BOOMERS CONFIDENT ABOUT RETIREMENT

Affluent Baby Boomers are increasingly aware of how much money they will need to enjoy a financially secure retirement, and that knowledge may be building their confidence about retirement. About three-quarters think they're in good or excellent financial shape, and nine out of 10 think they're making the best decisions about managing their assets, according to the third annual Lincoln Long Life^SM Survey. The respondents were Boomers with annual household incomes of $75,000 or more.

Aware of retirement issues

The Boomers displayed a solid awareness of the challenges involved in developing retirement income security, including the changing sources of retirement income. More than a third expressed concerns about whether Social Security will deliver the expected amount of retirement income. And 80% reported having an employer-sponsored defined-contribution plan such as a 401(k) — the type of plan that is gradually replacing the traditional pensions provided to earlier generations.

They also know about other issues affecting the security of their retirement income:

• Inflation. Boomers are concerned that rising prices can erode their purchasing power over time, and most expect inflation to increase from its current level.
• Spending constraints. Almost three-fourths of the Boomers say they will 5% or less of their retirement savings each year, to avoid running out of money.

As time goes on, these ever-more savvy Boomers will no doubt begin taking the essential next step: detailed financial planning for the many years they will enjoy after retirement.

Starting to plan

The Boomers' confidence comes even though almost half have not yet figured out how much they need to save for retirement, and more than half do not yet have a plan on how much they can safely spending during retirement. Next year, the first Baby Boomers will turn 62, the age at which they can begin drawing Social Security. The Employee Benefit Research Institute has found that American workers in general express confidence about their retirements, but that many haven't been preparing for retirement. Indeed, EBRI says, "many workers may be overconfident about their retirement security."

Some retirement hurdles

Some of the obstacles that Boomers face include the uncertain future of Social Security, which suffers from inadequate long-term funding, and the declining numbers of traditional pensions, which pay monthly checks to retirees.

Changes in U.S. private-sector pensions

The number of traditional defined-benefit pension plans has been declining over the years, as has the number of active participants. They are being replaced by defined-contribution plans, especially 401(k)s.

Millions of active participants

	1975	1980	1985	1990	1995	2000	2005
Defined benefit plans	26	30	29	26	23	22	21
Other defined contribution plans	11	19	23	16	14	11	8
401(k)s			10	19	28	40	47

Thousands of plans

	1975	1980	1985	1990	1995	2000	2005
Defined benefit plans	103	148	170	113	69	49	41
Other defined contribution plans	208	341	432	502	423	339	294
401(k)s			30	98	201	348	417

Billions of dollars in assets

	1975	1980	1985	1990	1995	2000	2005
Defined benefit plans	186	401	826	962	1402	1986	1950
Other defined contribution plans	74	162	283	327	458	492	468
401(k)s			144	385	864	1725	2443

Sources: Investment Company Institute, U.S. Department of Labor, and Cerulli Associates

In addition, most (65%) are probably underestimating the amount of income they'll need, believing that their spending will actually decline in retirement. In fact, the federal government created an experimental Consumer Price Index for the elderly in 1982. That index has risen faster than the CPI for the working population, according to the Bureau of Labor Statistics.

Convinced they're prepared

In the Lincoln survey, a large majority of well-off Boomers (84%) say they are financially prepared to retire when they would like. Most (79%) say they are somewhat or very knowledgeable about financial matters involving retirement planning.

A majority (58%) say they expect to leave the workforce before the traditional retirement age of 65 — even though they cannot collect full Social Security benefits until they are older.

But Boomers aren't counting on Social Security to provide them with a secure retirement. A mere 5% of respondents said Social Security would be their primary source of retirement income, even though it provides 39% of the income of current retirees. In contrast, 31% said their main income source would be a 401(k) or similar plan, while 27% said it would be a traditional pension and another 27% are counting on personal savings and investments to provide a secure income throughout their retirement.

Expecting long retirements

A full 62% of the Boomers surveyed expect to live 20 years or more in retirement, and 24% expect to live 30 years or more. To pay for a long retirement, the Boomers realize they'll have to depend on personal savings such as IRAs and 401(k)s, so 93% have a retirement plan in place.

Planning to consult the experts

Because they will have to make their savings last for a long retirement, many Boomers plan to rely on the expertise of a financial advisor. Already, about half are working with at least one financial advisor, but many more expect to consult one before they retire.

Of those who work with a financial advisor, 96% said they were confident about their advisor's advice, and 94% said their advisor understands their retirement goals, dreams, and concerns.

Using home equity

Almost half of the Boomers are counting on being able to tap the equity in their homes, although that might require moving to a smaller home, something Americans have never been eager to do. And a third of those surveyed expressed concern that falling or stagnant real estate prices could affect their ability to pay for retirement.

The use of reverse mortgages has been growing in recent years. These loans enable homeowners to take out loans against their homes, without having to make monthly payments. The loans are repaid when the home is sold or when the homeowner no longer lives there. Reverse mortgages, however, typically enable retirees to access only a small amount of their home equity.

Pulled in two directions

One hurdle between Boomers and their goal of a secure retirement is their responsibilities to their families. Three-quarters said they were providing some financial support to either children or parents. And a third of those said they were helping both parents and children, making them truly a "sandwich generation."

Not surprisingly, this is taking a toll on Boomers' retirement plans. Half of those with dependent adult children said providing for family members made it more difficult to save for retirement. One-fourth of the care-givers have put off their planned retirements by a year or more because of this financial strain.

Perils of inflation

The Boomers' retirement resources will have to hold up against long-term inflation, something the Boomers expect will be higher in the next 20 years than it was in the last 20. Only 2% of those surveyed expect the rate of inflation to be lower, while 65% expect it to be higher. Even at the relatively low rate of 3% inflation that the United States experienced over the last two decades, the effects can be substantial.

The High Cost of Inflation

Expense	Time Period	Average Annual Inflation Rate	$1 equals (2005)
Hotel Stay	1976-2005	6.45%	$0.29
Dining out	1959-2005	4.60%	$0.15
Admissions to movies, theater, concerts, and sporting events	1977-2005	5.14%	$0.31

Data source: U.S. Bureau of Labor Statistics, 9/06

Some are worried

The challenges of creating a secure retirement have some Boomers concerned. Only 43% of them expect to have enough to live "very comfortably". Despite their above-average incomes, 17% expect to fall short or just have enough to meet basic necessities.

Conclusion

While Baby Boomers may be confident about their pending retirements, many have not yet adequately prepared. A solid retirement plan would include a reasonable estimate of your spending in retirement and how much you need to accumulate to fund that spending.

Building retirement income security can be a complex task, and most Boomers seem to realize that. About three-quarters of affluent Boomers will consult a financial advisor before retiring.

Contact your financial advisor or visit LFG.com to learn more about how you might achieve retirement income security.

Sources:

2006 Lincoln Long Life^SM Survey. This national survey, which was sponsored by the Lincoln Retirement^SM Institute, involved 1,004 adults ages 42 to 60 with annual household incomes of at least $75,000.

2006 Retirement Confidence Survey^®. This national survey, which was sponsored by the Employee Benefit Research Institute, involved 1,252 adults (1,000 workers and 252 retirees) ages 25 and older.