Those Most Concerned about Taxes have Untapped Solutions
Research from The Hartford found lower income Americans are more worried about rising taxes than those with higher incomes, yet are not taking advantage of tax-saving solutions.
The research found Americans age 45 and older who make less than $50,000 are more worried about rising taxes than the middle income group (salaries from $50,000 to $100,000) or high income group (salaries more than $100,000), yet this group is less likely to participate
in a 401(k) or other retirement plans that could reduce their taxes or
provide tax-free income.
The Hartford’s 2011 Taxes
and Investment Study found 37% of respondents from the lower income group sited rising taxes as their primary investment concern, followed by inflation and market volatility. By comparison,
only 28.5% of those in the middle income range and
32% of those with high incomes said taxes were their biggest concern.
People with modest means were also considerably less
likely to contribute to a 401(k) or similar retirement plan than
higher-income Americans, and were also less likely to invest in
equities or bonds typically found in IRAs, variable annuities or other
retirement savings vehicles, the study found.
“Rising taxes can have a bigger impact on Americans with
lower incomes, so they are understandably more concerned about that
possibility,” said E. Thomas Foster Jr., vice president and national
spokesperson for The Hartford’s retirement plans.
“The Hartford is working with employers that sponsor retirement plans to
help educate employees about opportunities to reduce their tax bills,
defer taxes on their investment earnings or generate tax-free income.”
Foster pointed to the Saver’s Credit, Roth 401(k), Traditional 401(k), matching contributions, and Roth IRA as common, tax-saving solutions.
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Helping Boomers with Retirement Income Ripe for Specialization
Less than five percent of advisers have shifted their practice to exclusively serve the Baby Boomer market, but researchers say this percentage is likely to grow.
Howard Schneider, President of Practical Perspectives, and Dennis Gallant, President of GDC Research, have co-authored a report, “Trends in Retirement Income Delivery: Advisor Portfolio Construction, Product Usage, and Sales Support,” the fifth in a series of reports discussing retirement income.
Speaking to PLANADVISER, Schneider addressed how the “hype” surrounding the wave of Baby Boomers reaching retirement is now the reality. “Because they are such a huge group, they transform whatever stage they’re at–parenthood for example. Now they’re starting to transform retirement,” he said. However, many advisers are still trying to play both sides of the fence, he added; they’re trying to service younger clients in the accumulation phase, as well as older clients facing retirement.Eventually, Schneider predicts more advisers will realize that serving the Boomer market–specifically in dealing with retirement income solutions – is an area worthy of specialization.
Unlike in the accumulation phase, in which virtually every adviser uses a portfolio-planning method, staying within risk parameters, to build a diversified total-return portfolio, Schneider says such an across-the-board method has not yet been adopted in retirement income planning. He said there are three philosophies in the field today. One is to use the same method as from the accumulation phase for the retirement phase–about 40% of advisers do it this way, he said. The idea is to stick with a diversified portfolio and withdraw a percentage from it each year.
Different methods
The other 60% of advisers say this is not wise, as retirees tend to be more risk averse than those in the work force and should be given a different method. The other two methods are the “pool” or “bucket” approach, and the “income floor” approach. The bucket approach divides assets into groups according to time–a short-term bucket, intermediary bucket, long-term, and “long”-long term, Schneider said. The short-term bucket would be for living expenses in the next three to five years. The intermediary bucket would eventually become the short-term bucket and it would need to be refilled, and the long-term buckets can continue to be invested for future use.
The income floor approach takes a retiree’s assets and sets a minimum, sustainable living requirement for the most fundamental expenses, the “non-discretionary” things such as housing, healthcare, and food. Everything else–travel, charities, home repair–is considered to be “discretionary” and can be invested in a total-return portfolio (as in the accumulation phase). If the market does well, those discretionary things can be attended to, Schneider explained.
How can providers help advisers help clients?
The report says how mutual fund companies, annuity providers, and broker/dealers have been offering basic support related to retirement income. Schneider explained that this entails tools and calculators advisers can use with clients, basic marketing support advisers can use to target different demographics, and education/training for advisers about rules and regulations regarding retirement income. Providers are focused on reaching the adviser market, because they are the gateway to clients, Schneider said. The “mass affluent” population–people with between $250,000 and $1 million in assets by the time they’re ready to retire–will not want to tackle this on their own.
However, Schneider said it’s time for the providers to move beyond the basics; clients want answers to tougher questions. They are trying to figure out how they can build a portfolio to last through retirement, in an environment still saturated with risk, and advisers will need to help them find answers.
Schneider said a disconnect exists between providers of retirement income solutions and the advisers and clients. Providers are thinking in terms of income or cash flow; whereas advisers and their clients are trying to look at the bigger picture. “How are they managing portfolios, and providing growth and sustainability to stay ahead of inflation and to make sure they don’t run out of money… it’s not about funding a retirement income product, it’s about management of the whole picture,” he said.
One other challenge that Schneider foresees happening is having Boomers accept the fact that some sacrifices might have to be made. “People are talking about working part-time or starting their own business, but that’s not going to be possible for everyone,” he said, nor will it generate a significant amount of money. Considering the longevity Baby Boomers face, advisers will have to paint a realistic picture for their clients.