From the August 2006 issue of Boomer Market Advisor • Subscribe!

When enough isn't enough

When my uncle started working, at the age of 15 in 1929, his ambition was to retire with $50,000 in the bank. In 1979, his dream came to fruition. He owned his own home, had a fixed pension of $20,000 a year, Social Security benefits and around $250,000 in savings. He felt rich; by the standards of his time, he was certainly comfortable. But he doesn't feel that way now. Even at the fine age of 92, he worries about whether or not he can afford assisted living -- and what he will do when he outlives the income from his savings.

As we enter the early retirement phase of the boomer generation, advisors are creating a plan to pave the transition path that many of their clients will follow. From an investment perspective, advisors are honing their asset allocation capabilities, and running models and simulations that offer sophisticated recommendations of where to put their dollars. They are building plans with a longer life expectancy, than our forebears enjoyed. Minimizing risk and recognizing that these assets cannot be replaced is critical. Most advisors are employing products and strategies that were unimagined, and unheard of, when my dear-old-uncle retired.

The fact remains it is unlikely that most advisors will meet their clients' expectations.

Several months ago in this space, John Hurley made several interesting points regarding boomer client expectations and their need for advice. He pointed out that today's retirees are far more likely to reach my uncle's age than ever before. During their retirement they may continue working in a very different endeavor than the one from which they retired. They may have dreams of adventure, philanthropy, or luxury. They may be athletic and vigorous.

Mr. Hurley noted that boomers may "find themselves in control of larger amounts of investable assets than at any other period of their lives." That is certainly true. It is also quite likely that boomers will seek the services of brokers, agents, planners and advisors to help guide them down the path. This is a serious charge. What kind of advice will they receive?

For those who are well off, they will be the beneficiaries of our preparation. But millions of Americans will retire with inadequate resources. A recent survey found that one in five retirees are financially struggling. My uncle is still in retirement, and recently my cousin announced his own retirement. He is retiring at the age of 60 from a foreman's job at a Midwestern industrial company. He is a quintessential baby boomer, albeit in somewhat more modest circumstances than some others. He will have a fixed pension of around $40,000 annually and a 401(k) of $550,000 that can be rolled over in to an IRA. He is, obviously, not yet eligible for Social Security. He is certain that $65,000 a year will meet all his needs. Better yet, $80,000 a year will enable him to really enjoy his retirement. And $100,000 will permit him to do the things he has dreamed about: buy a bigger boat, do some traveling and rent a vacation house for four or five weeks a year. And he doesn't worry. Good luck to him.

Someone, probably not me, has to tell him the truth. He doesn't have sufficient assets to meet his optimistic hopes and still last him through a possibly lengthy retirement. More than that, if he tries to squeeze higher returns from his assets he runs the risk of loss and the risk of not meeting his minimum needs. He may have no choice but to return to work. If he loses money, the risk is his and his alone. The government, his employer or his advisor is not going to come to the rescue. The hard truth is that, even with assets and income that is far greater than he expected when he entered the work force -- and indeed is not unsubstantial in nominal terms -- he will need to be judicious and economize. He will also have to ignore the temptation to align himself with the advisor who promises the highest rate of return. As in the growth markets of the past when some advisors won clients by promising them extraordinary rates of growth, there will be an increasing competition built upon unrealistic promises of income. I need to talk to my cousin about his expectations.

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