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How are baby boomers handling financial risk-taking now that the economy is on the rebound? And, what should financial advisors be saying to boomers about financial risk, especially those who are recovering from big losses in the early 2000s recession, but are now also nearing retirement?

According to some advisors, “risk” and “boomers” are mutually exclusive terms, a financial oxymoron of sorts. Many boomers are playing it safe, staying in cash positions and making only small “necessary” purchases, they say. That means no big variable universal life purchases for them. No huge deposits into equity funds. No fancy trips around the world.

Many boomers adopted that position following the stock market crash of the early 2000s, points out John Deihl, vice president of Planco, Wayne, Pa. This was no doubt intended to be a short-term reaction to financial setback, he says. Most probably planned to move back into the higher-risk investments once conditions improved, he says, but many have not done that to date.

This is despite the fact that investors generally are branching out a bit. For instance, Financial Research Corp., Boston, reported in early December that estimated net flows for mutual funds were up for domestic equity and international/global objectives in the first 8 months of 2004 over the same year-earlier period, while estimated net flows for corporate, government and tax-free objectives declined in the same period.

The boomers may be thinking they are reducing their risk by playing it safe, surmises John Goodwin, a financial representative with Northwestern Mutual Financial Network, Prairie City, Kan.

Unfortunately, he continues, “the vast majority are taking the most risky position of all: They are ignoring the fact that they may live in retirement for 20 to 30 years” and therefore they are neglecting to manage their finances in a way that will provide them with a comfortable retirement.

In Goodwins view, by not taking a long-term approach to their finances, boomers actually are accepting a huge long-term risk that they will not retire comfortably. “Some are even planning so-called hybrid retirements, where they will retire into new jobs,” he says.

The rule of thumb is that people need to have 80% of their pre-retirement income in order to be financially comfortable when retired, continues Goodwin. “Many boomers think that maxing out their 401(k)s and IRAs is all they need to do to get there. But those people are way off base. They will not be anywhere close to 80%.”

Boomers who are earning a consistent income of $150,000-$200,000 a year may be able to afford a less risky position, he concedes. “They wont have to look for 12% to 15% growth a year, or at least they dont think so, to achieve that goal.”

But a lot of boomers are not in that position, Goodwin says. In fact, many boomers he has seen feel the situation is hopeless. As a result, they dont even try to save, let alone build up retirement assets. “They just keep looking for immediate gratification,” he says. Since saving for retirement does not provide immediate gratification, they just ignore the issue.

“Its hard for agents to get their attention,” agrees Donald L. McLean, client educator at Matters of Choice, Tucson, Ariz.

Furthermore, McLean says, many boomers procrastinate. “Many will say, I will do my planning later. But they dont understand time, or that the years go by.” In fact, he says, people in general dont want to talk about anything serious, in the financial area, “until they are in their 80s, when they are in pain and its too late.”

Most boomers McLean knows are wonderful people, he adds, and they can be brought around to see financial realities, but the agent has to find ways to get their attention.

Some boomers are looking for the right time to move into longer-term allocations that will better serve their long-term needs, contends Deihl. This reflects the fact that many now are, perhaps for the first time, developing sensitivity to risk and awareness of their own risk tolerance.

In the late 1990s, many boomers just didnt focus on risk or their own feelings about risk, explains Deihl. “The market was up and they were chasing performance. No one really thought they would lose money.” But now, he says, boomers are healing from the financial “wounds” of the crash, and “they are looking for a prudent way to re-explore equity options.”

The question is, how to do that? Here are some suggestions.

Educate on ways to (re)enter the market: Advisors will need to educate or re-educate their boomer clients about how things like living benefit features in annuities, asset allocation programs and rebalancing programs can help, suggests Deihl.

Those product features arent new, he allows, but boomers still need education on them, because many never really paid much attention to them before. Besides, he says, “we tend to forget these concepts over time.”

Dont sell the prescription, adds McLean. “That doesnt do any good when people dont even know they are sick.” Rather, provide the boomers with proper education, starting by identifying what the boomer values and fears. “Those are issues that will get the boomers attention,” he contends.

Talk about the impact of cash. “Point out that cash is not a long-term solution,” suggests Deihl. Some boomers may still be using the conventional wisdom, which says people should scale back from equities as they approach retirement, he says. “When that is the case, the planner should educate on how such a strategy will impact funding for 30 years of retirement.”

Provide reminders about the need to save for retirement. Currently, people arent reminded about this every day in the way they are constantly reminded to buy DVDs and TVs, says Goodwin. “The result is, boomers dont think about saving or retirement very often, and they wind up with little or no financial legacy to monetize for retirement.”

Be a savings coach. Goodwin credits that idea to a conversation at a holiday gathering. Someone there wanted to know why there are not “savings coaches” to help people save for and plan their retirement income, the way fitness coaches help people improve their physical well-being.

Point out the historic value of a diversified portfolio. “Most advisors will tell you that a fully diversified portfolio that accepts some risk will stand the test of time,” says Goodwin. “Boomers need to hear that.”

Perhaps the economy itself will help. “Lately,” explains Matthew J. McAvoy, president of Target Insurance Services, Overland Park, Kansas, and chairman-elect of National Association of Independent Life Brokerage Agencies, “there appears to be more activity in the amount of life insurance being purchased at my agency.It seems boomers are buying on strength, and also when there is a big event, such as birth, marriage, new business plan, etc.”

That seems counter-intuitive, McAvoy suggests. “You would think boomers would buy life insurance when the need is greater, but thats not what is happening. Optimism seems to impact their buying decisions.”

The visibility raised by the first-ever Life Insurance Awareness Month in September “couldnt hurt this trend either, due to the energy and momentum it created,” McAvoy adds.

Some boomers do recognize that there are economic cycles, allows Goodwin. “They know they have to be invested over the long term to do well.” But relatively few are acting accordingly right now, he says.


Reproduced from National Underwriter Edition, December 16, 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.