Right from the beginning, baby boomers have been different. Never had America seen so many children being born in such a short period of time. As theyve grown through coonskin caps and the Woodstock Nation, to self-actualization training and minivans, this unique generation has insisted on setting its own course and style.
As the tsunami of baby boomers now approaches retirement, its clear that it will again ignore tradition and do things its own way. What does this bode for the financial services industry? It means financial advisors must open themselves to some fresh thinking and be prepared for the changes that might be afoot.
Not like their parents retirement. Any experienced financial services professional knows that retirement for baby boomers is going to be a lot different than that of their parents. Heres a look at some of the reasons why.
New retirees will continue to live a lot longer than past generations. Add to this the possibility of an extended period of low returns in the financial markets that could slow the growth of retirement nest eggs, and its easy to understand why the fear of outliving their assets is a very real concern. Even with investments, annuities, IRAs, life insurance cash values, pensions, defined contribution plans and Social Security, many baby boomers arent so sure they will have enough. Thats one reason why an AARP study of 2,000 baby boomers found that 80% expect at least part-time employment in retirement.
Baby boomers arent looking forward to taking it easy on the front porch swing. My clients are looking forward to an active and vital lifestyle in retirement that, in many cases, will be more exciting than what they have today–and might be more expensive.
Boomers will play their fair share of golf, but they have other things in mind, as well. For example, Ive talked to a number of people who are interested in experiential travel. That means everything from gourmet institutes and swimming with whales, to elder hostels, historical walking tours and spiritual journeys.
Boomers, in general, will be more aggressive with their retirement assets. Several factors point to the idea that the “mutual fund and 401(k) generation” will be more at ease with balanced portfolios than the “savings account generation” that preceded them. Assets will need to provide more and last longer, so a balanced approach to risk and return will most likely be a positive for baby boomers in their retirement years.
There is a declining “Bequest Ethic” in America today. Research of people over age 65 shows a drop in those who believe “Its important to leave an inheritance,” from 56% in the early 1990s to 47% in 2000. This means that baby boomers will spend more of their assets during their own retirement than previous generations did.
Keeping this in mind, I feel it is important in any retirement planning discussion for my clients to include a legacy discussion to make sure the right balance is struck among all of the clients priorities, including lifestyle, heirs, charities and other bequests and, of course, the potential unintended beneficiary, the government. In many cases, clients have not thought through how much they might like to leave and to whom. Talking the issue through always adds value to the relationship.
Turning gross assets into cash. As baby boomers forge their own unique way to retire with new expectations, priorities and concerns, financial advisors face a number of challenges to make sure their business remains relevant and positioned to help these clients for the next 30 years. As pointed out above, this will include considering a number of ideas for adapting your business, some traditional and some not so traditional.
A more robust retirement lifestyle will require that baby boomers put a greater emphasis on turning gross assets into income. Advisors will need to strengthen their expertise and skills in distribution planning and income-generating strategies. In conjunction with this comes a host of tax-efficiency and risk-assessment questions that planners will be asked to address by clients.
Knowing the best way to turn those growth assets into income-generating assets, while minimizing the tax bite, will be a critical competency. People dont want to take capital gains for instance, but it may be preferable to increasing the ordinary income generated by distributions from an IRA in some cases.
Nontraditional ideas may be invaluable. Most financial advisors are prone to taking a very analytical approach to their job and their clients. On the other hand, we all face the reality that our clients are emotional beings. Its the “right brain vs. left brain” idea. For example, research by Meir Statman has demonstrated that clients keep separate “mental accounts” for various pools of assets. They may feel greater affinity for their companys stock fund than any of the other investment options in their 401(k) plan. These feelings affect their desires and their decisions about different assets.
Efficient or not, these feelings about these accounts can influence their satisfaction with the recommendations they get from a financial advisor.
Thats why planners should consider developing at least a conceptual knowledge of the principles of behavioral finance. A general Internet search on the subject will prove helpful and one of the articles at Statmans Web site, “Financial Physician” is a particularly excellent resource that will help advisors understand how emotions and cognitive errors influence investors and their decision-making process.
I will often create different accounts with different asset allocations to recognize this difference in how people feel about assets that they emotionally segregate out for different purposes.
Many top financial advisors today are looking beyond their clients financial needs and taking a more holistic approach to serving these clients and providing nontraditional value-added services. Especially for their best clients, top advisors create client appreciation events as part of their practice management and business planning.
There are many ways that the changing face of retirement could provide ideas. From presenting various “experiential” travel ideas to profiling successful and fulfilling part-time careers, there will be many ways to strengthen relationships with baby boomers in the years to come.
The baby boom generation has created challenges for every industry it has touched over the years. Hopefully, those of us in the financial services industry will be prepared to meet their needs before the full effect of their demand for services strikes our industry. The key is to be flexible, be open to new ideas and anticipate their needs. You will now have to approach retirement planning very differently than you had in the past.
is senior vice president of Financial Network Investment Corporation/ING Advisors Network, Torrance, Calif. He can be reached at firstname.lastname@example.org.
Reproduced from National Underwriter Life & Health/Financial Services Edition, October 24, 2003. Copyright 2003 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.