If bigger is better, then the Baby Boomers, some 76 million strong and the largest generation in US history, can consider itself large and in charge. This generation, born from 1946 to 1964, has wielded their influence on just about every aspect of American life and they continue to do so. They have more discretionary income than any other age group and control some 70% of the total net worth of all American households.
But even with this substantial financial firepower, many Boomers face some serious threats to their financial health as they enter their retirement years. As financial planners at Glassman Wealth Services with a large subset of our clients falling under the umbrella of “baby boomers,” we have found 5 important problems that keep coming up again and again and again.
1. Longer Retirement Years:
By 2020, an astounding 8,000 people will be turning 65 every day. The real threat that’s emerging is that almost half of Boomers simply haven’t saved enough to provide for a comfortable retirement. Boomers can expect to live longer than their parents or grandparents. Unlike past generations, who might have 15 years of retirement to plan for, Boomers might have as much as 30 years of retired life ahead of them. The simple fact is that most have not planned for a retirement that, for some, could last longer than the years that they worked.
2. The Great Recession:
Compounding the issue is that Boomers’ wealth and retirement savings were set back by the bear markets of the dot-com crash and the more recent housing collapse. The same low interest rates that the Fed has used to breath life back into a flailing economy and have been a boon to borrowers such as corporations, municipalities, and home buyers, presents the GREATEST CHALLENGE FOR BOOMERS LOOKING TO RETIRE.
3. Low Interest Rates = Not Enough Yield:
Past generations had the ability to simply park their money in money market accounts and CDs and earn upwards of 5% or more, but that kind of strategy is nonexistent today because of continued low interest rates. The search for “safe yield” continues to be a challenge and it’s a trend that won’t quickly reverse itself. In fact, a report we wrote in 2010, The Yield Drought – Retirees Greatest Challengewhich explained the reasons for the low-yield environment and gave Boomers investment strategies they may not have considered still holds true today.
4. The Boomers’ Influence on the Markets:
What’s interesting is that as a whole, the size of the Boomer generation alone can make or a break an entire asset class. You just have to look back at time periods when boomers were buying their first homes (70’s and 80’s) and first investing in stocks (80’s and 90’s) to see how this generation’s demand can influence prices.
Even if we were to see interest rates rise or even spike in the near future, the vast numbers of Boomers who have been patiently waiting for this day to move their money into lower risk investments would likely have the effect of depressing rates again anyway. (Simple supply and demand economics.) If Boomers continue to look primarily for yields in bonds, it’s hard to see how those interest rates could ever skyrocket given the impact this generation has.
Put simply, attractive safe yields may likely not be in existence for a while – a fact that retiring Boomers need to prepare for.
5. Barbell Investing:
More often than not, when I work with new clients, the majority being baby boomers, they come with portfolios resembling “barbells,” meaning they have a lot of safe stuff, like cash and bonds on one end of the risk spectrum, and riskier assets like stocks and stock funds on the other. The problem here is that we believe that this kind of portfolio simply cannot sustain someone through retirement.
Alternative Investment Vehicles for Baby Boomers: The Stuff in Between Investing
The good news is that there are alternative investment vehicles that exist between riskier stocks and low-yielding bonds to help older investors get potentially more yield, but with less overall risk. These are what I like to call “the stuff in between” consisting of investments like long-short bonds or hedged equity.
I’ll explain what these investments are and how they work in my next article The Best Investment Strategies for Boomers Today.
Boomers will need to consider a variety of investment strategies to bolster their retirement income that their parents didn’t have to. With some planning and hopefully higher interest rates in the future, many boomers can enjoy a financially healthy retirement.