As retirement looms, questions mount

Editor’s note: Sheila Reilly is principal of Reilly Group, a Newport, R.I., research firm. This article is adapted from material she contributed to After Sixty: Marketing to Baby Boomers Reaching Their Big Transition Years, published by Paramount Market Publishing.

The leading edge of the Baby Boom generation, 78 million strong, turned 60 in 2006. From cradle to classroom to boardroom, Boomers have never shied away from redefining how life happens, setting their own agenda, goals and priorities.

Now, on the cusp of a transition away from a life defined primarily by working/achieving/acquiring/consuming, will Boomers also redefine what comes next? What are the Boomer generation’s priorities for managing the assets accumulated over a lifetime? What are their plans as they shift from income producers/asset accumulation to pensioners, where they will be their own asset managers? What will be the implication of the largest transference of wealth in history ... of longer life, healthier lives ... of women outliving men ... of providing for generations above and below them?

What is the financial outlook for Boomers in their 60s? Providers of banking and investment services need to know what Boomers aspire to in their senior years, how they view managing and using their money and what their starting point is.

Baby Boomers will redefine what it means to live through the transitional decade of their 60s. Collectively, Boomers take pride in their uniqueness. Though prior generations retired and settled down in their 60s, Baby Boomers will break new ground. Boomers on the cusp of 60 don’t see themselves as old; they believe there is a future ahead of them. They expect to live longer, healthier lives; they are eager to get out and live life to the fullest. Boomers are still “in the game.” They are not ready to hit the rocker and retire from life. Many are planning “second acts,” changing careers, starting anew. Many will start businesses in “retirement” - many see work as fulfilling.

Energy, enthusiasm

At the beginning of this transitional decade, many Boomers exhibit energy, enthusiasm and satisfaction with their lives. While many have followed a predictable track of pursuing the American dream (family, career, recognition), more than a few stopped to smell the roses along the way. Boomers were the first generation to extend adolescence. They often started families later and in fact some are still raising families, paying for braces, tuitions, mortgages and all. Their financial timeline is pushed back. For these Boomers, time is catching up with them. They are joined by those financially supporting adult children and sometimes aging parents.

For Boomers late to financial/retirement planning, it’s more of a financial burden because they must meet all the day-to-day financials plus ensure retirement is taken care of. Some simply lacked planning/foresight.

As a result, it’s not unusual for a Boomer, at 60, to be a little behind their parents’ generation in readiness for the next stage of life and this has implications for what their 60s will be like. Rounding the corner to 60, most Boomers are still fully vested members of the wage-earning class.

Like every other generation, Boomers are not a homogeneous group. They are blue-collar and white-, healthy and not, savers and spenders, wealthy and not. What they have in common is the times they live in. Used to being in control, Boomers are not yet entirely free to control their own destinies; they are somewhat a hostage of their circumstances.

800-pound gorilla

Here’s the environment in which Boomers are entering their 60s, as it will affect their financial attitudes and behaviors.

At 60, the 800-pound gorilla in the room is this thing called retirement. No matter how much vigor and enthusiasm for work Boomers exhibit, their most rigorous work years are behind them. The next several years are, for most, the final years before retirement. All Boomers are beginning to do the math to see what they’ve got to work with. Some of the funding sources they could always count on are turning out to look like quicksand. A perfect storm is brewing and the unique problem for Boomers is they may not have time to change direction, to navigate a new reality in a way that future generations will. There are three factors, in particular, that combine to form this perilous scenario for today’s leading-edge Boomers.

Social Security: Today’s 60-year-old approaches retirement at a time when the social contract that Boomers signed onto when they began working 40 years ago has significantly changed. Social Security, once a cornerstone of retirement income, is neither sufficient to fund a dignified retirement, nor rock-solid.

Retirement spending needs have outpaced Social Security disbursements. The rising cost of living - in particular, of health care and energy - redefines what is needed to fund day-to-day living in retirement. With Social Security looking more like an appetizer than a main course, the issue of its solvency only multiplies the problem.

Another issue is Boomers’ well-deserved reputation as consumers. Keeping up with the Joneses was perfected by Boomers, who are uniquely preoccupied with acquiring. Not one car, but two. Not one vacation, but two. Perhaps not even just one home, but two. The cost of raising a child was/is also astronomical, and capped by the most expensive college tuition in history, rising at a rate much higher than the cost of living. Despite best intentions, some Boomers can’t get serious about saving for retirement until the last of the kids is kicked out of the house and the last payment is made on the mortgage.

Pension vulnerabilities: Another social contract, albeit privately funded (unless one works for the government) is the pension. Leading-edge Boomers may be the last generation to stick with any one employer for a significant period of time, and many have deliberately done so to fulfill the necessary requirements to draw a pension in retirement. But is the pension system secure? Many large, blue-chip companies are inadequately funding their pension funds to satisfy Wall Street’s unceasing demands for cost-cutting and higher profits. Many are, if not outright defaulting, seeking to change the rules late in the game, and the Boomer-aged employee is caught in the crossfire, often too late in their career to adjust to a harsh new reality.

Medicare: A third social contract in doubt is Medicare. Any retiree will suffer this classic Catch-22: just as the income ceases, needs for health care will escalate. But for Boomers, it’s more than that. Health care costs have been outpacing the cost of living for years, and there’s no end in sight. As long as they are working, Boomers’ health care needs are probably funded well enough. But paying for health care in retirement is altogether different. Just as pensions may falter, retirement health care benefits are no sure thing. Most will rely on Medicare (can the government continue to fund it?) and to the extent they can, supplement Medicare with their own resources. Boomers are used to ready access to high-quality health care, and to a fair degree of choice. Will this expectation be met with the resources they have available to them in retirement? Boomers should be worried.

Both Social Security and Medicare are large social programs that were predicated on the assumption that succeeding generations’ size and contributions would keep the systems solvent. But we know how that’s worked out.

Add to these concerns other forces beyond Boomers’ control, some of which are the result of living in a financial reality that has been, if not created by 9/11, certainly shaped by it:

  • forced early retirement (they get a buyout);
  • the vagaries of the residential housing market (most Boomers count on the equity in their homes to fund their retirement; recent reports suggest, if not a bursting of the bubble, then at least a deflation);
  • rising cost of living;
  • high budget deficits and national debt; and
  • stock market fluctuations.

Put it all together and you have a recipe for precarious life as a retiree in the 21st century.

In addition to these current factors, the eventuality of diminishment of physical capacity is beginning to come into focus, even for young-at-heart Boomers. Mentally, they’re still young, but their bodies tell a different story. Boomers are now coming to grips (with difficulty!) with this. They may not be as old as their parents were at this age but by the age of 60, many Boomers can see it coming.

Isn’t all bad

The news isn’t all bad. Many reports suggest the largest transference of wealth in history has begun. In 1999, it was projected that $32 trillion of personally-held wealth would be transferred in the next 50 years. If that number is even half-correct, it’s clear many Boomers have resources to fall back on. But how many of them will know how to handle it?

Some Boomers are quite ready for retirement. But so many more have yet to get serious about how to fund themselves for a comfortable and fulfilling retirement. Now is the time of reckoning.

From a financial perspective, what will Boomers need to be successful? They need to figure out what author Lee Eisenberg calls The Number: how much they will require to live in retirement according to their plans, or at least comfortably. Most don’t know, and don’t know how to pin down an exact figure, and this creates anxiety.

The Number (and therefore the challenge) will be greater for Boomers than for previous generations, because of their grand plans for retirement. They want to maintain the style of living to which they’ve become accustomed. Boomers want to keep their homes. Will they be able to? Will they be able to buy a second home, travel, indulge their interests? Boomers are part of the first generation to live on credit; this may not be a sustainable practice on a fixed income.

Their last working years (five to 10 years) will be spent building the nest egg. Depending on their circumstances, they may need an actively managed plan toward maximizing their assets.

Too late to achieve The Number? They’ll need guidance on how to manage with less.

Either way, they’ll need a game plan to shift from accumulation to management/preservation of assets. This is a significant paradigm shift that few, if any, have given thought to. Today, planning for life after a paycheck is all about getting to The Number, not how to manage once you’ve settled on it.

Most will need to adjust to life on a fixed income. Many will need to plan for survivorship of partners. Among leading-edge Boomers, men still take a dominant position in managing a couple’s assets. Women, in particular, need to educate themselves, as most will outlive their husbands and there will come a time when they have to manage on their own.

All will need strategies and tactics to protect their assets for ailing family members and survivors (e.g., states will seize assets to pay for nursing-home care; wealthier Boomers will want to protect assets for heirs).

Because of these circumstances, and their increased longevity, while previous generations had less of a need for financial service providers at 60, Boomers could well have an intensified need for them.

Piece of the pie

It’s not like this major transition from Boomers has gone unnoticed. Anyone who wants a piece of the pie is already out there jockeying for it. The question is, what messages are relevant and differentiating?

The message should begin with empathy, a convincing articulation of both Boomers’ obvious financial needs and acknowledgement of the underlying aspirations and fears. Some other mandatory considerations:

  • Boomers have always been dominant and they want to continue to feel in control of their destinies.
  • Boomers want to be young, act young.
  • Boomers are family-oriented. These indulgent parents want to be super-indulgent grandparents; they want to be an important part of their grandchildren’s lives. They want to assure their future.
  • Boomers are nesters; their home is very important to them, they will need strategies/tactics to keep them in their homes.

As investors, Boomers look for a track record, proof of performance. But the closer they are to retirement, the stronger the desire to manage and minimize risk. There’s no time to recover from another downturn. However, there are those who are playing catch up for retirement, who feel they need to assume more risk for greater return.

Nearsighted

Boomers seem, so far, nearsighted about retirement. Many are irrationally sanguine about their ability to manage adequately, not just in their 60s but beyond. They seem not to have a full appreciation yet for the idea that while life as a sexagenarian may not feel significantly different, they’re on the brink of being 70 and then 80. And one day they may be less able to care for themselves, and less able to “do” something if they’ve miscalculated, if what they have is not enough to manage on. The message may need to emphasize that retirement can last for a long, long time.

The message that will resonate best is: “Life is a journey.” There’s no right process or timeline to life. Life after 60 is what you will make it. Make it a time to celebrate life; at 60 you have earned the right to reward yourself with the time and resources and the wisdom of your years to enjoy your family, yourself, your life. Retire, un-retire, be bold, try something new. Forget about keeping up with the Joneses - try keeping up with yourself.