Yoshikami: Boomer Investing Strategies for 40s, 50s and 60s
After a decade of financial drama, many Baby Boomers are entering a new phase of their lives facing a future they did not expect. And with the economic picture still cloudy, anxiety levels have never been higher.
The Baby Boomer generation is the demographic bulge of people born after the Second World War. If you were born between 1946 and 1964, you are considered a Baby Boomer and a member of a group facing unprecedented challenges.
Over the past 10 years, there have been two monumental corrections that have derailed many retirement plans: The dotcom bust in 2000-2001, and most recently, the financial crisis of 2008-2009.
On top of these market disasters, housing values have plummeted. Jobs are scarce. All in all, a very difficult environment.
Facing Reality: The "New" New
Baby Boomers now face a complex future and an avalanche of uncertainty. Unknowns abound: inflation could sky rocket or stay flat; global growth could take off or go nowhere; and the future of global asset prices, including equities and properties, remains unclear. Growing and preserving wealth in the current environment will be harder than before. Nobody knows what the new "new" is.
So far, equity markets have failed to provide the returns Baby Boomers were expecting to finance their retirement years. This generation will need better returns than the last 10 years to make their money last the rest of their lives, even in a mildly inflationary environment.
Falling real estate values have sapped the net worth of almost all investors. Owning a property or two used to be the fall back asset in case investment returns did not measure up. Unfortunately, even real estate values have not measured up and home equity is simply not available for many to make up the shortfall.
With interest rates near historic lows, bonds may satisfy the desire for safety of principal, but at current rates, they do not necessarily provide an adequate return for retirement. Fixed income assets are barely keeping pace with inflation.
The generation who coined the phrase "he who dies with the most toys wins" now faces the possibility, even probability, of outliving their savings. As we live longer, we need more income for a longer period of time; no one wants to live out the rest of their lives on a shoestring. What are boomers to do?
Different Financial Goals, Based on Age
It is tempting and oversimplifying to categorize all Baby Boomers as facing similar challenges.
Given that Boomers were born across three decades spanning 18 years, each group faces unique challenges that must be addressed.
- Age 40-50: The Issues
This group is challenged by the specter of simply not having enough money for retirement. Cautiously balancing the competing goals between building a nest egg while, at the same time, facing the huge expense of funding college education. With corporate pensions all but extinct or drastically reduced and Social Security in dire straits, the burden on this group to accumulate funds for future retirement needs is huge.
- Age 50-60: The Issues
This group had come to expect an 8.5 percent annual return to be the norm. In the long run, maybe. But as Keynes wryly said, "in the long run, we are all dead."
Having survived a market where cash outperformed equities over a decade, many in this group have seen their retirement plans seriously impacted. How do you recover from shrinking 401(k)s and investment accounts? Compound returns work well over time, but time is a luxury this age group doesn't have. How long should I work? When can I retire? Do I have enough money when I retire? What do I do after I retire? These are critical questions for this group.
- Age Over 60: The Issues
The type of challenges facing those in their 60s largely depends on the wisdom of their past investment strategies. An over-concentration in equities means there are not enough years to make up for market losses. Adjusting living standards to a hard reality may be needed.
For investors who focused more on fixed income, the problem is different. With yields at historic levels, returns have dropped to unprecedented levels. The days of simply living off your monthly bond yields are, for many, a thing of the past.
For the over 60s, the issue of long-term care takes center stage. Currently, about 60 percent of people over 65 will require some type of long-term care services during their lifetime. More than 40 percent will need care in a nursing home for some period of time. It is wise to plan for long-term care insurance as the cost can be very high.
Asking Questions, Making Plans
No matter which age group you are in, you must ask yourself these questions: What do you need to do to prepare for the next phase of your life? Are you ready for retirement? Can you afford to retire? How do you make sure that the transition from the nine-to-five grind to retirement is a smooth transition? What do you need to know and do, both financially and mentally?
There's no getting around the fact that you must take concrete steps to navigate the uncertainties. Denial only leads to floundering and disappointing results. Facing current conditions with proactive actions is the best way to beat these tough times. Remember, whether you are 45, 50, or 60, it's never too late to make plan. Here's where to start:
1. Confront Reality: Assess Your Needs and Wants
It is important to confront your current financial situation with a candid assessment of what you have, what you need and what you want. You have to figure out how much it will all cost in order to achieve your "perfect retirement" and recognize the difference between required and desired spending.
Once you know exactly how much you need, the motivation will then be there for you to push towards that goal. Seeing what is reality will help outline what goals must be established and what challenges exist.
Look at your investments, pension and other income sources with a critical eye and assess where you are on your road to a comfortable retirement. See reality.
2. Develop A Roadmap
A plan must be developed, put in place and examined on a regular basis as you navigate through retirement. Every year, take a look at inflation, returns and other conditions that might affect payouts.
Check up on your health benefits as well. Do you have adequate health coverage? Without a proper health plan, an emergency could easily wipe out a chunk of your retirement savings.
What about your insurance policies? Do you still need that life insurance you bought 30 years ago? Examine Long-Term Care insurance that can help pay for the cost of in-home care or assisted-living facility costs.
Put it all down on paper and revisit the plan at least once a year. This is not a one time activity; this is your life map to peace of mind in retirement.
3. Rebalance Your Portfolio
We are all living a lot longer these days and that means our money needs to continue to work for us as we head into retirement. Investors should take a look at their current investment strategy and examine their risk appetite. The foundation for success is mapping out a successful investment strategy based on the level of risk you are most comfortable with. This may mean a change in your portfolio strategy and a deviation from previous investment actions.