As 77 million baby boomers have moved through life, they have made their economic mark--from baby food and toy sales to a huge labor supply and inflated housing prices. They also created an echo boom, producing 72 million offspring from 1977 to 1994. Sandwiched between boomers and echo boomers is Generation X, the 46 million baby busters born from 1965 to 1976.
Boomers' impact on the future will be no less significant. The group--now aged 35 to 55--will continue to affect the economy and financial services. What will their lives hold, and how will that drive what they need from financial advisers?
A 30-Year Retirement Thanks to longer life spans and boomers' innovative nature, retirement is being redefined. "If people think they're going to retire early--at age 60--they could live 30 years longer," says Ken McDonnell, research analyst with the Employee Benefit Research Institute in Washington, D.C.
Thirty years is a long period to finance. But McDonnell says one trend may help: Many boomers will take "bridge jobs," part-time positions as consultants, entrepreneurs or in a new line of work.
Indeed, the concept of retirement is changing, says Carol Anderson, a researcher and writer in Poulsbo, Wash., specializing in retirement life planning issues and financial education. "Boomers and gen Xers are thinking outside the box, and they want an adviser to think outside with them," Anderson says. "There's a growing number of people who do not equate retirement with leisure or not working." So retirement needs will likely encompass more than getting a check in the mail, for example, helping finance a small business.
Another twist: Boomers are getting married and having kids later--in their 30s and 40s. Fast forward 20 years, and retirement intersects with college funding. "It costs 30,000 dollars to 80,000 dollars to fund a kid's college education. It's going to come out of [boomers] current income," says Mike Snowdon, academic associate with the College for Financial Planning in Denver. College funding is a continuing need, working in concert with retirement savings.
Disappearing Pension Plans Boomers will never know what it means to retire with a company pension. "Companies have terminated pension plans," Snowdon says. "In the old days, you could retire with half or two-thirds of your income. It's becoming a thing of the past. Most retirement saving is done in a 401(k)."
For a lot of people, it's scary to save on their own, Snowdon says. In fact, about 58 percent of boomers say they have no idea how much money they'll need for retirement, according to the 1996 to 1999 Scudder Baby Boom Retirement Preparation Study conducted by the National Center for Women and Retirement Research (NCWRR). It surveyed 1,100 boomers with household incomes of more than 30,000 dollars.
"We found boomers are doing very well clicking the mouse for day trading. But when it comes to pension plans and 401(k)s, very few have done their homework--developing a budget, anticipating needs and figuring out how to get there based on saving and investing," says Christopher Hayes, executive director of the NCWRR. "There's an incredible disconnect in the sequential pattern of planning."
Boomers need guidance and financial advisers "can help them make an estimate of what they need in retirement," says John Migliaccio, who heads Maturity Mark Services, a consulting firm in White Plains, N.Y. "Most people don't know about them. They're called replacement ratios. The middle class needs to replace 75 percent to 80 percent of pre-retirement income."
Hayes also urges advisers to help boomers face reality. "They have unreal expectations for retirement--to travel, go on the Love Boat. But you go into their portfolio and look at what they've accumulated, and there is no way they're going to fund leisure and self-improvement. A good percentage are in for a major wake up call in the next decade."
Prepare to Care, Long Term Advisers can also help boomers address the hot issue of long-term care. "Because of increased longevity, not only are baby boomers living longer, their parents are living longer, too," Anderson says. "It won't be unusual to see a 70-year-old boomer caring for a 90-year-old parent. Financial advisers can look into long-term care insurance to help them prepare."
Without proper planning, paying for long-term care can be a "huge wealth destroyer," Snowdon says. "Odds are that people will need long-term care at some point in their lives. It's 50,000 dollars to 150,000 dollars in expenses that's going to come from savings or insurance."
In addition to the direct costs of care, there are indirect costs to the caregiver. A November 1999 study by the National Alliance for Caregiving and the National Center on Women and Aging at Brandeis University found that caregivers forfeited 659,000 dollars over their lifetimes in lost wages, Social Security and pension contributions.
Currently, 22 million U.S. families are providing care. That figure is going to escalate as boomers age. In 2011, boomers start turning 65. "People need to start thinking about long-term care insurance," says Kathy Burnes, research associate for the National Center on Women and Aging in Waltham, Mass. "But it's currently expensive."
Wealthier, More Sophisticated Customers There has been much speculation about boomers' expected inheritance. A 1993 study from Cornell University projected inheritance from 1990 to 2040 at 10 trillion dollars. While an October 1999 study by Boston College forecasts much higher levels of wealth transfer--41 trillion dollars to 136 trillion dollars from 1998 to 2052. The estimates are based on different assumptions about current wealth, real growth in wealth and savings rates.
Even though the amount of boomer inheritance is uncertain, charitable giving is already an important service to offer the affluent, says Russ Alan Prince, who runs Prince & Associates, a financial consulting firm in Shelton, Conn. "As boomers and their parents get older, a legacy becomes important--doing something for society."
The prosperity of boomers will change the businesses that serve them. Households with net worths of 1 million dollars or more doubled in the 1990s, according to Larry Cohen, director of Consumer Financial Decisions group of SRI Consulting in Princeton, N.J. "As we become more affluent, we start to be able to afford more concern with service quality and personalized service," he says.
"The investor has gotten more sophisticated," says Len Reinhart, head of Lockwood Financial Group, an investment management consulting firm in Malvern, Pa. "They're savvier, and dollars have become more meaningful. For example, a client had 700,000 dollars, and now they have 1 million dollars, and they get a tax bill of 100,000 dollars. The client goes through the ceiling." This scenario has sparked a strong interest in tax-managed investing.
To position themselves for the future, brokers must redefine their services. "They have to think in terms of a miniature financial advisory business covering taxes, retirement planning, estate planning and investments--all in one place," Reinhart says.
Boomers are going to need estate planning, long-term care insurance and college funding for their kids. "They need general advice on how to have money in retirement," Prince says. "There's money they're sitting on, and they don't have a clue about what to do with it. As their situations get complicated, they have to turn to high-quality advisers."
Demographics are wreaking havoc with economics when it comes to Social Security.
Because of baby boomers' magnitude, Social Security receives 70 billion dollars more each year in taxes than it pays out in benefits, according to Ron Gebhardtsbauer, senior pension fellow with the American Academy of Actuaries in Washington, D.C. As boomers retire, the 70 billion dollars goes down, reaching zero in 2014, he says. It remains to be seen what Congress will do to maintain the program--raise taxes, borrow money and/or cut benefits.
One form of benefit cut is already occurring. The retirement age went up this year to 65 years and two months, gradually increasing to age 67 over a 20-year period. The earliest a retiree can receive partial benefits remains age 62, but retiring early will bring a greater reduction in benefits.
The upshot for brokers: Look for people to retire later, or rely less on Social Security.
RR: How have baby boomers affected the economy in the past, and how will they do so in the future?
Hokenson: The biggest impact is the difference between young boomers and old boomers. Young boomers created inflation when they reached the stage of their life cycle when they were buying goods and services--first household, first car and first job. Aging baby boomers are creating disinflation.
RR: How would an investment strategy differ in inflation versus disinflation?
Hokenson: With inflation, you don't want to own financial assets. You want to own real estate, something highly leveraged. Disinflation changes that. The assets with the greatest returns are stocks and bonds. This creates a demand for financial consultants, broker/ dealers and mutual funds. Financial services is still a growth business.
RR: Traditionally, as they aged, investors have reduced their exposure to equities and invested in safer vehicles like bonds. Will this still happen?
Hokenson: Those rules of thumb won't apply anymore. Returns on bonds will be too low. This is a challenge to the financial services industry. People will have to live with more risk for a longer period of time.
RR: Will baby boomers continue to have the biggest impact on the economy of all the generations?
Hokenson: Boomers are the largest generation. The impact of baby boomers won't dissipate until they start dying off in 30 to 40 years.
RR: Meanwhile, boomers are moving into their retirement years. What effect will that have on aging-related products and services?
Hokenson: The negative legacy is the inflationary bias on the things boomers now buy, like retirement homes. Rising demand brings higher prices.
RR: Some economists predict a market meltdown in 2011 or so when boomers start retiring. What do you think?
Hokenson: I disagree. The biggest change is going to be the sharp decline in the supply of U.S. financial assets. The Treasury is not issuing 30-years anymore. With fewer domestic assets, investors will hold more non-U.S. assets. Returns on pure U.S. assets will be too low. There will be global searching for higher return.
RR: So why won't U.S. stocks crash?
Hokenson: For a couple of reasons. People don't magically sell all their stocks when they turn 65. Historically, what people used to do was become more conservative, focusing on capital preservation. But bonds won't provide the returns they'll need--Treasury bonds will fall to 4 percent. The total return of the S&P 500 will be in the 6 percent to 7 percent range. But I'm not predicting a crash--just lower than what it's been.
RR: What's the time frame on that rate prediction?
Hokenson: Three to 10 years. And it will stay around 4 percent--even for an extended time horizon.
RR: What return rates do you think advisers should be using in calculations?
Hokenson: My sense is that most people are using 10 percent to 12 percent. I would use 7 percent for stocks.
RR: What do you think about the future prospects for the financial services industry?
Hokenson: For all financial planners, it's a strong growth business because of the demographic trends and the number of people who need help. This is because of the greater reliance on individuals [for retirement funding]. It will create a stronger environment for financial services.