In Practice November 15, 2006

Study Says Pre-Retirement Connection Key

Connecting with baby boomers while they are still in their working years is critical to establishing relationships for advisers, according to the third annual Lincoln Long Life Survey of baby boomers released by the Lincoln Retirement Institute.
Reported by
Three out of four affluent baby boomers (with incomes in excess of $75,000) will consult with a financial adviser before they retire, and half already work with an adviser, the survey found; for those who have already retired however, just 5% say they are open to the idea of getting help with financial decisions for their remaining retirement years.

The vast majority (84%) of affluent baby boomers feel they have enough financial resources to be able to retire on their own terms, but while 93% of those surveyed report having a 401(k), IRA or retirement savings plan, only about one-third say that will provide most of their living expenses in retirement; and another quarter (27%) will rely on a pension plan as their chief source of retirement income. Nearly half of those surveyed reported they are counting on the equity in their homes or investment properties to help fund their retirement years.

Many in this group are optimistic; the survey found that because they have faith in their planning skills, boomers are confident about deciding when to retire. Despite reports of extended careers, nearly six out of 10 of these relatively affluent respondents say they plan to retire before age 65. This determination to retire before “normal” retirement age is found among more than half of both older boomers (over 50) and younger boomers (under 50). That optimism may, however, be based on questionable assumptions. Nearly two-thirds (65%) expect they will spend less money per year than while working, and though 62% of those surveyed expect to spend 20 or more years in retirement 17% speculate they will fall short or just meet their basic living expenses with their current resources.

Never miss a story — sign up for PLANADVISER newsletters to keep up on the latest retirement plan adviser news.

Among this so-called “Sandwich Generation” sampling, 74% report providing financial support to a child or parent, an action which is making it more difficult to save for retirement, according to almost half of respondents with dependent adult children. One-fourth of these baby boomer caretakers have delayed their planned retirements by one year or longer as a result of providing financial support to family members but, despite those additional financial strains, boomers experiencing a generational squeeze are just as likely as the rest of the group (80% and 77%, respectively) to rate their financial situation positively.

Those sentiments notwithstanding, there is a clear positioning advantage for advisers in linking up savers while they are still employed. Not only because it provides a real chance to have a positive impact on savings behaviors and preparation – but also because it greatly enhances your ability to establish a long-term relationship.

In Practice November 15, 2006

2007 Compensation and Benefits Limits Published

Last week, the Internal Revenue Service (IRS) unveiled the maximum benefit and contribution limits on qualified retirement plans for 2007, and, for most of the limitations, the increase in the cost-of-living index met the legal thresholds to trigger the changes.
Reported by
The Pension Protection Act eliminated the sunset provisions on limit increases introduced with the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA), but many of the limits will continue to increase based on cost-of-living adjustments. Under Section 402(g), retirement plan participants will be allowed to defer up to $15,500 to their 401(k) plan in 2007, an increase of $500 over the 2006 limit, but just half the $1,000/year step-up that followed EGTRRA’s passage. The limit on deferrals under 457(e)(15) deferred compensation plans of state and local governments and tax-exempt organizations is also increased from $15,000 to $15,500. The Section 415 annual additions limit, the maximum total contribution to defined contribution plans, including employer contributions, will rise to $45,000 per participant from $44,000.

Also a change from previous years, the allowed “catch-up” contribution, available to those who will be age 50 or older by the end of the year, is not tied to a cost-of-living adjustment provision, and will remain unchanged at $5,000 in 2007.

For purposes of non-discrimination testing, the highly compensated threshold remains $100,000 a year, while the annual compensation limit under Sections 401(a) (17), 404(l), 408(k) (3) (C), and 408(k) (6) (D) (ii) is going up from $220,000 to $225,000, and the dollar limit under Section 416(I) (1) (A) (I) concerning the definition of key employee in a top-heavy plan is increased from $140,000 to $145,000.

For more stories like this, sign up for the PLANADVISERdash daily newsletter.

The limitation under Section 408(p)(2)(E) regarding SIMPLE retirement accounts is increased from $10,000 to $10,500.

The limit on the annual benefit under a defined benefit plan under Section 415(b) (1) (A) is being bumped up from $175,000 to $180,000, and the amount of employee compensation that can be considered in calculating pension benefits and contributions to defined contribution plans will rise to $225,000 from $220,000.

This annual change in deferral limits is a great way to lead off an education campaign at your clients’ workplaces. Not only does it spur discussion with your CFO or CEO clients (the amount of income subjected to FICA withholding also increased, this year to $97,500 from $94,200), and while they might already be maxing out the current limits, this is a chance to plan ahead. It can also be a good point of contact with the general employee base, especially those over 50 who are eligible for the catch-up provisions, and the Saver’s Credit and Roth 401(k), which were given a new lease on life with the Pension Protection Act.

A table with these changes detailed is online at http://www.plansponsor.com/solution_type1/?RECORD_ID=11611

«