Boomer Diagnosis: Financial Paralysis

Some 76% of all boomers thought that saving $100 a month from age 30 to 65 would yield greater returns than saving $100 a month from age 21 to 30. In fact, the investor who saves from age 21 to 30 would have the larger nest egg when he turns 65. So the vast majority clearly don’t understand compound interest, Guardian says.

Some 13% said they would be satisfied with an investment that grew from $10,000 to $15,000 over the course of 20 years.

An individual’s wealth, not age, is a better indicator of understanding about the principles of money and the financial needs of retirement, the study found.

“No matter their age, the boomers with more than $100,000 in investable assets had a better understanding, though not always great, of principles like portfolio diversification and the difference between risk and volatility,” Murtha says.

The survey found some tendencies among boomers that many advisors would consider imprudent. Much of the “paralysis,” for example, seems to stem from a tendency to think in the short term.

For instance, when asked how they would spend a small windfall ($1,000), most said they would use it mostly to pay off debt or take a vacation. When asked about how they would spend a larger windfall ($25,000), however, most said they would set aside a substantial part of a larger windfall for retirement.

In both cases, the better option for a boomer would be to use most of any windfall, large or small, for retirement, Guardian says.

Asked to name their biggest concerns about their post-retirement years, boomers listed them as the effect of inflation (80%), health concerns (79%), whether Social Security will exist (74%), outliving their financial resources (72%), adverse stock market impact on savings (58%), and being financially responsible for others (e.g. parents or spouse).

Asked to name their largest source of retirement income, respondents answered as follows: defined contribution (e.g. 401k) plan, 30%; Social Security, 20%; defined benefit (pension) plan, 17%; personal savings and IRAs, 13%.

Other sources mentioned including money from the sale of a home or business (3%), inheritance (3%), annuities (2%) or insurance policy payout (1%).

Reproduced from National Underwriter Edition, October 28, 2004. Copyright 2004 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.