Going In Style

We’re past halftime of the Baby Boomer Retirement Game.

It’s been 10 years since the first cohort of that generation, born between 1946 and 1964, hit retirement age. On that first day of January in 2011, and every day since, roughly 10,000 members of that demographic have reached the full retirement age of 65 (and in some cases now, slightly older).

And the long-anticipated seismic shift in investing as a result of that trend is now off the Richter scale of investing. By some accounts, Boomers are sitting on $30 trillion in assets that will eventually be transferred to successive generations. By others, that figure could swell to $70 trillion before the last Boomer retires, the offiicial date of which would be Dec. 31, 2034.

But while a considerable amount of wealth has been created and corralled by the Boomers, it’s not what it could have been, thanks to a particularly nasty virus that encircled the globe in late 2019. The Center for New Middle Class conducted a survey amid the pandemic and found a remarkable 25 percent drop in the number of Baby Boomers who said they were self-employed or owned their own businesses. It also found that the largest jump in unemployment cohorts was in the 55-to-64 age group.

The implications of that will be profound for successive generations, who stood to benefit from the wealth that vanished with that group’s fortunes: Small companies owned by Boomers generated $5.1 trillion in sales in 2019. For the companies that simply closed their doors, that could mean an economic impact equivalent to losing $2.55 trillion in sales every year through the final Boomer retirements in 2032.

Still, whether it’s $30 trillion, $40 trillion or the high-end estimate of up to $70 trillion in aggregate wealth by the time the final Boomer leaves the work force, it’s a figure not to be lightly dismissed.

Creating Wealth

The Investment Company Institute estimated in the first quarters of 2021 that retirement accounts nationwide had more than $35 trillion in assets—$12.6 trillion in Individual Retirement Accounts, $9.9 trillion in 401(k)-type accounts, and $10.5 trillion in private- and public-sector defined-benefit accounts. And that was nearly triple the $11.6 trillion, inflation-adjusted, in those accounts just a generation earlier, in 2000. And those figures don’t include more than twice that total in the value of hard assets like businesses owned, homes owned, commercial-real estate investments, or in stock and bond portfolios held outside those structures.

So . . . where did it come from? Even someone with Bernie Sanders’ grasp of basic economics should be able to tell you it wasn’t pilfered from the poor—had they such sums, they wouldn’t be poor, now, would they?

A lot of it came from growth of tax-free retirement account savings—steady, regular contributions from workers’ paychecks, and organic growth of those accounts through prudent investing. But the rules of that game could soon change, imperiling those balances as a federal government looks to ease the fiscal hangover from a $6.55 trillion spending bender in 2020.

What Might Have Been

For some, 2020 was a painful year in ways beyond a health crisis. When the markets tanked as COVID sank its spikes into the economy, many investors who knew better—after years of experience with downturns—panicked. In some cases, with brutal consequences. Those who kept their heads were handsomely rewarded.

“Bear markets are painful in the short run but bring opportunities that can have material financial impact for years afterwards,” says Nick Withrow, a portfolio manager for BKD Wealth Advisors. “During last year’s downturn, we looked to capitalize on depressed asset prices by rebalancing portfolios, actively looking for tax-loss harvesting opportunities, and incorporating new investments into portfolios.” 

Some investors, Withrow said, waited to make changes “thinking that things would get worse and got left behind when the markets rallied.  Other investors waited for things to get better before they felt emotionally ready to rebalance.  They, too, saw the best of the recovery occur before they were ready to act.” 

If there was a silver lining to be had in selling for a loss, it was the ability to reduce capital-gains taxes by year’s end. Those losses can, Withrow said, “provide real economic value to investors, and that value may increase for high-earning investors if tax rates rise going forward.”

Success Strategies

More than COVID has been at work in shifting Americans’ traditional approaches to retirement savings, wealth planners say. Increased life expectancies, combined with some earlier retirements, could mean 30 years spent enjoying life after work. Someone in that range has a far different investing dynamic than a 65-year-old with a longer life expectancy.

“Every client is different, but the old ways, as in a 50/50 or 40/60 portfolio, are not enough,” says Tom Siomades, chief investment officer for Topeka-based AE Wealth Management. “With traditional pensions gone and Social Security not being sufficient for most folks, adding annuities for guaranteed income and staying longer in the stock market to harvest gains are some ways soon-to-be or recent retirees are approaching the lack of income via traditional yield-oriented securities challenge.”

That goes especially for those arrived on the back end of the Boom, and are looking at full-retirement age of 67 in 2031.

“To achieve their required return or yield objectives, those Mid-point Boomers are most likely going to have to accept more risk,” says Chris Osmond, chief investment officer at Prime Capital Investment Advisors. Whether that’s with equities or income-oriented bond investments, “those investors at or nearing retirement are arguably facing some of the hardest decisions from an investment perspective,” he said. “We’re trying to educate our investors on these various types of risk.”

BKD’s Withrow notes that market downturns—can one be far off with stock near record highs?—bring
opportunity to refresh investment portfolios and purchase asset classes that have become cheap.  “Examples of this in 2020,” he said, “include high-yield corporate and municipal bonds, investment grade corporate
bonds, economically sensitive stocks, as well as mid cap and small cap U.S. equities.” 

Spreading the Wealth

Boomers, of course, aren’t the only demographic looking down the road—the only difference is the proximity of their destination. Time alone, though, will not see younger investors through to their goals.

“One of the things that worries me is whether an entire generation of younger investors have become complacent when it comes to the ongoing management of their retirement accounts,” says Chris Costello, founder of the on-line investing platform blooom. “For many younger clients, this past year’s rapid decline (and subsequent rapid recovery) were the first time their investing fortitude was really tested.  Prior to that, we all enjoyed a decade’s worth of fairly consistent growth.”

For anyone with a retirement account through their employers, Costello said, it’s hugely important to constantly evaluate asset allocation within those funds “It is quite possible that the huge run-up in the stock market has shifted their allocation (potentially unbeknownst to them) in a much more aggressive direction. Even if you have decades to go until retirement, having a diversified mix of equities is still very important.”

Risks Past, and Ahead

One particular class of investor—business owners investing in their enterprises, are viewing risk through a new prism these days.

“The COVID pandemic seems to have spurred on a flurry of M&A activity,” says Quint Hall, a consultant with Lockton Investment Advisors. “Business owners may be reconsidering their risk exposure following the pandemic and seeking to diversify their financial assets. Beyond the pandemic, though, last November’s election results and an anticipation for higher capital gains taxes, seems to be motivating business owners to divest sooner that they may have otherwise.”

At the same time, the pandemic also motivated many others to test their skills as entrepreneurs. “New business applications began to rise in May 2020, reaching their peak in July and August, but continuing strong through 2021,” Hall said. “The COVID disruption gave us all pause to reconsider what is important in our lives. Business owners and aspiring entrepreneurs should consider the risks and rewards of owning their own business and how it aligns with their long-term financial goals.”

If anything, 2020 introduced many investors to the need for better risk assessment. It was, says Justin Richter of Mariner Wealth Advisors, “for all, a reminder to not be greedy. Stay disciplined with your long-term strategic asset allocation by periodically rebalancing.”

For Boomers in particular, Richter says, “assuming they stayed invested in 2020, their portfolios should be in far better shape than they would have dreamed last spring.” It’s important for them to find a balance “between reducing portfolio risk to capture this recent appreciation without transitioning to an overly defensive position.”

This bull market, save for COVID has largely gone up since 2009, Richter noted, so it’s impossible to know whether it lasts another six months or six years. The key, he said, is to “diversify into assets that can still provide return, but demonstrate less volatility than the broad market.”

For Generation X investors, he’s seeing a greater willingness to increase savings for investment and less overall impact compared to older and younger groups, and for Millennials and younger, it will be important to stay engaged with the markets, even if they get burned in the short term, then “transition to investing versus speculating.”

The rapid changes in the investment ecosystem during 2020 produced some changes in portfolios that, even if successful, might not produce optimal returns in 2021, wealth managers say.

“Over the last year and half, our typical client experienced significant growth, but with losses on their tax return as we executed disciplined approaches to both tax harvesting and rebalancing trades,” says Jim Williams, chief investment officer for Creative Planning. “When we moved from bonds to stocks in March, it created a windfall for clients. Given the big recovery, most clients ended up off target. For example, a client that started 70/30, may be 80/20 now. We have been having these conversations about changing target allocations.”

Even with current high equities valuations, he said, the opportunities might be greater there than in the bond markets.

“Expected bond returns are very low. If stocks earn zero over a decade, the dividends alone are expected to be in line with expected bond returns,” Williams said. “Clients should really only have bonds so they don’t have to sell stocks to meet their income needs for five to seven years in an economic downturn OR if they simply can’t handle volatility.”

No matter where an investor turns in efforts to manage risk, Siomades offers a perspective that should frame anyone’s long-term investment strategy: “The most significant risk of all,” he says, “is running out of money in retirement.”