The Bust in the Boom

In December 2008—the same year that the oldest members of the Baby Boom generation became eligible to file for early Social Security retirement benefits—the board of governors for the Federal Reserve Bank responded to that autumn’s financial crisis by dropping the key federal funds interest rate to a record-low 0.25 percent.

For many investors, seven full, frustrating years would pass before the rate would budge from that cellar. And even then, last December’s quarter-point increase failed to be the sign of more hopeful things to come, both for retirees and near-retirement Boomers who have been seeking higher returns on comparatively secure investments. Decades of financial planning—based on securing safe, stable and reliable returns in retirement, or of finishing out a working lifetime’s worth savings by turning to lower-risk tools—have run headlong into the reality of a protracted global economic stagnation.

“Coming out of 2007 and 2008, we would have thought that we’d have recovered by now,” said Lynn Mayabb of BKD Wealth Advisors. “GDP would be growing faster, maybe leading to increasing interest rates faster, but that has just not happened. The U.S. economy is like a snail, slowly moving along.”

And millions of retirement-age investors are still stuck in that slime trail.

To be sure, some spectacular investment gains have been realized by those who took advantage of the huge market correction in 2009—especially younger investors who didn’t have much at risk when that downturn set in. And Boomers who gritted their teeth and held on through the equities’ recovery have seen their balances restored, and then some.

But in many cases, the equities roller-coaster ride took a toll on nerves that were already fraying. Worse, for those Boomers who for too long had under-funded their retirement portfolios, catching up now will be harder than at any previous point in their lives. They’re stuck between equities markets that many investors believe are due for a pullback—perhaps a protracted one—and the prospect of near-zero return in the bond markets.

“I don’t think that anyone, if they looked back five years, would have expected this interest-rate environment to last as long as it has,” says Justin Richter of Mariner Wealth Advisors. “Resetting the expectations of being able to return to a more normalized environment— whatever that might be—I think that has been the most dramatic change.”

Indeed, the cold shower that investors have been taking has changed the very nature of the wealth-management game, and in particular, the nature of discussions that financial planners have with clients today.

“If you have a married couple who have had good earnings through their lives, their combined Social Security checks might be $50,000, and they’re going to be OK,” says Dean Barber, of Barber Financial Group. “Maybe they’re not going to do a lot of traveling, the big

gifts for the grandkids, or the charity they wanted, but they are going to be OK. But if they think they could come out and take a 6, 7 or 8 percent withdrawal off their savings every year, that’s just not realistic anymore.”

That kind of message may have been particularly disheartening to a prospective client who arrived at his office recently, declaring her intent to retire soon—as long as she could realize returns that would allow her to draw down her savings by 12 percent a year. That kind of planning simply doesn’t square with current life-expectancy trends.

“Longevity is a primary concern,” says Kevin Farrell of Waddell & Reed. “People aren’t necessarily thinking about that, but it’s certainly something that we think about. The reality is that people live longer.”

Boomers fortunate enough to retire in their late 50s or early 60s could be looking at up to 30 years of additional life, he said. “When you add that kind of longevity to the mix, obviously, having to make sure your nest egg is built up to support the lifestyle you’re used to is probably the No. 1 thing.”

The harsher reality, financial planners say, is that far more people today will have to come to grips with the realization that the retirement they’re getting might not mirror the lifestyle they’re used to—or the one they’d planned on for years. Worse, many haven’t correctly factored in the impact that rising health-care costs will have—rising not just in real terms, but as a share of their overall living costs when they hit their 80s and beyond.

So where do investors turn from here?

“We’ve had an incredible bull market run since the Great Recession,” Farrell noted. “Not that it can’t keep going on, but at some point, the nature of the beast is that the cycle will take its turn and we will go into some sort of recession.” Thus a Boomer retiring today should have asset protection at the top of his list of investment strategies. “If you’re sitting with a sizable portfolio and you retire today, and in six months or a year from now we have a recession, your overall asset value could decrease,
assuming you’re still invested in the markets,” Farrell said. “That would be another major concern of ours.”

Gary Cloud, of FCI Advisors, Inc., says the key for many Boomers who grew up with set-it-and-forget-it plans driven by mutual-fund performance will be tiered plans that, though potentially complex in structure, can get them into a number of tools available to investors today.

“High-quality, dividend-paying stocks seem to make a lot of sense,” Cloud said. “That’s kind of stating the obvious, but you need to have some inflation protection for the forward years.”

If an investor uses the long-standing 4 percent rule of drawing down principal in retirement, “there’s a 95 percent probability you’ll never need to tap into the principal,” Cloud said. You can get close to 3 percent with the equity side, he suggested, but the fixed-income piece is where things can really present diversification challenges, as well as opportunities.

Some of the higher-yielding tools there include preferred stocks, purchases of securitized bank loans, master limited partnerships (especially now that the plunge in energy prices has driven shares so low), real-estate investment trusts and other tools that can return 7, 8, even 10 percent or more. The key with all of them, Cloud said, is to assemble a portfolio that isn’t overly reliant on the performance of any one piece, and is able to help the portfolio beat the 4 percent target should one or more of those sectors suffer setbacks.

“You really need to emphasize the risk-control side,” he said. “You can’t go crazy with these, so you need someone with experience in these asset classes, in the right sizes for the client.”

Over the coming years, as the rest of the Boomer generation nudges into retirement age, “people are going to have to be a little more nimble” with their investing, said Mayabb. “When there are buying opportunities, you have to take those. Personally, if I see a pullback, I want to put more money in stocks, even though traditionally that might have been seen as risky. You have to be a little contrarian. And the other thing I’m telling clients is, get everything paid off that you possibly can.”

Everyone, she said, can control their asset allocation, and while “nobody can control what markets are going to do, they can control what they spend” in retirement.

Most financial planners today who work with clients from Generation X or the Millennials say plans are generally structured to avoid reliance on Social Security. For those with the longer time horizons, the goal should be building the personal wealth needed later in life, rather than relying on public financing that is every bit as uncertain as the markets.

“Most Gen-Xers and Millennials aren’t planning for it,” said Richter. “At some point, those programs may be going away, so taking more personal responsibility is really important.”

The younger generations, said Farrell, are certainly a lot more skeptical, and that’s one reason why the nature of the adviser-client relationship is changing.

The trust factor is one of the most important things for an Xer,” he said. “On top of that, the Xers often want to do things himself or herself, and we need to change the dynamic a bit with regard to how we deliver advice to those generations.”

One challenge, advisers generally note, younger generations haven’t experienced a true bear market. The Dow Jones lost half its value in the 14 months between October 2007 and February 2009, but didn’t hold in that trench. Almost immediately,
it started a climb back that recovered those losses by 2013, and since then, has tacked on more than 28 percent additional growth.

“The Boomer experienced investing through multiple recessions that, in many cases, the Xer might not have,” Farrell said. “And the Millennial probably hasn’t. At some point, there will be a situation where the economy goes into a recession and the market will not go up. At that point, having a professional adviser, someone guiding them, will be beneficial.”