The nest eggs of high net worth Baby Boomers got clobbered during the financial crisis. Between 2007 and 2008, their investable assets plummeted by 22 percent, to $5.3 trillion, according to recent research by the Corporate Executive Board. Something else is missing, too, the board says; a sense of urgency among boomers about preparing for retirement in light of the collapse.
“We expected to see a lot of pessimism, and we didn’t see that,” says Wallace Blankenbaker, senior director at the board. Despite the sizable hit that they took, most boomers in the survey indicated they haven’t changed their plans or outlooks on retirement, Blankenbaker says. Fifty-one percent, for example, said they hadn’t reduced spending over the 18 months following the financial crash. “If you just do the math on how much they’ve lost in their portfolios and the fact that they haven’t cut back, coupled with the fact that many already were behind, the numbers don’t add up,” he says.
The first wave of Baby Boomers, 78 million Americans born between 1946 and 1964, began turning 62 beginning in 2008, the U.S. Government Accountability Office said. The disconnect between their perceptions and the realities of retirement stem from a lack of understanding, Blankenbaker and some financial advisors say. “I have some clients who are conservative and get it. But for the most part, the vast majority of the people I deal with really don’t understand,” says Allan Flader, a chartered retirement planning counselor at Flader Wealth Consulting Group in Phoenix, Ariz., affiliated with RBC Wealth Management. “Some clients are just downright delusional about what they think they have and what they think they need.”
“When I run the projections, it will come down to, ‘You need to spend less,’” Flader continues, rehearsing the kind of response he expects. “‘Well, Allan, I don’t want to spend less.’ ‘Well, then you might need to sell your house in California.’ ‘Allan, the house in California has been with us for 20 years.’ ‘Then you’re going to run out of money.’ Those are very difficult conversations. I always say, ‘My role is to advise you, to be honest and objective and to tell you what I see. The choices about how we handle this are up to you.’ The problem is, they can leave my office and go to another advisor. And the other advisor is going to say, ‘Oh, no problem. This is fine.’ You can make the numbers look any way you want to.”
Some boomers may need to work at least a few years into their retirement. But that doesn’t mean the economy will cooperate. Meanwhile, retirees should count on diminished returns on their investment portfolios. Bruno Fellin, portfolio manager at GM Advisory Group in Port Washington, N.Y., said the stock market is likely to see sharp increases and decreases in coming years but should remain flat overall. What’s more, taxes, particularly at the state and local level, are likely to go higher.
“Our recommendation is always to save more,” Fellin says. After meeting with clients, “they’re pretty much on board with the fact that we have to plan accordingly for a market that is indeed more range bound. And there are certain headwinds. …You cannot escape increased taxation by saying, ‘I am earning less, therefore I will be paying less.’ A lot of our clients are more sophisticated and are aware of the realities that are out there.”
Advisors who are willing to offer retirement-bound boomer clients a deeper relationship can reap rewards, the Corporate Executive Board report says. There are five key characteristics to financial planning—maintaining an up-to-date plan, customizing it to meet a client’s long-term goals; balancing return with the client’s risk tolerance; a design that generates predictable retirement income; and having a plan that was produced by a financial advisor, as opposed to someone else such as an accountant, attorney, or family member. Most boomers in the survey reported having at least one of these characteristics in their financial plans, but only 38 percent had all five, the report says. Clients of advisors who offered all five of these things in their planning increased their asset levels at a greater pace than clients of advisors who did superficial or no planning, the report states. The clients of advisors who provided in-depth planning also tended to report better relationships with their advisors—feeling that advisors understood their situations, for example, or had their best interests at heart—which, in turn, led them to invest more with the advisor.
Despite the losses resulting from the collapse, the current market affords “a huge opportunity to help advisors play a role that wasn’t really there before,” Blankenbaker says. “The markets were going up. The portfolios were doing well. They didn’t necessarily need a lot of guidance in that environment. But now, they clearly do need it.”
Flader agrees with the report’s findings. “If a client feels comfortable that you are their go-to guy and you understand what they’re trying to accomplish, that’s going to build trust. They’re not going to need second opinions. They’re going to go to you for everything,” he says.