On Jan. 1, 2006, it became official: The Baby-Boomer generation that introduced the world to the concept of a youth culture started to enter retirement. The first members of the generation born between 1946 and 1964 are now turning 60 at a rate of 7,900 a day, or a whopping 330 every hour.
For financial advisors, this vast demographic shift, as 78 million Baby Boomers head toward retirement, raises critical questions:
- How will the generation that has redefined every stage of life approach retirement?
- How will the role of the financial advisor expand or evolve to meet the complex needs of retiring Boomers?
- What distribution strategies will fill the void as pension plans and other forms of guaranteed benefits disappear?
- How can a generation that has tended to be more focused on spending than on saving catch up financially and prepare for a life expectancy that may well extend beyond their 80s?
What’s most important to Boomers is the feeling that their financial advisor is a
“Traditionally, the idea of preparing for retirement has centered on financial preparedness,” says Ken Dychtwald, Ph.D., founder and CEO of Age Wave, a provider of market analysis of the maturing Baby-Boomer generation. But as Boomers approach retirement, they are looking to financial advisors for a lot more. Predicting that the most successful financial practices in the future will offer an expanded range of services, Dychtwald urges advisors to cultivate a deeper understanding of the psychological and emotional components of retirement.
What’s most important to Boomers, Dychtwald explains, is the feeling that their financial advisor is a collaborative partner committed to working with them every step of the way to create a retirement that is as positive and as empowering as possible.
Boomers do not plan to retire like their parents did, and their retirement years will be marked by a far more complex range of challenges and expectations. As such, they do not want a cookie-cutter or outdated approach to mapping out their financial futures. Seventy-seven percent expect to be working after they retire—either alternating between work and leisure, working part time, starting their own businesses or embarking on another full-time career.
The process of retiring
A psychologist and gerontologist, Dychtwald has authored many books, including The Power Years: A User’s Guide to the Rest of Your Life. He says that until the publication of a new study, The New Retirement Mindscape, conducted by Ameriprise Financial in conjunction with Age Wave and Harris Interactive Inc., retirement had not been studied as a process that spanned several decades.
The study found that people go through a series of distinct and predictable emotional stages during the years leading up to, and following, retirement:
1. Imagination (six to 15 years before retirement). During this stage, retirement is not top of mind. Activities such as putting children through college, paying bills or pursuing careers tend to take precedence. Most preretirees in this phase tend to have very high expectations that they will be able to achieve their dreams during retirement. Those who are not yet working with a financial advisor begin to look for someone who understands what is important to them.
2. Anticipation (up to five years before retirement). The years immediately prior to retirement are a time of great excitement and hopefulness. Financial resources begin to align and people start to spend more time planning for recreation, new hobbies or post-retirement careers. While the anticipation stage tends to be time for enthusiasm about retirement, a level of worry and doubt starts to mix in as retirement day nears. A large percentage of preretirees during this stage feel that concerns about health insurance will be the most significant challenge during retirement.
3. Liberation (retirement day and the year following). This is retirement’s honeymoon phase, and it lasts only about a year. During this stage, retirees feel excited and relieved. Most are enjoying retirement a great deal and expect they will have enough to do to stay busy during retirement. To a large extent, they are confident their retirement preparations have paid off. Seventy-two percent of respondents said they felt “on track.”
4. Reorientation (two to five years after retirement). After the initial liberation period, retirees quickly transition to a reorientation stage. People discover that retirement is more challenging or different from what they expected it would be. While a letdown occurs during this stage, how serious it is and how long it lasts depend on many factors. Those who have the benefit of a plan and a clear vision of the potential for this time of life tend to find the greatest satisfaction.
5. Reconciliation (16 or more years after retirement). The later years of retirement tend to be marked by relative contentment and acceptance. Many begin to consider moving to a new home. Relaxation is increasingly appealing. Priorities during this stage are relaxing, spending time with family and maintaining health. Fully 75 percent would value advice on inheritance and legacy issues.
The need for empathy and earnings
Recognizing these phases is a critical starting point in understanding clients’ specific goals and expectations. Indeed, it appears that nothing is more important to Boomers as they approach retirement than knowing that their financial advisor is able to empathize with them. When respondents to The New Retirement Mindscape study were asked to choose from a list of statements that describe an ideal relationship with a financial advisor when planning or managing their retirement, there was a tie for these top two attributes:
- Understands what is important to you (88 percent)
- Is able to achieve competitive returns on your money (88 percent)
Also high on the list:
- Provides a knowledgeable point of view (81 percent)
- Helps you set achievable goals for retirement (79 percent)
- Takes the time to educate you (77 percent)
These findings present a two-fold challenge to advisors: They need to increase their level of understanding of the lives of their retired clients and must find ways to convey a high level of commitment and concern.
One potentially powerful gesture that demonstrates a financial advisor’s central role in the retirement-planning process is simply being there for clients on their retirement day. Acknowledging the magnitude of the occasion with a personal visit, card, phone call or gift can remind clients that their financial advisor has been, and will continue to be, a key player in the success of this new phase of their lives, Dychtwald says.
Charting a new course
Looking back to their own parents’ retirement planning, Boomers probably do not recall it being a particularly complicated exercise, points out Don Ames, CLU, ChFC, LUTCF, senior partner with Ames & Weinheimer in Austin, Texas, a member of NAIFA-Austin and a qualifying and life member of the MDRT. But 35 years ago, retirement was more straightforward. Pension plans were solidly in place and “only the rich bought securities.”
Ames points out that the public now has access to a wide range of products; they can execute transactions over the internet; and there is not a common understanding of what financial planners do or what they charge. These converging factors have led a segment of the Baby-Boomer generation to question whether they can access, through the internet, all of the tools and products needed to craft their own retirement plans.
Parents traveling with children should make sure their own oxygen masks are secure before helping their children. with theirs.
“Never has there been a time when the role of the financial advisor has been more critical—from both an emotional and a practical standpoint,” Dychtwald says. As such, it is incumbent upon financial advisors to emphasize whenever possible that “retirement planning and navigating retirement is not a do-it-yourself exercise.” Perhaps that was the case in previous generations when life expectancies were shorter and benefits were guaranteed, but today’s retirees need a lot of help, and studies show that a financial advisor is the best place to start.
While some preretirees may feel confident they have saved adequately and gotten to where they are without the help of a financial advisor, few are aware that distribution planning is considerably more complex and unforgiving than accumulation, says John McTigue, CLU, managing partner for the McTigue Financial Group in Chicago, and a NAIFA-Chicago member.
Baby Boomers who are retiring today may well be retired for as many years as they were in the workforce, points out Brady C. Knight, owner of the Knight Planning Corp. in Houston, and a member of NAIFA-Houston. It’s doubtful, Knight says, whether many “Baby Boomers really have the ability to design a 30-year distribution strategy, hedged against inflation.”
The advisor advantage
The New Retirement Mindscape study points out that Boomers who have worked with an advisor are considerably more optimistic and hopeful about their retirement than those who haven’t. Among those who have already retired, the study noted a striking difference in their level of fulfillment: 73 percent who work with an advisor report they are enjoying retirement a great deal, versus 54 percent of retirees who have not worked with an advisor.
The majority of Baby Boomers still do not have a financial advisor, Dychtwald says. “The market is wide open as the biggest generation in history barrels toward retirement. This should serve as a wake-up call to advisors,” he adds.
Heeding this call requires a realization that Boomers who are heading into retirement will be looking to financial advisors to provide a far greater range of services and support than they have in the past—everything from helping adult children make better financial decisions, to helping with understanding health- care options, to advice on how to finance a new business. (See table below.)
The financial practice of the future will consist of generalists, specialists and a range of other value-added experts, Dychtwald predicts. Possibly modeled after group medical practices that bring together various specialists, firms could achieve a distinct level of market differentiation by integrating the services of a life coach, for example, or a family mediator to help with legacy issues, or health-insurance experts to help clients understand Medicare and long-term care options.
Of course, as many advisors point out, a short-term alternative to beefing up existing practices with new kinds of expertise is to cultivate a very robust Rolodex and be ready to recommend books, trusted professionals and other resources that could help clients with the specific issues they are facing.
The kid factor
Top among those issues is the need to educate retirees’ children about money and encourage them to take the necessary steps to assert their financial independence.While some Boomers feel they did not instill the values of frugality into their children, others are concerned that the current economic climate is less conducive to getting on one’s feet at a young age than were previous climates. Boomers are realizing that the prospect of bankrolling or bailing out their children stands to jeopardize their own retirement, and in many cases, are not sure how to stem the tide.
A former financial advisor, Nathan Dungan, president and founder of Share-Save-Spend in Minneapolis, gives presentations around the country and has developed resources for advisors that set forth a “balanced, values-centered approach to financial matters.” The financial-management challenges that Boomers are facing with their adult children did not emerge overnight, Dungan notes. Parents have been caught in a time-vs.-money guilt conundrum that started at a young age. Many of these Boomer parents, however, mistakenly assumed that at some point, their children would begin to take on some financial responsibilities, Dungan says. Instead, they are graduating from college laden with consumer debt and with expectations that they need to continue to spend to reach for an upscale lifestyle.
“For many children, the realization that there are more things to do with money than spend it is actually an eyeopener,” says Brian Kompelien, ChFC, an advisor with Swenson Anderson Financial Group in Minneapolis. A subscriber to the Share-Save-Spend program, Kompelien says that the program can successfully teach two generations at the same time that “there are all kinds of options and implications for how you handle money, but getting into the habit of saving and sharing actually adds to happiness.”
Notwithstanding the fact that dependency tends to spark resentment, McTigue urges clients to consider the recommendations that flight attendants repeat before every takeoff: Parents traveling with children should make sure their own oxygen masks are secure before helping their children with theirs.
Building a nest egg
For many Boomers approaching retirement, securing a financial lifeline will require a high degree of flexibility and expertise. While many preretirees may be hoping to make up for lost time with an aggressive investment strategy, “this is not the time to try and hit a home run in the stock market,” says Michael Tillis, CFP, senior financial advisor for Ameriprise Financial in Walnut Creek, Calif.
Noting that life insurance is a far more flexible asset than most clients realize, Steve Quiner, CLU, ChFC, co-owner of Coleman/Quiner, Ltd. in Des Moines, Iowa, says that under certain circumstances, paid-up, permanent life insurance can serve as a “permission slip to consume other assets.”
But retirees who have not yet accumulated the assets needed to design a workable distribution strategy must understand that their principal should stay put for a while, Quiner explains. As a prelude to retirement, many Boomers will need to consider taking a part-time job or pursuing a low-stress, post-retirement career that pays living expenses while interest compounds.
Once portfolios are restructured to create a steady stream of income, Tillis anticipates a greater reliance than ever on variable annuities, indexed annuities and annuity-like products. Many new products that address the specific needs of Boomers will also be introduced, Tillis adds. “As advisors, we will need to be on our tiptoes.”
Lisa Wahlgren is a frequent contributor to Advisor Today.