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.
The sad reality is that few of the entrepreneurs intending to generate current income into their third age have well-thought-out, active business and financial plans. It’s almost as if people say to themselves at retirement, “That’s it. I’m retired. I don’t have to think about this anymore.” Ignorance about financial planning is a critical issue. For example, few near retirees understand that without proper financial planning they cannot protect their loved ones after they have passed on. There are those who are shocked to learn that without addressing estate, insurance and health protection considerations, their stock or mutual fund purchase program is not adequate or guaranteed and not a complete financial plan.
Ignorance also affects Americans who feel safe because they are participating in employer-sponsored retirement plans. According to pension consultants Watson Wyatt, pension funds worldwide have lost a staggering $2.8 trillion, or 20 percent of their value, since 1999. The Economist magazine has said this issue has left many companies with big pension shortfalls that may weigh heavily on share prices for years to come. Too few Americans are adjusting their retirement savings plans to address the shortfall in their investment returns. Moreover, many plans do not specify how much money is actually going to be there when people retire, and they could be in for an unpleasant shock when that first post-retirement check comes.
This means elder boomers must engage in ongoing retirement financial planning as well as make choices about how money is going to be effectively invested and encourage them to step up whatever they can set aside now. Because of the wide range and complexity of retirement options and the limited amount of simple information, they will continue to put off planning and make costly mistakes. Here again is where you can step in and explain what their options are and clarify complex issues in terms elder boomers can understand.
The health care crunch
With increasing longevity, most elder boomers expect to have to pay for significant long-term health care bills, first for their parents and then themselves. They are a sandwich generation, caught between caring for elderly parents and supporting Twixers, the children who are caught in a netherworld of dependence somewhere between adolescence and adulthood. Few companies provide any health benefits after retirement, and those that do are experiencing a huge drain on their bottom lines.
A majority of retirees will not have sufficient health care coverage to pay the normal medical bills that come with older age let alone to pay for a catastrophic health care event. Without adequate life and health insurance based on a personal financial plan, their security and the security of those they care for is at risk. This will become even more of an issue as governments will be forced to modify healthcare systems. Without adequate disability and long term care protection, elder boomers run the risk of liquidating all their assets to pay for health care and outliving their resources. Americans must develop a healthcare savings and protection strategy, much as they do for retirement, so they can have their personal healthcare looked after with dignity when it is needed.
Elder boomers on the edge
Most Americans have a mortgage, kids and car payments. Even with an income from $50,000 to $60,000, they are struggling to make ends meet, much less plan. We should in principle be debt-free when we enter our progressive retirement years, but this is virtually impossible for many. As elder boomers transit between full-time employment and phased retirement, many will lose about half their income, research suggests. Many retirees will find it impossible to make up the shortfall, either because of lack of marketable skills or no savings.
With so many more people requiring the services attached to older age, and fewer taxpayers to pay for those services, it is reasonable to expect the level of government-funded health care and the cost of private care to be impacted dramatically. People who are on a financial edge when they are working will find that retirement could push them into a financial crisis. If they are but two paychecks away from the street before retirement, what will be their situation in retirement? This lack of money leads to poor decisions about their lives and their healthcare, such as not filling or skipping prescriptions, cutting back on food, and limiting those things that allow them to seek and achieve value in their lives.
When they reach the point of being challenged to perform the activities of daily living and require care, the cost can become prohibitive. The national average for a nursing home stay is $150 per day, $55,000 a year. The cost of home care for a basic minimum four-hour visit seven days a week can run between $1,500 and $2,000 a month. Financial planners need to alert people to these realities so they can take the appropriate action now to insure their future dignity and independence.
Although the main challenge for elder boomers as they approach retirement is related to changes in personal income, having to adapt to a change in lifestyle is also an issue. They plan for retirement as a destination and not what they are going to do when they actually arrive. Their choices not only have implications for the quality of their retirement, they also have a profound impact on the cost of retirement. Will they have sufficient money to fund a chosen lifestyle? If not, what lifestyle can be realistically chosen and managed?
People have to become far more involved in the retirement planning process than in the planning for retirement process. You can show elder boomers how to look at the realities of retirement and help to manage their expectations by developing realistic and manageable plans. Income uncertainty and growing issues around Social Security indicate to elder boomers that financial ability more than any specific age is the real indicator of their readiness to enter a new phase of life.
Only when Americans begin to treat financial planning as a process, rather than a one-time event, can they begin to create money practices that serve them well in every stage of life. Professional financial planners are in a position to give these elder boomers crucial counsel. The problem is that most Americans do not know how to access this advice.
Ironically, financial institutions are contributing to this problem. When financial practitioners limit their practices to high-net-worth clients, a majority of Americans rely on less-than-comprehensive financial planning often focusing on a financial plan that is all about stocks and mutual funds and little to do with comprehensive life financial planning. Moreover, only 2 percent of American households earn in excess of $200,000 a year. The median family income is $45,000. By focusing on high-net-worth markets, financial planners are eliminating the vast majority of Americans who need their help, especially elder boomers who are now facing the often unpleasant realities of a poorly planned retirement.
Financial services providers are going to have to adjust their product and marketing strategies to address the emerging elder boomers. They need to understand their attitudes, beliefs, values and goals. They need to develop marketing and product development strategies that meet the needs of this all-powerful demographic.
You can position yourself by developing a new practice focus where you help people plan their life and work in the years of phased retirement, not just the years leading up to it. By educating yourself on the personality and forces that drive the elder boomers as they go through life, you will be able to position yourself as a key provider of guidance and advice to this, the biggest generation.