The long echo

In his 2006 State of the Union Address, President George W. Bush outlined what is going be one of the defining issues that face our nation in the immediate future. He said, “This year the first of about 78 million baby boomers turn 60, including two of my dad’s favorite people – me and President Bill Clinton. This milestone is more than a personal crisis. It is a national challenge. The retirement of the baby boomer generation will put unprecedented strains on the federal government. By 2030, spending for Social Security, Medicare, and Medicaid will account for almost 60 percent of the federal budget. And that will present future Congresses with impossible choices – staggering tax increases and immense deficits, or deep cuts in every category of spending.”

In the next 20 years, the demographic we know as the baby boom will become the elder boom, and they will begin to retire in the millions. While everyone expects to retire, few effectively plan for the new realities of retirement. As elder boomers retire, they will have less personal income, and some will have crippling personal debt and be faced with exploding health care costs. Add to this a very real concern that Social Security and company pension plans (if they have are lucky enough to have them) may not be there when they are needed, it is easy to see how elder poverty could become a significant social and policy issue.

Financial planners need to be aware of the nature and complexities of the elder boomer tidal wave. In so doing, you will be among the few professionals actually capable of helping elder boomer Americans plan to meet these and other retirement issues successfully.

Changing nature of work
By 2012, boomers will start turning 65. By 2030 there will be 69 million elder boomers making up 20 percent of our population, up from its current 13 percent. Within six or seven years, half our work force will be 55 or older. Graying Americans have legitimate concerns about rising health care costs, the funding of Medicare, Medicaid and, with ballooning deficits, the sustainability of our Social Security system. Many Americans who are not fully retired and are under 65 believe the federal government is not going to be able to meet its future obligations.

Although many Americans are contributing to company pension plans, they have misgivings about their employer’s ability to make those pension benefits a reality, and with good reason. We have an unfunded pension liability of $10.5 trillion. The pension benefits they might expect to receive, if they get them, will only amount to about 45 percent of their pre-retirement income. That is 15 percent below what the average European employee can expect. In the next 10 to 15 years, as elder boomers begin to swamp the Social Security and company pension rolls, those retirement standbys will face bankruptcy. To prevent this, we will have to make sweeping changes to ensure they are sustainable in some form – and that will be a painful exercise.

These changes could foment an elder revolt of historic proportions, for nothing will disturb this potent and activist generation more than someone changing what they perceive as their entitlement. Pension plans are in trouble for three reasons. First, elder boomers are living longer. In 1950, if you retired at 65 you could expect to live another 12 years. Today it is 19 years. We also are deciding to retire earlier, in the mid-50s, or are forced into early retirement. This means we will be spending longer periods – in some cases a third of our lives – in some form of retirement. Consequently, we will draw down on plans for longer periods of time. The second reason is lower fertility rates. There will be fewer contributors, people working and paying into plans that support retired people.

Third, lower-than-expected returns on pension investments will change the amounts of money that will be available for payout.

As we are faced with a dwindling tax resource base, soaring Social Security and medical costs, elder boomers have to start looking long and hard at how they are going to retire and when. As elder boomers begin facing retirement up close, rather than 20 years down the road, they’ll realize they likely will experience significant drops in personal income. Only a handful of them have thought about, let alone put in place, a plan of action.

Despite their increased need for professional financial advice, people who have already retired or are close to doing so don’t seek out as much help with their financial planning as they did during their buildup to retirement. In an AARP survey, “Boomers at Midlife,” 23 percent of boomers said the worst aspect of their life was their personal finances. Only 58 percent believe they could meet their financial goals for retirement. But if they are going to live for another 20 to 25 years in a reasonably secure manner and with a degree of independence, they’re going to need from $2 million to $2.5 million working for them.

This sobering reality becomes even more depressing when you look at how little savings Americans have. Less than half of elder boomers have any investments, and only two in 10 will be self-sufficient when retired. Financial planners need to help people not only realize that it is never too soon to start saving but also never too late. As a generation, elder boomers have been great spenders and terrible savers. Credit card debt for the average American is $8,562, up from $3,454 10 years ago. The individual savings rate, according to the Department of Commerce, is now at minus 0.5 percent. These realities certainly demonstrate there is a great need for financial planning to help boomers on the edge of retirement and beyond understand their situation and develop financial action plans that will meet their retirement goals.

The labor shortage
We are not only on the edge of an elder boomer retirement wave, we coincidentally are going to see a worker drought in the next couple decades. Lower fertility rates will cause a projected shortage of more than 10 million people in the labor force by 2010. Even with increased immigration, this looming labor shortage will figure prominently in our economic and social fabric without measured intervention.

Businesses and government need to be creative in how they engage elder boomers, for they are the keepers of decades of technical, cultural and management leadership experience so essential to our knowledge-based economy’s international competitiveness. To reduce the impact of the labor shortage, we need to encourage people to continue to work and gradually reduce their working time as they age. This is known as phased retirement. If more elder boomers keep working, it will help maintain tax revenues and create job opportunities for younger workers as boomers reduce their time on the job. It will also provide employers the opportunity to develop mentoring programs so younger employees can benefit from the wisdom and experience of organizational veterans.

Companies will be aided in this by how elder boomers view themselves and retirement. Some will be forced, because of financial reasons, into working after the so-called retirement age. Thirty percent to 50 percent of them say they will have to work past 65 because they have not saved enough to retire. Other elder boomers simply want to continue working. The “New Retirement Survey” by Merrill Lynch found that “boomers reject a life of either full-time leisure or full-time work. When probed about ideal work arrangements in retirement, the most common choice among boomers was for a repeating cycle between work and leisure (42 percent), followed by part-time work (22 percent), starting their own business (13 percent) and full-time work (6 percent). Only 17 percent hope never to work again.

Work’s changing nature
Elder boomers have a set of shared values driven by a sense of independence and self-sufficiency. The notion of entrepreneurship runs strongly in their perceptions of how they will retire. The word retirement is offensive to many. Remember, they are not sitting around reminiscing about their glory days – they are living them. More than three-fourths of boomers intend to work in retirement, but they want to retire from the current job or career and start a new one. Indeed, they feel that earned income will be their main source, or an important and essential secondary source, of retirement security. Although they may have the knowledge skills to become successful entrepreneurs, they may not necessarily have the business or systems savvy. There is a new generation of elder boomer entrepreneurs who need the advice and guidance of business and financial services consultants and planners.