Strategies for navigating the baby boomer danger zone
Recent Social Security Administration projections show the number of Americans 65 and older will increase from about 61 million in 2023 to about 77 million by 2035.1 With a large influx of people potentially entering retirement and exiting the workforce, the country’s composition will dramatically change and a larger number of people will begin to draw on their retirement savings.
And therein lies the problem. According to a survey from AARP, 20% of adults ages 50+ have no retirement savings and more than half (61%) are worried they won’t have enough money to support themselves in retirement.2 Those working to make up for their lack of retirement savings face additional risks, the greatest being outliving their assets as lifespans increase.
As the economy strengthens, the risk of inflation looms, and uncertainties about the future could tempt some to take risky, aggressive approaches to investing in an effort to make up for lost time.
The danger zone
Many baby boomers have entered what’s commonly referred to as the “danger zone” — the five years leading up to retirement and the first 10 years in retirement. A wrong move during this period could spell financial hardship without enough time to recover losses.
Investors are typically at their wealthiest point during this time and, consequently, at greater risk of losing large amounts of money. Future earnings could diminish, and your clients may likely become more concerned with preservation than growth. Placing assets in high-risk equities during this time generally becomes less desirable, and your clients may seek products that offer absolute returns over short-term performance.
Spending levels
As you know, retirees typically categorize their spending into two basic levels: essential expenses (food, clothing and shelter) and discretionary spending (recreation and amenities that enhance a lifestyle). Discussing how to diversify a portfolio based on these two levels rather than going over pre-set platforms based on current assets can help your clients understand which investments offer the greatest potential for a secure future. Consider the following approach:
Essential
Help your clients calculate their expected monthly expenses for necessities. In addition to food, clothing and shelter, look at healthcare, transportation, utilities and any potential taxes. Work with your clients to evaluate their ability to “make ends meet” with fixed income streams that can last a lifetime and aren’t exposed to market risk, such as Social Security or a pension plan. Is there money left over or a shortfall? That arms you with information to customize a portfolio mix that addresses their needs.
Discretionary
As you build a relationship with your clients, you’ll get a sense of their lifestyle. Do they like to travel? Own a vacation home? Collect vintage cars? To sustain a lifestyle they’ve become accustomed to, some investors will likely need to rely on income sources that are exposed to market risks, including 401(k) disbursements, IRAs and other taxable accounts. That income is not guaranteed, however, so it’s important to establish a backup plan.
Closing the gap
If fixed income streams aren’t enough to cover the essentials and clients become uneasy about the market risks associated with traditional accounts, there are ways to help them close the gap.
You may want to discuss liquidating some assets, downsizing a home or encourage them to stay in the workforce longer. According to T. Rowe Price’s recent Retirement Saving & Spending Study, around 20% of retirees are working either full time or part time while 7% of respondents report looking for employment.3 While unappealing to some, it may need to be a serious consideration depending on an individual’s forecasted expenses.
Also, seek ways to reduce exposure to equities and market risk by considering an annuity that guarantees some minimum income. It may offer just the level of security your clients are seeking and mitigate the risks of having too little to cover expenses. Choosing an annuity investment platform that combines growth potential and guaranteed, personalized limits on loss can help your clients navigate through the danger zone and emerge safely on the other side.