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Not Our Parents' Retirement

By Walter L. Guertin, CFP®, CPA/PFS
Senior Vice President, Financial Planning

With considerable fanfare, 2006 has been proclaimed as the official beginning of a new phase in the lives of the baby boomer generation. Beginning this year and continuing for the next eighteen, people born between 1946 and 1964 will be crossing the threshold of "60-hood".  Why is this important and what are the implications of this development to the "average" baby boomer?

Retirement is expected to be very different for members of this generation. They will be more active and will live longer than their parents. The Social Security Administration projects that by 2011, when the oldest baby boomers turn 65, the remaining average life expectancy for a man will be about an additional 17 years and, for a woman, an additional 20 years. Given the longevity improvements that are likely to be made in the future, these projections may understate reality.

They also will be different in other ways: Their parents lived in the era of company-provided defined benefit "pension plans". For many, these pensions, combined with Social Security and personal savings, have generally been enough to provide for a secure retirement. On the other hand, most boomers will have their self-contributory 401(k) and other retirement plans to support their retirement lifestyles. Unfortunately, recent surveys today show that individuals are not saving nearly enough to support their current lifestyles during retirement years. Nor do many know much about their retirement plans or which investment selections to make. I once commented during a speech to a banking group that many individuals seemed to make their investment selections based on the opinion of the smartest sounding person in the company's lunchroom and, not surprisingly, there were several nodding heads!

Parents of the early baby boomers were children of the depression and part of the World War II generation. Because of these experiences, they tend to be more fiscally conservative than their children. They would save until they could afford to purchase a big-ticket item. For many boomers, buying for today has become a way of life. Parkinson's Law states that work expands to fill the time available for its completion. One pundit suggested a Parkinson's corollary relating to personal finances:  Expenses increase to meet available income. Unfortunately, that has been generally true for many. What if expenses exceed income?  Well, why put off to tomorrow what you can get on credit today? Borrowing is no longer the stigma it used to be and, as an added bonus, it sometimes can be tax deductible!

Their parents counted on Social Security to be there for them at age 65 and fully expect to receive these benefits for the rest of their lives. Boomers can begin receiving full benefits at age 66 and they all hope that Social Security will be there for them, in at least its current state, for their entire lives. Add to that the rising medical and long-term care costs and more individuals today are beginning to look at retirement very differently than their parents. Retirement just isn't the same as it used to be. Getting to retirement age does not necessarily mean being ready for retirement. Perhaps most individuals today understand this and have a plan in place. Then, maybe they don't.

The potential silver lining in all of this is that longer life expectancies also provide the potential of working longer. This may prove to be more of a necessity than an option. The downside is that as life expectancies increase in the future, your money will need to work longer for you. One way of monitoring this is to control how much you take out each year. It has been demonstrated that if you limit your annual withdrawals to 4% of your beginning of year investment balance, you will never run out of money. However, withdrawing as much as 9% of your investments each year could potentially deplete them in as little as nine years. This analysis was based on a study by Ibbotson Associates, Inc. covering a 30-year time period (1972-2002) and assumed that 50% of the portfolio was invested in equities and 50% in intermediate-term bonds.


Getting Started

Over the years, we often have commented to clients that doing a retirement plan wasn't necessarily "rocket science". With many financial calculators available today, people theoretically could do it themselves. However, planning is more than just "crunching" numbers. It's also gaining insights on choices and options from an experienced financial professional. 

A retirement research study performed by the Employee Benefit Research Institute, a nonpartisan benefits think tank, found that those who have tried to figure out what they needed for a successful retirement appeared to be doing a better job of preparing for retirement than those who did not try at all. Fellow boomers, the time is now!


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