Financial Planning is a good profession with many solid people doing what they genuinely feel is the best thing for their client on a daily basis. Most planners I have met are knowledgeable, conscientious, and stick to their plan through thick and thin. The industry as a whole is on solid footing, but problems lurk around the corner.
In traditional financial planning models, nothing has changed, while in the world around us, everything has changed. There are 77 million baby boomers going over the hill to retirement, the same 77 million people who drove the incredible economic growth that produced solid stock market returns. What effect will this have on the stock market going forward? Economic indicators and simple numbers are not promising, in either the short term or the long term. Taking everything into account, I see a flat, choppy and even down market for the foreseeable future.
As an example, let’s say that $1 million is my magic number to retire. I have in my 401(k) $990,000 and file my retirement papers. And the market crashes, going down 40% (not a reach if anyone remembers what happened as recently as 2008). So now what? What is the plan that I follow now? If I am putting my retirement money into ETFs and mutual funds, what plan am I really following except the belief (reinforced by traditional financial professionals) that the markets always recover – but when? If I now have to work longer now and completely change the retirement picture that I had drawn only recently, that unfortunately causes me worry.
Let’s again consider how financial planning models have stayed the same while everything else around us has changed. When we say everything has changed, what are some of those changes?
We are living longer. The average life expectancy of a baby boomer has changed considerably. In 1960, the average life expectancy for someone in the United States was 69.7 years, compared to the average today of 78.7 years. So what is a measly 9 years, right? Well if you are in retirement trying to make sure that you never run out of money, 9 years is huge.
The Social Security System. Most people my age are not planning to have a viable social security system in place at retirement. Government mismanagement and the granting of benefits to those that the system was never meant to pay benefits to are only a couple of reasons that the social security system is failing. There are plenty more.
The (near) death of the defined pension plan. There was a time when you went to work out of college, worked 30 years with the same company and retired with a defined pension check every month. Those days for the most part are gone. Increased job movement, the declining power of labor unions, and the loss of manufacturing jobs in the United States have contributed to a system where we are increasingly expected to self-fund our retirement finances. According to the Society for Human Resources Management, only 6% of companies offer formal phased retirement programs, down from 13% in 2006.
Shrinking home values. Just as many people reached retirement age, the asset that they counted on most to fund many of the plans they made for their retirement years took a dramatic drop – and in most cases it has not yet recovered to earlier levels.
The lack of interest being paid on savings accounts. Putting money in the bank or into a money market account today draws an interest rate just barely above zero. There were many years where safe investments into savings accounts were rewarded with excellent interest rates. Those days appear to be over, at least for the foreseeable future.
So what can be done on the financial planning side to prepare this generation of boomers for retirement? It’s not rocket science. Boomers need to look outside the box for income products offered by independent financial planners. You won’t find these in the “Wall Street Aisle” of your local investment supermarket. Rather, these instruments and investments, properly vetted through a rigorous due diligence process, will be found with financial planners who understand the need for cash flow and income in retirement. Financial planners like the team at South Coast Investment Advisors.
There are many tools that address the needs of today’s baby boomers that are on the verge of retirement. Some of these tools are good, some bad and some downright ugly.
Our job at South Coast is to find the right tools, to piece them together into a portfolio that makes sense, and that accomplishes the goals of the soon-to-be retiree. Then we monitor that portfolio and we make adjustments along the way so that our clients don’t find themselves in the position of too many baby boomers like this actual gentleman from Seattle, WA. He took an early retirement from Verizon in 2003, and after the market meltdown of 2008, the 70 year-old retiree spent two years looking for work to support his retirement. He now drives a van for seniors around the Seattle area to support himself.
Talk to your South Coast team member today about effective retirement planning given the dramatic changes that have affected our world recently.