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Farrell: Lesson of the Boomer Generation: Diversify!

Jack McCarthy always had a sense of humor. We met in the fall of 1965 when we were both freshman in college. Over the years we have been pals, not friends, but pals, if you can imagine the distinction. We see each other at reunion type functions so it's every few years and I have noticed the change in him from the boy I met to the older man he is now. I suspect he has seen the same in me although I think I look remarkably the same.

A couple of years ago Jack had the idea to have a pre-40th reunion dinner in the winter as a warm up for the big 40th that was planned on campus for June. The idea that our 40th was at hand was stunning.

About 40 or so classmates met at the University (quite a few wound up living in the area as it happened) along with spouses, or in my case, my youngest son who shares the same school as his alma mater. We got there early so we could walk around the campus and share common memories.

Physical Health and Financial Health

At dinner Jack suggested we reintroduce ourselves not so much by name, as after all these years we mostly knew one another, but rather by the drugs we were taking—that's the sense of humor. Of the 40 or so who were there, probably 30 played high school sports, maybe more. About 20 had played college-level sports. Most of us had stayed in reasonably good shape, as ours was really the first generation to be fixated on conditioning.

One thing I have noticed about reunions is they are attended by people who are happy with their lot in life. Be it grand or not, they are content and feel confident about sharing what has gone on. That didn't stop the list of medications from becoming so long we quickly decided to list the medications we weren't taking!

That was perhaps the first time it hit me that we really were aging and the Baby Boomers were no longer babies. Life had happened and we were all very definitely on the back nine. There were a lot of smart guys in the class and many had gone on to financially rewarding careers.

At a time when the conversation should have been about retirement or grandchildren, the talk was more of how we couldn't retire, couldn't give our grandchildren the college tuition for eighteen years hence, or, in some cases, how we had to unretire—so devastating was the financial storm we, and the country, had gone through.

Unlimited Opportunities, Unforeseen Challenges

Ours is definitely not Tom Brokaw's "Greatest Generation." But it ain't all that bad either. We had the Vietnam War and the realization governments do lie. The Watergate scandal emphasized the disillusionment many of us already felt.

Oil traders on the floor of the New York Mercantile Exchange, New York.
AP
Oil traders on the floor of the New York Mercantile Exchange, New York.

But life had its opportunities compared to the Depression Era and World War II and we took advantage of them. We all knew real estate could only go up in value and stocks, while volatile, had been on an upsurge since 1982. The debate was always not should you own stocks, but which ones. The financial type guys were always the biggest donors and giving records to the school were broken almost every year.

Then came the tech bubble, subprime mortgages, CDOs, MBSs, Bear Stearns, Lehman Brothers, and the threatened meltdown of the world we lived in. If there was one common mistake it was we weren't diversified. Many had success building businesses and were supremely confident we were "Masters of our Financial Fate". But none could control the forces that gathered for the perfect storm.

Many of us had far too much real estate. A main house, apartment in whatever city we commuted to and the obligatory beach place or ski home were all good when the money rolled. But rarely was the question asked "can I afford it all if the music stopped?". Like mortgage- backed bonds, many discovered there was no liquidity and the comforting thought you could always sell something if times got tough turned out to as reliable as President Nixon.

The Most Important Lesson Boomers Learned

So, if we were to do it again: First, pay yourself every payday. Put some aside and make it the first "bill" you pay. Build up liquidity and make sure you have at least six months worth of cash, at least. Buy life insurance so you know the kids can go to college if the bus hits you. Keep a diversified portfolio.

Great wealth can be had by concentration—if you concentrate correctly. But try to imagine how you would feel if your huge holding was subject to a trading halt and you didn't know if the news was good or bad. If you can weather that trauma in your mind you are probably okay.

Remember, the biggest holding you will have is probably your home. Treat it like a castle and pay off the mortgage as fast as possible. Forget the folks who tell you about the tax advantages of mortgage debt. Try to have no debt.

The average savings rate for the last 70 years is about 7 percent. Be average. Save 7 percent of your take-home pay. Do not get a second mortgage to buy a boat or go on vacation. If you have to borrow, make it worthwhile and use the money to send the kids to college. Max out contributions to your 401k and your IRA. If you buy that dreamed of second home—do it with as much cash as possible.

Retirement Reimagined

If you are now an "unable to retire boomer" you have to lower your expectations. When the real estate market recovers, and it will, downsize and get something cheaper. Think about buying an annuity to create monthly income (I have no affiliation whatsoever with any insurance company). Take a deep breath and be glad you can still work.

401k
iStockphoto
401k

Thoreau (I think) said "The mass of men lead loves of quiet desperation." Don't be one of those. Find something that you love to do and that you always wanted to do. I will someday be a maitre 'd at a comfortable local restaurant. I love meeting people and what better way.

On a personal level, I was told a year ago my colon cancer had come back, it had metastasized and I had two years to live. They were wrong—I responded unusually well to chemo—but I live with cancer every day. My finances have been dented but not broken, but that became secondary.

I wake up each day and realize the gift of life outweighs all. I'm lucky. We have enough and I happen to love what I do. But I still want to try that maître 'd spot.

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Vincent Farrell, Jr. is chief investment officer at Soleil Securities Group and a regular contributor to CNBC.

Watch "Tom Brokaw Reports: Boomer$!", Thursday, March 4 at 9pm ET on CNBC. The program will also air Saturday, March 6 at 7pm ET; Sunday, March 7th at 9pm ET; and Monday, March 8th at 8pm ET.