But our country is also creating remarkable new challenges for itself as it boldly strides into uncharted and potentially dangerous territory, as millions of baby boomers-your clients--ready themselves for retirement. As we define and review the challenges--which include rising healthcare costs and overextended long-term-care capacity, broken safety-net programs, underfunded retirements and a wholesale reengineering of the workplace--it becomes clear that Americans are going to need all their ingenuity in the years ahead. Meanwhile, new responsibilities might fall most heavily on the most financially literate subset of the American population: the financial planning profession.

If you believe that the future will be much like the present, a helpful wake-up call can be found in a book 50+: Igniting a Revolution to Reinvent America by Bill Novelli, CEO of AARP. Novelli is not exactly a doomsayer. "This is an exciting time," he says. "We have longevity like we've never had before, we have a tremendous number of productive and creative people coming into their mature years, who have an attitude that they can change and reinvent anything. "But," he adds, "these are also times of great peril and problems."

Bill Novelli, CEO of AARP,  believes that boomers will reinvent both retirement and the workplace.

UNDERFUNDED HOUSEHOLDS

For the past 20 years, the American worker has been the subject of what amounts to a lab experiment in retirement funding, and there is evidence that for many, the experiment is not offering a positive outcome.

To see why, consider that for previous generations, retirement funding rested on what was widely described as a three-legged stool: (1) a defined benefit pension plan; (2) Social Security; and (3) personal savings. In retirement, two of these--the largest two--took the form of monthly checks. Workers defined their retirement assets in terms of the monthly income they expected to receive from Social Security and a company pension, whose total could be quickly and easily translated into a fairly clear picture of their expected lifestyle.

Over the past 20 years, some form of a defined contribution arrangement has increasingly replaced the defined benefit leg of the stool. Instead of counting on professionals to manage their asset pool (as was the case with a defined benefit plan), workers are expected to make their own long-term investment decisions. More important, workers are expected to do on their own what pension actuaries once did with sophisticated computer models: Figure out how the lump sum of their savings nest egg can be translated into an income stream at retirement, and manage it so that the income stream doesn't dry up over unpredictable cycles of market returns.

Interestingly, replacing the actuary in a client's life has suddenly become the No. 1 retirement planning service offered by financial planners around the country. "All other issues are a subset of this," says Cal Brown of The Monitor Group in McLean, Va. "Even with our bright and wealthy clients, we regularly have to warn people that their withdrawal rate is too high."

Ron Pearson, who practices in Virginia Beach, Va., has found that some clients will try to simplify the problem in potentially disastrous ways. "My biggest challenge is to help my clients understand the total return concept and how best to take an inflation-adjusted income stream," he says. "Many of them are still in the spend interest, don't touch principal' mindset."

Given the mental gymnastics required to handle these actuarial calculations, a surprising number of Americans seem to be passing the test. But the statistics are grim for those who are not, and they make up a hefty minority. A 2003 Congressional Budget Office (CBO) Report summarizes 17 rigorous studies of pre-retirees, which took data from a variety of sources, including the Bureau of Labor Statistics (The Current Population Survey and the Consumer Expenditure Survey); the University of Michigan's Panel Study of Income Dynamics; the Federal Reserve's Survey of Consumer Finances; and the Census Bureau's Survey of Income and Program Participation.

The results? Using various assumptions, the studies found that U.S. savings rates (elsewhere estimated to be around 1.1% of net income) are somewhere between 25% and 38% of the amount required to meet overall retirement needs; that Social Security will make up 80% of retirement income for the least wealthy 20% of retirees; that (depending on your assumptions about future returns) between 48% and 58% of all households are on track to accumulate adequate retirement wealth (meaning, of course, that the rest are not); and that at current mortality rates, the average underfunded household faces 19 years of unfunded living expenses. One study recommends that people age 50 and over immediately begin to set aside 13% to 23% of their current gross income.

In March 2004, the CBO released its own report, concluding that roughly 25% of baby boomer households "have accumulated very few assets thus far and are likely to find themselves largely dependent on government benefits in retirement." Not surprisingly, the report predicts a decline in their standard of living.

In 2005, a mini-boom of sponsored consumer polls painted the same generally gloomy picture. Allstate found that 52% of American pre-retirees had set aside $50,000 or less for retirement. Fidelity reported that the typical American household was on track to replace approximately 59% of its projected pre-retirement income--and that fully 16% of working Americans hadn't even started saving for retirement yet.

Meanwhile, Prudential released its fourth annual Workplace Report on Re-tirement Planning--which asked respondents to grade themselves on their retirement preparedness. More than half--53%--gave themselves a "C" or lower. AXA Financial's 2005 survey reported that the retirement picture was more favorable for Americans than it was for workers in other developed countries, but noted that only six in 10 U.S.-based retirees felt their retirement income was sufficient.

In this course, a "C" probably won't be a passing grade. Speaking somewhat facetiously, Steve Henningsen of The Wealth Conservancy in Boulder, Colo., suggests that planners might create a new service for retired clients who fall into that underfunded 40% to 50%: "helping them to learn farming for their own subsistence needs, and how to make their Wal-Mart application stand out from all the rest."

Cal Brown, of The Monitor Group in McLean, Va., regularly
warns retired clients that their withdrawal rates are too high.

REINVENTING RETIREMENT

The 2004 CBO report tends to agree with Henningsen's assessment, though it puts a more hopeful spin on it. The report pointed out that each year a person post-pones retirement reduces his or her need for retirement savings by about 5%, while increasing Social Security benefits by 7%. To a surprising extent, working longer can make the numbers work--even if the job is only part-time and provides only a subsistence income.

Novelli points out that, coincidence or not, this solution to the retirement di-lemma arrives at a time when the retiring population seems less inclined to exit the workplace completely. "I don't think you're going to see people sitting in their current jobs for an extra 10 years," he says. "Instead, I expect that a large percentage of people will change jobs, industries and professions and stay in the workplace dur-ing their so-called retirement years."

Is this retirement? Yes and no. Some advisors, like David Lindau, who practices in El Paso, Texas, thinks the term is already obsolete. After helping his clients transition to more meaningful, less stressful, often part-time careers, he suggests that "we should get rid of, bury or leave behind the word retirement' for good. We need a different word for this stage of life."

Other advisors are discovering that work is part of the new retirement equation and are extending the life planning concept into the complicated arenas of "meaning" and "relevance." "Many of our clients need help deciding what they want to do with the remainder of their lives," says Ron Pearson. Redefining work often means earning less, but enjoying it more. Jim Johnson, who practices in Sacramento, Calif., has memorably defined his retirement planning services as "helping people leave their high-paying crappy jobs for great crappy-paying jobs."

Novelli sees bigger-picture implications in this generational refusal to retire in the traditional way. One is a rise in small-business development. "According to our research, there are more entrepreneurs over the age of 50 than under," he says. Nurturing these 50-plus startups, he suggests, is a huge potential service opportunity for financial planners.

Beyond that, he envisions a total reinvention of the workplace. One driver is the baby bust generation that follows the baby boomers. Demographics will put skilled, experienced workers in increasingly scarce supply right as the retiring generation begins to demand part-time or flexible job arrangements. Last year, the Economic Policy Foundation predicted that by 2011 the American economy will face a 4.3 million shortfall of workers--a number that could exceed 35 million by 2031, if present trends continue. "We need companies to value older workers, and it is already happening in many sectors because there are fewer people coming up the pipeline," Novelli says. "My belief is that more and more companies are going to design flexible work policies and other innovations to keep their older workers."

At this point, Novelli's prediction is unproven; there are some interesting signals pointing in its direction, however. A $3 million grant from the Alfred P. Sloan Foundation to Boston College will fund the first comprehensive study on the availability of flexible work options for older workers. The study is likely to investigate the examples cited in an issue brief published by the Business for Social Responsibility: consulting firm Booz Allen Hamilton's flex-time scheduling and work/life programs and Deutsche Bank's telecommuting, job sharing and part-time work options. In his book, Novelli cites Home Depot's flexible work schedules, health benefits for part-time workers and "snowbird" programs that allow older workers to relocate to different facilities as the seasons change. New York Life's New York headquarters now has a child-care center that cares for employees' grandchildren.

Of course, when these kinds of programs are introduced at more companies, they will be open to younger workers as well, altering the workplace in ways that could make it easier to have a fulfilling life outside the office--perhaps even to spend more time and energy outside of work than in it. That would be a welcome change for everyone, but most of all for older workers. Bill Glasgall, vice president for content management in the equity research group at Standard & Poor's, envisions retirement as "a part of a life, perhaps a long one, in which the workplace is no longer the primary focus."

But what will be the new primary focus? Just as many Americans are not pre-paring their financial lives for retirement, an equal number--or more--are not preparing emotionally. "I find that my biggest challenge is engaging 40- to 60-year-old clients in a conversation about what comes next," says Steven Podnos of WealthCare in Merritt Island, Fla. He says that people discover a whole new enthusiasm about life when they finally envision an alternative to the golf course.

Others, however, have trouble escaping from their pre-retirement habits. Bobbi Munroe, who practices in Atlanta, finds that her biggest retirement services challenges are men who have defined themselves by their jobs, and who have trouble coming up with a new raison d'tre.

Steve Henningsen, of The Wealth Conservancy, in Boulder, Co., worries
that many retirees will be unable to fend for themselves.

THE CHALLENGE OF HEALTHCARE

While a growing number of Americans moves toward retirement with insufficient savings, the country is moving into uncharted territory on another, potentially more dangerous front. The American Institute of Financial Gerontology notes that although the average American life span is 77.2 years, a person who reaches the age of 65 can expect to live to age 83. Neal Cutler, dean of the institute, predicts that 26% of all 65-year-olds today will live past the age of 90. By the year 2030, the percentage of persons in the U.S. age 65 or older will reach 20%.

Longevity, of course, is great news--considering the alternative--but it's ex-pensive. AARP research indicates that people over age 65 spend four times as much on healthcare as their younger peers. In a 1999 study, the organization found that those over 65 represented 13% of the total U.S. population--and consumed 36% of all personal healthcare spending.

Retirees may be even less prepared to bear these costs than they are to cover living expenses. Those who retire early are increasingly forced to pay private health insurance premiums--if they can afford them. The National Coalition on Health Care reports that in 2004 (the most recent year for which government data is available), 15.7% of the American population had no health insurance coverage, and the number is rising at a rate of 800,000 a year.

Retirees over age 65 are covered by Medicare, but even then, the government doesn't pay for everything. A 2003 study by AARP showed that noninstitutionalized Medicare beneficiaries age 65 and older were spending, on average, 22% of their income on healthcare, including Medicare cost-sharing, Part B, private insurance premiums and the costs of goods and services not covered by Medicare. Note that "noninstitutionalized" means that this sample excluded those who had to spend time in nursing homes.

In recent years, there has been a great deal of public policy debate about the unfunded future liabilities embedded in the Social Security program, and repeated calls to fix its finances. But few have noted that the Medicare program is in signifi-cantly worse shape financially. To get a handle on the size of the problem, con-sider that the total U.S. government debt currently amounts to approximately $9.9 trillion. According to a September, 2006 GAO report "Saving Our Future Requires Tough Choices Today," future Social Security benefits represent a cost of about $4.7 trillion in today's dollars, or almost half the national debt.

The same report estimates future Medicare Part A benefits at $8.8 trillion--a figure comparable to our entire national debt. Future Medicare Part B benefits are pegged at $12.4 trillion. And future Medicare Part D benefits (the new prescription drug benefit) are estimated to run another $8.7 trillion. Add them up, and you get a total Medicare liability of approximately $30 trillion-more than three times our current national debt and more than six times the size of our future Social Security obligation. The GAO report helpfully points out that the total government debt, plus future Social Security and Medicare obligations, comes to $411,000 per household in today's dollars. That's almost 10 times the median household income of $44,389. One doesn't have to study these figures very long to realize that coverage might be scaled back at some point not very far away.

Planners should begin to factor into their retirement plans some additional monies earmarked to pay for increasing medical costs--particularly end-of-life care, which can eat up as much as 50% of an individual's lifetime healthcare funds. (Classic planning documents like advance directives, living wills and healthcare proxies might help here, too.) Unlike retirement shortfalls and reinvention of the workplace, this corner of the wilderness is likely to cause real hardship down the road.

LONG-TERM CARE: BACK TO THE HOME

A significant subset of the healthcare financing issue is, of course, paying for as-sisted living and long-term care as retirees falter because of illness, injury or extreme old age. Recently, Troy Jones, who practices in Oklahoma City, Okla., had his first encounter with the nursing home marketplace when he began searching for a facility for his father. The experience was unnerving. "I had trouble finding space in any of the local homes," he says. "And I'm thinking, what's going to happen when this next generation reaches retirement age?"

It's a good question. The American Psychiatric Association has estimated that roughly 5% of all persons age 65 and over will spend time in a nursing home; the number rises to 20% of people over 85. According to the Foundation of Health in Aging, about half of all residents spend at least one year occupying a nursing home bed; 21% live there for almost five years. Roughly 78 million people will be turning 65 between now and 2030, and nearly half of them will reach age 85. Yet according to the American Health Care Association, the 16,995 nursing facilities in the U.S. have a total of only 1,813,665 beds--or approximately one for every 43 soon-to-be retirees.

Most financial planners have long recognized that clients who rely on Medicaid or government funding to pay for nursing home space will be treated like second-class citizens. It is not hard to envision a day when demand so outstrips supply that most facilities will no longer accept Medicaid-funded patients, rendering the various asset-shifting techniques that have cropped up over the past 20 years totally ineffective.

But here, too, there are interesting rays of hope. "The percentage of disabled people going into nursing homes is actually falling," says Novelli--because, he says, people prefer to recuperate at home. Jones, as a consumer of the services, puts it somewhat differently, but makes the same essential point. "You can buy service," he says, "but after looking long and hard, I'm convinced that you can't buy care. You only get that from a relative or loved one."

Bill Glasgall envisions a world where each of us will, in his words, "cobble together a new, unwieldy support system based on our own financial and emotional resources, augmented by our families, Medicare and Medicaid." Novelli would like that system to become less unwieldy. "Right now, our policy is tilted toward institutional care," he says. "We can save money and improve quality of life if we can keep people at home longer."

Reducing the percentage of nursing home consumers will require significant changes, but these may be on the way. Novelli points to what he calls new assistive technology, including sensors that can monitor elderly people at home and tell family members whether Mom is taking her medicine. Beyond that, he expects much greater interest in long-term-care insurance, and thinks more LTC policies should allow the patient to choose what kind of caregiver should be compensated--so benefits could be used to pay a daughter or friend in addition to, or instead of, a visiting nurse. And he thinks we can save dollars for pennies if we fund the National Institute of Health properly so it can accelerate the pace of research into Alzheimer's and Parkinson's diseases.

CHALLENGES AND PROMISE

The interesting thing about exploring these trends is that, for the most part, there are plausible solutions to the worst of them; a byproduct of these solutions would be a more flexible and fulfilled society. Already, corporations that turned their employees loose with a 401(k) plan and little guidance are starting to adopt automatic opt-in programs and payroll-deduction increases. There's even renewed talk of strengthening Social Security.

On the financial planning side, some of the most important adaptations are already underway. Life planning services incorporate career planning and a deep exploration of the nature of personal fulfillment. Planners are increasingly focusing on the most tax-efficient ways to take money out of a client's melange of traditional and Roth IRAs, taxable investment accounts and annuities; others are learning how to make the increasingly complex calculation about when to start collecting Social Security benefits.

For financial planning clients, there is reason for optimism. "By and large, people are going to experience a more enjoyable retirement," says Elyse Foster of Harbor Financial Group in Boulder, Colo. "The more information we provide, the more confident and prepared people will be."

The public policy debates of the future will certainly be more intense and interesting, as the wealthiest, most powerful nation on earth moves ever deeper into uncharted terrain. The future is bright, but only because we make it so.

Bob Veres is publisher of the Inside Information service for financial planners (www.bobveres.com).

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