The impending exodus of the Baby Boom generation out of the workforce and into retirement is prompting a host of questions about investment strategies, pension plans and indeed, the very nature of retirement itself.
Since about 2011, the Pew Research Center has estimated that about 10,000 Baby Boomers turn 65 daily, a trend predicted to continue for at least the next 19 years. Further, the leading edge of Boomers began to enter retirement just a few years after the worst financial crisis since the Great Depression, in a low-interest rate era of ever-increasing health care costs and flagging confidence in the social contract.
Now, many Baby Boomers may be facing retirement feeling a bit like the kid who showed up unprepared for the final exam. Increasingly, financial advisors are urging their clients to push off retirement a few more years, or to wait until they turn 70 to collect Social Security.
Even having a financial advisor in the first place is a step in the right direction, said Ed Farrington, executive vice president of the retirement division at Natixis Global Asset Management.
Citing research Natixis conducted last summer of 401(k) plan participants, Farrington said survey respondents who used a financial advisor had better habits than those who didn’t. For starters, they saved at a higher rate, about 9.5 percent of their income versus 7.8 percent, and they were more likely to know how much they would need for retirement, more likely to establish long-term goals and more likely to set better short-term habits that would help them meet those goals, he said.
“We’re seeing a lot of conversation around what retirement looks like today, and oftentimes it’s not a full retirement. Many people are continuing to work after the age of 65,” Farrington said.
He said that half of respondents in the plan participant survey said they intended to work into retirement, should they fall short of their savings goals. Smaller numbers of respondents said they planned to rely on government programs or their children.
A Public Policy Issue
That Plan B may become increasingly relevant as more and more Baby Boomers approach retirement.
“The typical client has experienced two horrible markets in the last 15 years or so,” said David Smith, chief investment officer at Rockland Trust, noting that the tech bubble and bust of the late ’90s and the more recent financial crisis hit a lot of Baby Boomers’ savings – and hard.
“Today in 2015, most of these folks are very, very timid. They have been hit with two of the worst market environments in modern times,” he said. “It’s been a very, very difficult time for this Baby Boom generation to accumulate wealth.”
Markets like those are the reason Rockland Trust applies modern portfolio theory to its investment strategy, Smith said. Rather than try to forecast which asset classes will do well and beef up on those, the bank’s investment arm invests more evenly, so no investor is overexposed to, say, REITs or tech stocks.
It goes against the grain of human nature, Smith said, but it works. And had you invested that way all along, your nest egg might not have been too scrambled after the financial crisis.
But hindsight, as they say, is 20/20, and while Smith and his team do their best to counsel clients trying to rebuild their nest egg before checking out of the work force altogether, he also sees this as a big-picture problem.
“Our culture is very much a live-for-today society. I just think there’s a massive, eye-opening reality slap that’s coming to our society over the next couple of decades as folks begin to enter retirement without enough,” he said. “One of the biggest crises we have facing this country going forward is the lack of investments people have put away. We have never had this in this country before, where people were responsible for their own retirement.”
Farrington said the ideal retirement savings environment has three components: government, employer and individual participation.
More recently, Natixis ranked the U.S. 19th on its Global Retirement Index. While that’s not too shabby when you consider the organization ranked 150 nations overall, it still puts America toward the bottom of the list of top 20 nations in the retirement index, and that’s largely because America’s retirement savings environment rests largely on the last leg of that stool.
Farrington points to New Zealand’s “Kiwi Saver” program as a model the U.S. might emulate, should American lawmakers ever get serious about the issue. The program automatically enrolls every worker in a retirement fund, with a $1,000 “kick start” from the government and a mandatory employer match of the first 3 percent of contributions, he said.
The program is optional, he adds, but you have to opt out, rather than opt in. That alone boosts the participation rate, Farrington said, adding, “If you’re a plan sponsor and you begin to auto enroll employees, we know that creates better results.”
Email: lalix@thewarrengroup.com
