With Sunset Years on Horizon, Boomers Redefine Retirement

Millions of Baby Boomers have secured their retirements with a solid financial plan. For others, the decisions they face with a short horizon will determine whether they sail smoothly into their golden years, or find themselves up the proverbial creek—without a paddle.

By Dennis Boone

Financial Advisers pivot to meet the needs of a changing investor class, mindful of the challenges that are confronting Boomers, Generation X, and the Millennials alike.

In vast numbers, they became teenagers in the ’60s, changing everything from the way we eat (fueling the fast-food industry) to the way we think about foreign policy, conscription and military service.

"The downside for Gen X is that a lot of Boomers are continuing to work; they're not exiting the work force as prior generations did. - David Baxter, vice president, Age Wave

They became parents in the ’70s, changing the way we get around (shunning Dad’s station wagons for the minivan and then the SUV) and the way children would be raised, as the day-care center became
an operating norm for working parents.

Now, the graying Baby Boom generation is wreaking new changes on the nation’s economy, changing wealth-management practices, the travel industry, health care and many more sectors, and paving the way for innovators to establish companies aiming to serve needs that simply haven’t existed until now.

“The important point is that the Boomer generation didn’t just populate existing markets, they tended to transform them,” says David Baxter of California-based Age Wave, which specializes in analyzing the varied business, health care, financial, social and cultural implications of this huge demographic tide. “And again, we’re seeing not just expansion of what existed in prior markets; we’re seeing lots of innovation and redirections of businesses.”

In terms of the retirement-age threshold of 65—another societal norm being challenged by Boomers—the tidal wave has made landfall. But there’s lots of energy left behind that crest. And not all of it will produce positive change. Just last month, a news story making the rounds suggested that four out of five adults in America were living near or below poverty levels, or required some form of government assistance. The clear implication from that? We have an upper quintile of self-sufficient citiz-ens, but, in effect, no middle class.

If that scenario is even close to accurate, the implications for wealthier investors will be considerable, as well: The potential for even sharper political divisions over wealth distribution, potential means-testing of longstanding entitlement programs, even limitations on investment opportunities and estate-planning options, among others.

All of which will be setting the stage for longer-term economic disruption as the Boomers start fading away, replaced by a Generation X cohort little more than half their size in overall numbers.

“Most people are so obsessed with the Boomers, they forget about Gen X following them,” says Baxter. “From the Generation X perspective, there are both positives and negatives.” While Boomers pioneered and forced social change in their youth, he said, they’re not gracefully exiting the stage. “The downside for Gen X is that a lot of Boomers are continuing to work;  they’re not exiting the work force as prior generations did. They don’t want to watch TV for 20 or 30 years like their parents did.”

Because many of those same Boomers are still rebuilding from losses incurred in the 2007–09 recession and can’t afford to retire for 30 years, they’re posing roadblocks to Generation X in terms of upward mobility—and the increased earning power that comes from it, Baxter said. 


Boomers as Investors

To wealth and investment managers, the one generalization you can make about Baby Boomers is that there are few valid generalizations. Millions of clients born as much as 18 years apart have millions of different visions of what constitutes a comfortable retirement. Accordingly, most investment firms today look at clients not in terms of market segmentation, but as individuals who need guidance to reach specific goals tailored to their own interests. Is retirement travel a priority? Is charitable gifting or sizeable inheritance for the kids foremost? Will the funds endure through a life span that beats the actuarial tables, or sustain the loss of Social Security if that program is scaled back?

For those reasons, and because the industry has embraced more holistic advisory services with insurance, estate and tax planning, in addition to investment guidance, today’s investors bring increased sophistication to the relationships with advisers, said Justin Richter, vice president and portfolio manager for Bank of Kansas City. Because of that, they’re able to take day-to-day market gyrations more in stride—especially after surviving what’s happened with equities over the past five years.

“The overall response to comprehensive planning is that many investors are able to see the value in having an advocate sitting at the same side of the table, providing solutions rather than pushing products or ideas, and that is pretty powerful,” Richter said. Market performance has been and will remain a fairly key aspect for those investors, he said, but it’s no longer their primary focal point. “We try to coach as much as we can to have them turn off the television and the talking heads that are there to generate activity and ratings.”

Hank Herrmann, CEO of Waddell & Reed, says he’s seeing some changes in behavior from those with longer investment histories. “I think our clients are still relatively risk-adverse, but they also want their cake and eat it too,” Herrmann said. “That’s no surprise, given we’re talking about humans.” His firm has seen more of a focus on fixed-income instruments rather than on equities, but there’s some movement toward stocks—even after the run-up in prices over the spring, a bad case of return-chasing.

“Investors remain conservative,” he said. “But then, they’ve had the wits scared out of them. All the media attention appropriately focused on the fragility of the financial system in 2008, and more people became conscious of the fact that there are no guarantees. I think on margin that more people are realizing the return potential on equities is better than fixed income; we had a sharp reminder of that in May and June.”

In the end, Herrmann said, investors regardless of age will migrate toward what appears to be working now, and right now, “we’re in a transition phase from fear to greed.”

Dana Abraham, president of UMB Private Wealth Management, said Baby Boomers, early-stage or late, share fundamental goals with Generation X and even Millennial investors: “At the end of day, they’re all worried about whether I’m going to have enough money to last the rest of my life and to maintain my lifestyle, regardless of whether they have five or 15 years ahead of them,” she said. “For those in the work force, it’s am I going to extend my working time.”

Successful advising, she said, “gets back to one client at a time. It is a market of one. The preferences are different, the circumstances are different, the level of wealth is different.”

One trend emerging, she said, was a more granular goal-setting process with clients, matching specific investment strategies to certain goals. “There are different objectives for someone who wants that second home in Scottsdale, which is more of a want than a need, and we need to allocate for that with a more aggressive strategy,” Abraham said. “If someone wishes to sail around world, we allocate a pool of money toward that goal. Same if they wish to start a philanthropic foundation. Every client is just a little different.”

Stewart Koesten, of KHC Wealth Management, said the dynamic between investor and adviser is still grounded in portfolio performance, and clients may miss the big picture of what an adviser actually does. “People don’t really understand that the work of a financial planner is largely in the financial plan—the time they spend, the focus, the concentration—the real expense of our work is in the plan, yet they don’t understand the value of that,” Koesten said.

Instead, firms continue to charge based on levels of assets under management “because that’s an acceptable form to clients. But if you look at the time spent and the value, we should reverse the fee structure and charge larger fees for the financial planning.” The industry, he said, is still trying to figure out a way to bill appropriately so that it makes sense—but nobody wants to pioneer that. “If we had our way, my preference would be to charge reasonably for the planning we do, just like a lawyer or a CPA, and then a reasonable fee for managing money, but I don’t think we’re there yet.”


Wealth Managers Responses

In a nation where wealth creation has tapered off from levels seen before the recession, advisory firms are constantly seeking new ways to attract market share. At Waddell & Reed, wrap accounts—with quarterly or annual fees for portfolio management—have proven extremely popular, Herrmann said. “Wrap accounts have become a much more important part of advisor channel activity,” he said, “We sit down with a new client, work on risk tolerances, return objectives and try to put together a balanced portfolio that is diverse and strategic. That whole thing is reviewed semi-annually with clients and decisions are made to rebalance.”

That tool, he said, “certainly accounts for part of” the firm’s rapid growth in recent years, as its revenues have surged past the $1 billion level. 

UMB’s Abraham said changes are driven in part by industry issues and in part by client expectations. “A lot of times, as an industry, we present ourselves as performance vs. benchmark,” she said. “A client wants to know, am I on track to meet my goals, do you understand my goals. The thing that’s changed, what we do differently is spend more time listening, understanding what the priorities are and what the total financial picture looks like beyond money managing.”

That’s more labor intensive, she acknowledged, “but our business is growing, we just have to be smart in how we allocate resources. Clients want more time on the front end; that saves us time on the back end.”

As much as growth-oriented investment advice is valued, said Koesten, a good defense wins ball games in this arena, too. “A manager is really a steward, and often, the best advice he can give helps clients preserve assets, rather than making money. Diversification helps avoid the big losses—you have to maintain control over how much you’re going to lose over a given time.”

Advisory firms’ work with Baby Boomers retirement planning, he said, will continue well past the traditional threshold of 65. “My experience has been that the Boomer generation is interested in continuing to work as long as they can, and they’ll stay in the market as long as they can.” Even though the downturn after 2007 shook many up, it served as a wake-up call, he said.

Behind the first-wave of Boomers, there are issues. “The generation following them, the latter Boomers and Gen X, those are the ones I’m most concerned about, because they have compound problems,” Koesten said. “They live in an era where the return on investments is not good, job losses are increasing, they still have kids they’re taking care of and their parents are getting older. I hear that casually all the time, that the parents who themselves made bad decisions educationally and socially end up with nothing and infect their kids with that.”


Generational Differences

While most firms are hesitant to classify investors by age group, rather than by shared goals or levels of wealth, there are differences between age cohorts.

Younger investors, for example, Koesten noted. Many may have a misguided notion of what the markets can do for them. “With Boomers, the anxiety crosses all age groups,” he said. “But there’s a certain age of investor who have never seen a bear market, came into that world in 2008 and started investing, and don’t know what a real bear market looks like. They will be shocked and concerned when it happens.”

After the market run-up to a record high this year, investors are pausing to assess, Herrmann said. “I think for the average consumer, they’re more aware that the market has had a pretty big run,” he said. “Do I want to get into stocks now? After all, bonds have been good to me and stocks are up a lot. If we normalize, and over time we will normalize, the probability that stocks have outperformed bonds is pretty high. Going forward, I think it’s increasingly correct that equities will do better than bonds, but you have to fold into that your definition of risk.”

One of the challenges facing investors and advisers alike in the coming years will be the specter of a large elderly population lacking the assets to retire with enough money to meet basic needs. Last month’s report on the prospect of adults living near the poverty line suggests that an emerging class of investors is coming from a sharply dwindling pool.

“Yes, the middle class has been shrinking,” said Bank of Kansas City’s Richter, “but from our side, we haven’t seen a significant decline in opportunities for those who have significant wealth, $1 million or more—but $1 million today is not what it was 20 years ago. So even with a slightly smaller pool, the amount of stimulus popped into the economy and eventually a resurgence of growth, the expectation is that we’ll see more wealth created in the future.”

Bigger issues face the nation as a whole, said Age Wave’s Baxter, but the policies that inevitably will be put forth to address them will affect the needy and the wealthy alike. Means-testing of Social Security being only one possibility.

“A couple of things to keep in mind,” he said. “The demographics which have been hardest hit on the employment and economic front are often the younger generations. Look at the work force straddling the recession from 2006 to 2011—the 50-and older work force increased by 5 million, but the younger work force actually diminished. Older workers are staying on, they’re able to retain their jobs in this new economy.”

But that can’t last forever. “Looking ahead, there’s a perfect storm of a Boomer generation famously un-frugal in its savings, hit by a severe diminishing of investment assets, the value of their housing, everything they counted on for a retirement. In the years ahead, we’ll see the impact of the recession on the older generation.”

People in their 60s and 70s today, he said are largely the last class to have lived through an era of widespread corporate pensions. That cushion has largely worn out, and threats loom to Social Security and Medicare, so “there’s a lot more uncertainty for the Boomers,” who will become increasingly reliant on professional wealth managers.

All is not lost for Boomers, though, said US Bank’s Dan Heckman: “The front wave is concerned with low interest rates. We believe the lack of decent yield on high-quality paper will require some creative income-producing strategies,” he said. “The turmoil in the long-term care insurance market may also be a problem as insurance companies continue to modify contracts. Back-wavers will more than likely have an ever-increasingly challenging Social Security environment.”

But both waves, he said, will likely see increased health-care costs and will need to consider strategies to help protect themselves from unexpected illness and medical expenses. 

His colleague at US Bank, Brad Scott, likened today’s Generation X to the late 19th century’s Lost Generation, those born from 1883-1900.

“Both generations were challenged with the task of straightening out the messes that the previous generations created,” Scott said. “The Great Depression hit during the height of the Lost Generation’s earning years, and thus they suffered diminished opportunities for wealth creation. … If history repeats itself, the Gen-X crowd may need to have an amazing capacity for self-sacrifice for the sake of their children.  In comparison, some who accumulated stock during the 1930s actually ended up doing quite well over the long run.”