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How to Be a Retirement Planning Hero

Every broker has heard a story like this one. Recently, Tom Mingone, a financial planner in New City, N.Y., got a call from a new prospect. The man, a successful entrepreneur in his late 40s, had sold his sanitation business for $1 million and planned to retire and live modestly on $50,000 to $60,000 a year. A previous broker had put him entirely in technology stocks, promising a more lush lifestyle

Every broker has heard a story like this one. Recently, Tom Mingone, a financial planner in New City, N.Y., got a call from a new prospect. The man, a successful entrepreneur in his late 40s, had sold his sanitation business for $1 million and planned to retire and live modestly on $50,000 to $60,000 a year. A previous broker had put him entirely in technology stocks, promising a more lush lifestyle than the one a 5 percent or 6 percent return could provide.

“By the time he got to me, he had $200,000 left,” says Mingone. “It was absolutely staggering. He has to go back to work, probably as a garbage man because that's what he knows.”

Maybe the garbage man's story isn't the most heart-rending one. After all, even if his dream of early retirement has vanished, he still has time to create a new retirement plan. Countless others are far worse off: people who are close to retirement or have actually retired and, because they were too concentrated in equities, have watched their nest eggs crack and dribble away. Many investors are postponing retirement; some are even going back to work. The lucky ones are simply tightening their belts.

The concept of do-it-yourself retirement planning, which swept the U.S. in the 1990s as companies cancelled pension plans and switched to defined-contribution plans, helped fuel the bull market. Through 401(k) plans, IRAs and other tax-sheltered accounts, Americans poured trillions into the stock market. And, for a long time, the results were impressive: Employees would circle “growth” on their contribution form and soon find themselves with quarterly statements that induced visions of golf-course-side villas.

“One of the biggest misconceptions in the era of the 401(k) is that if you are investing in the stock market you have taken care of your retirement,” says Ellen Hoffman, author of The Retirement Catchup Guide. Indeed, some 74 percent of assets in 401(k) plans were in stock in late 2000, according to BusinessWeek. “We woke up in 2001 and 2002 and realized that we weren't really diversified,” says one Salomon Smith Barney broker. That has left many retirement portfolios in tatters, lacking the cash or fixed income assets to redeploy even when the market perks up. Consider this: Last February, The New York Times reported that 22 percent of workers in the 55 to 64 age group said they would have to work longer because of losses in their 401(k)s and other retirement accounts. After the summer's steep market slide, the number can only have grown larger.

And there's another problem. For all the money that was plowed into 401(k) plans, most workers weren't saving enough — even before the market drop. The result? According to Bill Wolman, author of The Great 401(k) Hoax, the median 401(k) account held only $75,000 in 2001. According to a recent Harris Poll commissioned by Charles Schwab & Co., only 32 percent of Americans aged 45 to 65 with incomes over $75,000 have saved enough to consider retiring. Yet another survey, commissioned by the Economic Policy Institute, found more than 40 percent of respondents expecting to live less comfortably in retirement.

The good news in this gloomy picture is that people desperately need your help. You may have clients who never have talked to you before about retirement plans because they thought they were taken care of. The landscape also is full of prospects who either have never before used a broker or are now dissatisfied with the one they have. But fixing a client's retirement plan (to the extent possible) may be the best opportunity brokers have today to create new business. “We went through a big period when everyone thought they could plan their own retirement,” says David Sack, a broker at Salomon Smith Barney, “and now people are thinking they should work with a professional.” A recent report by Cerulli Associates, a research firm in Boston, supports this view: “Many [individual investors] are unprepared to manage their retirement savings for lifetime income and security. This portends an overwhelming need for advice and guidance.”

Individuals needing “advice and security” these days are legion. “Baby boomers' retirement income planning is definitely taking center stage as an opportunity for advisors,” says Joshua Dietch, a Cerulli analyst. Cerulli estimates that private retirement assets will grow from a current total of $2.5 trillion to $10.2 trillion by 2012.

If the bear market damage weren't enough, Congress has provided brokers with another reason to revisit client portfolios with the Economic Growth and Tax Relief Reconciliation Act (EGTRRA), passed last year. EGTRRA increases the amounts employees and employers can stash into tax-deferred retirement plans and provides new incentives for small businesses to adopt such plans (see page 42). It also provides a modest “catch-up” feature that lets taxpayers over 50 allot additional funds. Cerulli estimates that EGTRRA will result in $956 billion in additional flows to individual retirement markets in the next 10 years.

Another important change that makes retirement planning more attractive for brokers is the introduction of new minimum distribution rules (see table above). These guidelines replace an earlier, confusing system that forced retirees over the age of 70 to withdraw big chunks of their IRA savings every year. Now, the formulas are more straightforward. They also have been rejiggered to postpone large withdrawals into a client's 80s. That gives planners new ways to approach the management of these accounts as well as a new investment horizon for these funds.

Brokers who seize the opportunity to rescue endangered retirement funds can look forward to the gratitude of clients for years to come. But first, brokers have to learn effective retirement planning management. Clients who already have been burned by the mercurial marketplace must be made to feel that they are not merely taking another spin on a roulette wheel, hoping their number will come around this time. Advisors need to prepare real client budgets for the present and the future that focuses on not how rich their clients can get but on what constitutes a realistic and meaningful life for them.

Now is the time to take clients by the hand and perform portfolio tune-ups, or to secure new customers by selling the concept of financial planning. “The first message people need to hear is that if they don't have a financial plan of some sort, if they haven't crunched some numbers and know what their budget will be in the future, this is definitely the time to do it,” says Hoffman.

Some brokers, of course, are better-positioned to grab retirement business. Craig Martin, a financial planner with the Family Wealth Consulting Group in San Jose, Calif., has always enforced a policy of strict asset allocation. While that caused him some pain on the upside when some clients' returns didn't match those of their dot-com neighbors in Silicon Valley, it engendered an intense loyalty when the bear came to market. Clients who stuck with him were making money as of June 2002, and only now are experiencing losses of 5 to 15 percent — losses that certainly can be recovered. And they are referring their less fortunate friends.

To win new business, it's important to remember that asset allocation is not the same thing as buy-and-hold: Clients have seen too many so-called blue chips wind up in the penny-stock tables to buy that notion now. “Buy-and-hold is gone, forget it,” says Andrew Freedman of AJF Financial Services in New York. “This dramatic turnaround in fortune forces you to realize that you've got to review and reevaluate your investments — especially as you get closer to retirement.” Retirement plans need to be actively managed. Clients need regular portfolio checkups to make sure allocations remain valid as market conditions change and clients' situations change.

Return Assumptions

Where to start with retirement portfolio tune-ups? Step one is to revisit return assumptions. Until this year, when the bear settled in for an unwelcome third year, brokers and planners would glibly trot out charts and point to retirement calculators that showed how quickly retirement funds would multiply in equities. Some tables forecasted 10 percent and even 12 percent annual gains — over the long term! Now, major firms are telling clients not to count on more than 7 percent or 8 percent. And that may be too optimistic, especially for clients facing retirement in less than 10 years. Remember, too, that returns on paper look better than actual net returns in real life. The return on equities has been 12.94 percent over the past 70 years, but when you factor in volatility during that period (22 percent), your compound average annual return falls to just 8.44 percent, according to a study by Hull Capital Management in Dallas. That's a big difference.

That is why it is important to move beyond simplistic formulas. Advisors who have not done so should now add Monte Carlo simulations to their toolbox; under an NASD plan, Series 7 holders will now be able to use Monte Carlo, too (see page 19). Indeed, economists note that most retirement planning calculators, which use an amortization algorithm that ignores return fluctuations, give wildly inaccurate predictions of future returns. Monte Carlo simulations, which were used by scientists developing the first atomic bomb, use many combinations of variables, based on historical data including inflation rates, life expectancy and interest rates, to calculate the probability of an investor reaching specific returns at specific times. While imperfect, Monte Carlo still provides relatively realistic parameters in which to plan.

Rebalancing Acts

What does rebalancing mean in a world where stocks keep dropping, bond prices keep soaring and yields keep shrinking?

It depends on the client's situation.

It may be preferable, for example, to sell into a falling market than to risk losing more. One retired over-70 couple had about 60 percent of their portfolio, which started out at $1.3 million, in stocks. As they began to drop, advisor Mingone decided it was time for a tune-up. The couple realized they could fairly easily cut their budget from $5,000 to $3,500 a month. “They agreed a lot of their spending — mostly gifts to children and grandchildren and a luxury golf vacation — was unnecessary,” says Mingone. Under the revised budget, they could afford to take every dollar out of stocks, purchase bonds for a 5 to 6 percent return, and still maintain their retirement lifestyle relatively risk-free. If they were to leave their money in stocks, they could count on a greater return down the line: However, if the market continued to slide, they would soon have to earn 10 percent to fund the same goals. So, Mingone put them in bonds.

“Everyone wants to make as much as they can, but the proper approach is to say, ‘What difference will it make in my goals to lose that money?’ If we stop the bleeding now, we can still fulfill our objectives.”

Stick With Stocks

But most people, especially those still accumulating funds for retirement, do need some high-octane equity in their tanks. For these clients, selling into a falling market makes less sense. They get less for their assets and risk missing out on significant appreciation when stocks rebound. According to Hartford Financial Services Group, an investor who began the bear market of 1973-74 with $100,000 in six-month CDs would have had $832,000 at the end of 2001. Had the same investor put 50 percent of the money in the stock market in September 1974, just before the market turned, he would now have had $3 million. “We can't regain the loss if we sell now,” says Martin. “If you came to the party with stocks, you have to dance with stocks.”

But you can keep clients from making fresh mistakes by continuously rebalancing to maintain proper asset allocation. This exercise sustains the practice of selling high and buying low, the basis of making money on any investment. “It makes you sell bonds after a rally and favor buying stocks after declines,” says Mingone. “If you rebalance, you never acquire an overexposure to stocks.” That's why clients who diversify properly and continually rebalance are doing better than ones who simply let stocks become a larger piece of the pie.

Another age-old investment shibboleth — dollar-cost averaging — is making a comeback, too. In a rising market, investors would do well by putting a lump sum into the market as early as possible to grab the greatest appreciation. But the opposite is true in falling or volatile markets, where regular monthly contributions in stocks ensure that investors are buying more at bargain prices and less at top dollar.

The turbulent markets, however, don't make it easy for brokers to keep clients focused on these proven long-term strategies. Mingone talks about one client, a 61-year-old doctor who had taken early retirement. The client panicked when his portfolio dropped by 10 percent, to $930,000. In the process, his bond allocation rose from 50 to 65 percent of his portfolio — but he wanted to move even more money into bonds. “He has to make 7 to 8 percent to cover his expenses over the next 20 years without losing purchasing power,” says Mingone. “There's no way to get that and not have exposure to the stock market. The cost of living could easily double, and what will happen when his $50,000 annual salary can only buy $25,000 worth of goods?”

The right approach to keeping nervous investors in stocks again boils down to planning. “Clients' initial reactions tend toward panic and fear, and the impulse is to take less risk,” says Amy Leavitt, of Lincoln Financial Advisors in Quechee, Vt., “so we model the alternatives for them.” She shows clients what their outcomes would be given different allocations. She starts with an all-cash, risk-free portfolio and then adds other asset classes. “Once they've looked at all the options and have taken an active role in determining which risks they'll take, they're more comfortable with their investment choices,” Leavitt says. “But unless you do some modeling for them, they'll never know if they're overacting or taking unnecessary risks. Many brokers just don't take the time.”

A Cash Cushion Keeps the Bears Away

One ugly specter haunting some retirees is the need for cash. It's not uncommon for these retirees to have to unload good stocks to raise cash to live on. That's why any good plan should build in a big enough cushion to bridge a bear market of three years — 19 months of a down market, and 19 months to recover, says Lynn Mathre of Asset Advisors Management in Houston. “Asset allocation is important, but it has to take into account cash flow needs. If that money wasn't set aside, clients are probably in a panic.”

A cash hoard is far less important for working people. However, the minute you know they are going to retire, you should start building the cushion, Mathre says. One option is a laddered portfolio of bonds with a duration of no more than five years, preferably using Treasuries in tax-deferred accounts and municipals in taxable accounts. The more risk-averse the client is, the more cash you should set aside. If the client needs $100,000 a year in salary, make sure you've set aside $300,000 in cash. For more conservative clients, make sure it's $500,000.

Real Estate to the Rescue

And what if clients (or their advisors) didn't create that cash cushion? Carol Rogers, president of Rogers & Co. in St. Louis, counsels clients to look at refinancing their homes. “Because interest rates are at 40-year lows, we're asking people to at least consider refinancing their homes or taking out a mortgage at 5 percent to 5.75 percent to give them some breathing room,” she says. A $200,000 home could yield a $60,000 short-term fix, enough to provide an annual $20,000 income over three years.

Real estate in highly valued markets right now is saving many a retirement plan. Most of Martin's clients live in Silicon Valley and are in the 55-to-65 age group. For them, it's a great time to realize the gains in their homes. “Most people want to get out of Silicon Valley anyway,” he says, “and they can buy a great home in a gated community on a lake or golf course for a whole lot less.” One 75-year-old client panicked, thinking that she was going to starve because her $1.2 million portfolio had shrunk to $750,000. But, laughs Martin, she's sitting on a modest home in Los Altos that's now worth $1.75 million. Younger clients who weren't diversified may be able to offset stock losses by selling highly appreciated homes, too. But they may have less flexibility about where to live next.

Work More, Spend Less

The bitter truth for some clients is that they can't afford to retire quite yet — or at least not completely. The alternative, however, is worse: retire now, only to realize years later that the money won't last, forcing the retiree to seek employment with little hope of finding any. That's a good argument to keep investors working longer, even if it's part-time. Many clients coming up short have no choice but to stay at the grindstone or seriously trim their retirement budgets. “There has to be some tough talk out there,” says Rogers. “Sometimes you just have to say: ‘You can't go out and buy a Lexus unless you can reverse your age and go back and get a job.’”

A new client of Rogers' had entered early retirement three years ago with a 100 percent equity allocation and a habit of making unreasonably high withdrawals from an IRA. Rogers liquidated the portfolio and invested it more modestly in a combination of stocks and bonds. She reduced his IRA withdrawals from 15 percent of assets to 5 percent — without penalty thanks to a new IRS ruling (see sidebar, page 39) — and gave him four months to get a job making $30,000 a year. “You could see the blood drain from his face,” she says. “But nothing else would work. If he couldn't do that, we couldn't work with him.” He is hardly alone. Short of going back to work, investors are selling their boats, shortening their travel plans and putting off buying second homes. Although this is a very painful time for them, there is a silver lining. According to a recent AIG SunAmerica, study “Re-Visioning Retirement,” another old adage is true: The best things in life are free. The happiest respondents valued family and friends, spiritual beliefs and starting a new life above financial concerns. Eighty-one percent of those aged 55 to 65, and 70 percent of those over 65, ranked exploring and tapping human potential much higher than moving to the house or location of their dreams as retirement goals. By far, however, those happiest in retirement were the ones who had the highest financial preparedness. That's where brokers and planners have their work cut out for them. Or, as Tom Mingone says, “We can't say that their plans and dreams are necessarily going to happen — but we have to keep working toward them.”

Lower Minimum Distributing Table Means More Flexibility

Determine the minimum required distribution from an IRA by dividing the account balance of the preceding year by the distribution period.


Distribution Period


Distribution Period



























































































115 and older


Source: IRS

Who's Making the Most of the Opportunities?

Rollover asset retention and gathering


  • Early attention to retention and capture of rollover opportunities.

  • Breadth of products and services targeted to rollover investors.

  • Organizational alignment.

  • High level of investor contact.

  • Elements of scaleable advice.


  • Little or late attention to rollover.

  • Product focus.

  • Low level of investor contact.

  • Organizational silos.

Source: Cerulli

Rethinking Retirement

Life after 65 is not the same as it was. For one thing, it's longer.

It's not just the bear market that is forcing Americans to change the way they think about their golden years. “Retirement isn't a very useful word anymore,” says Harold Evensky, a financial planner in Coral Gables, Fla., and author of Wealth Management. “It used to mean people stop working, go play golf all the time, and then die.” But people are living longer and healthier lives and can anticipate another 20 to 30 years of productive life past the age of 65. Planners now talk of becoming financially independent rather than ceasing to work and of “phased retirement,” gradually cutting back on work as clients age.

The classic retirement age of 65 is more a reference point along a much longer, less well-defined path. But there are general rules of investing that still apply for different age groups.

30 to 50

  • Clients may be more inclined to stash their savings under their mattresses than in their 401(k) plans these days. But these tax-deferred accounts are still the best game in town — and they have gotten even better. “At the end of the day you won't find a better deal from a tax perspective,” says Joshua Dietch of Cerulli Associates. Last year, Congress gave a boost to retirement planning with the Economic Growth and Tax Relief Reconciliation Act (EGTRRA), which raised limits on what employees can contribute to 401(k) plans. This legislation raised the annual amount individual clients can stash in a defined contribution plan from $2,000 last year to $3,000, an amount scheduled to rise by $1,000 each year until 2005.

  • With 10 to 30 years to recover from any bear market, this age group should consider an aggressive allocation of 70 percent to 80 percent in stocks, says Amy Leavitt, a financial planner in Quechee, Vt.

  • The bear market presents an opportunity for all age groups to consider switching from a traditional IRA to a Roth IRA. Clients have to pay taxes on assets that are transferred, but will not have to pay taxes later when the money is withdrawn. Losses in these accounts could significantly lower the tax tab.

50 to 70

  • Good news from the IRS for those who left the workplace early because they were laid off, accepted a buyout or merely decided to retire and withdraw savings from a qualified retirement plan before age 59. Until Oct. 2, withdrawals before that age would trigger a 10 percent penalty unless the money in the account was annuitized or amortized and paid out in equal amounts for the longer of five years or until age 59. Those who chose this method of payment may have done so when they had a bigger asset base to draw on. If the bear market hacked into their funds, they run the risk of depleting their savings early. But reducing the distribution amount would trigger a 10 percent penalty applied to all withdrawals retroactively and with interest. On Oct. 3, the IRS offered some relief, allowing early retirees a one-time switch to a withdrawal scheme that would lower payouts and hence slow the depletion of account assets.

  • Beleaguered baby boomers can take advantage of the catch-up provision that lets individuals aged 50 and over make an extra catch-up contribution of $1,000 this year, $2,000 in 2003, $3,000 in 2004, $4,000 in 2005, and $5,000 in 2006. If EGTRRA remains unchanged, pre-retirees will be able to sock away significantly more pretax money in retirement accounts.

  • Reverse mortgages are an option for anyone over age 62 who has substantial equity in a primary home and needs to raise cash that can be annuitized to last a lifetime. They can receive the money as a lump sum, monthly payments or a line of credit. The money is tax free, but the loan must be repaid with interest when the mortgagee dies. Usually the loan is repaid through the sale of the house. Retirees who have bought a dream home only to see their retirement plans shrink might consider this option if they don't plan to move.


  • Just because clients have to withdraw money from qualified retirement plans doesn't mean they have to spend it. Consider plowing some of it back into investments.

  • Consider immediate fixed annuities, insurance contracts that pay out a fixed income for the client's lifetime in exchange for a lump sum. “It's not uncommon for retirees to have lots of money, but because it's invested, they tend to feel very poor,” says Evensky. Taking 10 percent to 20 percent of their assets and investing it in annuities that will pay them every month can free them psychologically to live more comfortably. The older the client is when they purchase an immediate annuity, the higher the monthly payout.

A Big Break in Small Business Retirement Planning

New laws may prove a boon to financial advisors who learn to sell retirement plans to small businesses.

Small businesses could become important new business for reps. Under the new Economic Growth and Tax Relief Reconciliation Act (EGTRRA), it's easier and more economical than ever for small business owners to adopt retirement plans. “It's the most comprehensive retirement plan bill since 1974,” says John Stoma, director of retirement plans at Oppenheimer Funds in New York. “It stimulates plan growth in the small business marketplace, where there's a substantial amount of employment and a low level of retirement plans.”

In big corporations, the 401(k) market is all but sewn up by controllers, treasurers or in-house benefits operations. A few major brokers or broker groups get a piece of that action. But the field of smaller companies is wide open. Only 34 percent of businesses with 100 employees or less have retirement plans, according to the Labor Department. This relatively unmined segment controlled nearly $347.5 billion in 401(k) assets last year, and that number should grow to about $635 billion by 2007, according to Cerulli Associates in Boston.

Better yet, the majority of small-business owners rely more on brokers and financial planners for their advice than any other single source. And small business owners aren't well informed about their various retirement plan options, according to a study by the Employee Benefits Research Institute. “Reps can really add value in terms of helping plan sponsors understand what fiduciary responsibility is,” says Stoma.

This area represents opportunities for registered reps to build new business and offer new services to their existing business-owner clients. “If I were a registered rep, I would have a very big excuse to sit down with clients and look at their existing retirement planning and update it,” says Emily Urbano, vice president at Transamerica Retirement Services, one of many financial services companies offering brokers sales support and turnkey 401(k) administration for small businesses.

The new tax law, which went into effect at the beginning of this year, raises the amount employers and employees can put in tax-deferred accounts and provides incentives for small business owners to adopt plans. For the first three years, EGTRRA offers small business owners tax credits of 50 percent, up to $500 a year, of the costs of starting up and administering an employee retirement plan. Second, the new legislation has vastly simplified the red tape that until now has made administering 401(k) plans a nightmare of never-ending paperwork.

In addition, businesses of all sizes can reduce their corporate taxes by putting a higher percentage of payroll into a deferred compensation profit-sharing retirement plan. With EGTRRA, the deduction limit rises from 15 percent of the eligible payroll to 25 percent. So a company with a $1 million payroll could put away $250,000 versus just $150,000. In addition to this employer contribution, each employee can stash away a larger amount of his or her individual salary on a pre-tax basis. The limit, which used to be $10,500 is now $11,000 a year — an amount that's set to increase annually by $1,000 until 2006. To help those nearing retirement catch up on missed savings oppo

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