strategy that accounts for life’s little – and big – surprises: a serious health setback, the early death of a spouse, a change in or discontinuance of employer-sponsored retirement benefits.
6. Annuities can help. Consider using part of your portfolio to buy an immediate annuity, which provides you with a guaranteed income stream for as long as you live. * An immediate annuity provides a way to create your own "pension."
For more information about planning for retirement, visit www.getadvice.com.
The American Express Financial Advisors is one of the nation’s leading financial planning, asset management and insurance companies. Through its nationwide network of more than 10,500 financial advisors, AEFA delivers financial solutions to clients through a comprehensive and personalized financial planning approach built on a long-term relationship with a knowledgeable advisor. The company specializes in meeting the retirement-related financial needs of the mass affluent.
On Feb.1, 2005, American Express Company announced plans to pursue a spin-off to shareholders of the American Express Financial Advisors unit. The transaction is expected to be completed in the third quarter of 2005, subject to certain conditions.
American Express Financial Corporation will be the new parent company and will begin operating as Ameriprise Financial, Inc. on August 1. For more information, visit www.ameriprise.com.