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.