The changing face of retirement. What does that mean? Well, given the human propensity for individuality, it could mean 76 million different things over the next 25 years. Retirement is changing because boomers are like this, or because boomers are like that – and keep in mind that boomers are your future clients. Retirement is changing also because of factors boomers can’t control, chief among them longevity and soaring health care costs.

Taken together, those two factors represent a more daunting challenge than boomer spending habits or a generational lack of savings. That health care costs will continue to rise is given, as are extended life spans.

“Longevity and health care are intertwined,” says Christopher Van Slyke, CFP and managing partner of La Jolla, Calif.-based Capital Financial Advisors LLC. “People are going to live a lot longer, but there is a cost attached to that.”

The bulk of all health care spending occurs in the last few years of a person’s life, when health problems are most severe. As more and more people live into their late 80s and early 90s – 20 and 30 years into retirement – spending for health care will skyrocket just to get them into their last few years, adding to the overall burden.

Reality
Health spending already accounts for nearly one-quarter of after-tax spending for adults age 65 and older, a significant amount. According to a brief from the Center for Retirement Research at Boston College, that percentage will rise to 35 percent by 2030 for older married couples and 30 percent for unmarried older adults.

“Our projections imply that by 2030, when the youngest baby boomers are old enough to qualify for Medicare, older adults will devote implausibly large shares of income to health care,” write the brief’s authors, Richard W. Johnson and Rudolph G. Penner.

Figures like that should be enough to get the attention of any boomer client or prospect, but then what? How can advisors turn their clients’ awareness into action in their pre- and post-retirement years? Fortunately, says Jim Elder, CFS, boomers’ perception of retirement is already changing.

“Many boomers, when they talk about retirement, plan to retire and do something different,” says the owner of Montrose, Colo.-based ElderAdo Financial. “Working in retirement is not a bad thing if you have a good outlook.”

And for a substantial number of boomers, working in retirement will be part of their reality. Another part of the new reality is shattering the old perception of working years as the accumulation phase and retirement years as the distribution phase. Boomer retirement is sure to be a combination of accumulation and distribution – if they expect their money to last as long as they will.

Perhaps the harshest reality boomers will face as they near retirement has to do with their consumer lifestyle. Generation Spend’s debt load may be difficult to overcome. It’s one thing to make payments with a steady and substantial paycheck; it’s quite another without that money.

“More people are coming to retirement with debt,” Elder says. “It’s OK to have debt at 45 or 50. But once you’re on a fixed income, it’s harder to meet that debt obligation.”

These realities add up to challenges for advisors, tests of their professional skills and powers of persuasion.

Advisor challenges
Van Slyke and Elder agree that one challenge for advisors is to get boomers to recognize too much of their net worth is tied up in a house they don’t need. It’s either the house they raised their children in and therefore don’t need the room anymore, or it’s the house they bought after the kids were gone as their reward for a job well done and they therefore don’t need the room anymore.

“It’s smart to get more of their net worth out of their house and into assets that are more liquid,” Van Slyke says.

Elder suggests downsizing and becoming a landlord. “[I tell clients] to sell the house they’re in, buy a duplex, live in one half and rent the other half,” thereby decreasing their mortgage and gaining some rental income to boot.

Boomers are going to have to make their money work harder for them than ever before if they want a comfortable retirement. Defined-contribution plans outnumber defined-benefit plans by a 14-to-1 margin, according to the U.S. Department of Labor, Employee Benefit Security Administration. Traditional pensions are foreign to most boomers, so they need to make those 401(k)s, IRAs and mutual funds stretch. That probably can’t be accomplished by playing it safe with all of one’s money. But memories linger.

“Many boomers made horrible choices in the 2000-to-2003 time frame,” Van Slyke says. “Some are still lost or they are scared.”

Risk averse. Gun shy. Conservative. Once bitten twice shy. Whichever phrase applies to your clients, they must be convinced that some of their money has to be out there earning more, even if it is riskier. Inflation alone dictates that.

“They must realize we’re looking at a longer time frame,” Elder says. “You can’t put all your money in a bond fund anymore and outpace inflation. There are only two places to put your money to outpace inflation: stocks and real estate.”

Elder acknowledges there is more risk in that strategy than in leaving one’s money in a bank, but he insists that over the course of 20 or 30 years – the length of retirement for boomers – the stock market is the best way to ensure a client’s money makes money, which is the ultimate goal.

Van Slyke knows many boomers will remain risk averse after taking their beating with their tech-heavy portfolios, and he says that’s fine – to a degree. It’s OK, he insists, to put a portion in annuities, where the income is guaranteed down the road (even if it can’t outpace inflation). But clients will need to be more aggressive with the rest, especially those without a sufficient amount accumulated to be comfortable for the lengthy post-career period. What that amount is depends on where people live, but he says in the La Jolla area where he practices, it takes $5 million to $6 million for a retiree to have enough. Those without the funds need to expose themselves to a little risk for the potentially large gain.

Results
Work longer. Save more. Take a few (relatively small) risks. Trade down. Valid pieces of advice all. The boomer generation has been defining and re-defining itself for decades, and defying expectations for much of that time. Boomers have raised children, founded multi-billion-dollar corporations and a couple have even been president, each a terrifying thought considering many of them had the opportunity to agitate for or against the Vietnam War and disco.

Under the tutelage of knowledgeable, expert advisors, boomers may again defy expectations by securing prosperous and long retirements. One never knows. What is certain is that many bad habits must change, to be replaced by those of saving, planning and being smart about all things retirement. Good luck.