the Service of Baby Boomers: A Seismic Mind Shift for Financial
2005 - For half a century, the financial services community
has focused on helping individuals accumulate wealth in
preparation for buying homes, educating children, and ultimately
for retirement. As baby boomers (those born between 1946
and 1964) begin to retire, however, financial advisors and
the institutions serving this market must address the new
and different financial needs this generation will have.
2010, 13% of the population will be of retirement age, according
to Cerulli Associates. One of the most startling statistics
it offers is that 61% of households leaving the workforce
will be unable to replace 75% of their income in retirement—a
general benchmark often applied as the asset test for retirement
addition, people are spending significantly more time in
retirement. A 65-year-old stands a better than 50% chance
of living to at least 85 and a 30% chance of reaching 90,
according to a recent MetLife study. The added longevity
of seniors today also means that, unlike generations before,
retirees continue to remain active in some capacity long
after their careers end.
Phases: Fast, Medium, Slow
behavior of recent retirees suggests a trend that baby boomers
will likely follow. Their retirement years will become a
connected series of phases or speeds that might be labeled
fast, medium, and slow. These phases identify the different
goals and lifestyles of baby boomers after they turn 59
Qs . This emerging phenomenon makes sense, considering that
many baby boomers did not spend their entire working life
in one particular job, company, or vocation, as their parents
generally did. Many preferred instead to view their work-life
as a series of phases.
in the “fast” phase tend to embark on other
job like ventures, sometimes completely different from their
previous careers. The primary purpose may be fulfilling
lifelong dreams rather than generating current income. Though
their new careers may not require the 10-to-12-hour days
of their old jobs, many recent retirees find themselves
actively filling their time with family, travel, and social
the “medium” phase, seniors may scale back or
end their lifestyle-oriented vocation and devote more time
to social events, charities, or family. Retirees at this
stage, although still active, may want to reduce their commitments
and enjoy greater unstructured time. Medical issues become
a more significant part of daily life.
the “slow” phase will closely resemble retirement
of generations past, where seniors remain close to home
most of the time and participate in only a few—but
important—social activities, with medical concerns
consuming an ever-growing portion of resources.
Priorities and Safety Nets
only do the various active phases of retirement represent
a change from past generations, but the ways in which baby
boomers finance their later years will be far different
from those of their parents, who relied heavily on defined
benefit pension plans, Social Security, and Medicare coverage.
Although baby boomers are much more in control of their
own economic destiny, they also lack the safety nets available
to the prior generation, and must wrestle with ensuring
that their funds are adequate to meet their goals and desires
in each phase of retirement.
boomers must take into account not only the rising costs
of health care but also the tax implications of incorrectly
withdrawn funds from 401(k), 403(B), TSA, and IRA plans.
The nuances of this planning will catch many retired baby
boomers by surprise. People caught in the tax trap will
pay a higher effective tax on the money received from these
qualified plans than they saved while making contributions.
Baby boomers play a higher-stakes gamble with their finances
than did previous retirees, and most will not even realize
it before it is too late. If a 35-year-old suffers a financial
setback due to the market conditions or poor planning, chances
are she will have the opportunity to regain her lost position.
Not so for a70-year-old.
Advisors and Institutions Must Adjust
growing baby-boomer market segment represents challenges
for both financial advisors and financial institutions.
For one, a larger age gap will most likely exist between
the advisor and client. Most advisors, although educated
and intelligent, will be far removed from retirement and
will not have experienced the need to distribute accumulated
wealth. The industry relates to, and is more comfortable
with, individuals that desire to accumulate wealth for eventual
retirement (albeit a long way off), rather than clients
who have accumulated wealth and are searching for strategies
and methods to guarantee income for life.
the financial services industry is largely centered around
selling appropriate financial products and holding assets
under management for as long as possible. This tactic will
not work for baby boomers, who will consume their assets
just the last two years, the financial services industry
has recognized that change must come in order to meet the
unique demands of baby boomers. Though many seniors have
never thought of working with a financial advisor, a great
many more are starting to question whether they can adequately
maintain their current quality of life without the assistance
of a knowledgeable consultant. The complex modeling and
analysis required will send baby boomers to financial institutions
and advisors in large numbers. The key here is that the
industry must understand the issues of providing income
for life, and it must be able to offer appropriate recommendations
within the context of a plan.
date, the financial services industry has largely responded
to the baby boomer market by offering variations of conventional
products and solutions. Most existing mass-marketed products,
however, are not customized enough to help baby boomers
transition from the one-dimensional working career into
retirement, let alone provide for the moves between the
fast, medium, and slow phases. Although new financial products
and services are emerging that address the new retirement
paradigm, more attention and innovation are needed. The
new focus will be on income for life and on products that
facilitate careful and systematic decumulation of a client’s
savings in retirement, along with insurance vehicles that
address the health-care issues that senior citizens face.
are also opportunities for those that provide financial
advice directly to individuals. Logic dictates, and consumer
research confirms, that individuals will seek advice and
are willing to realign their financial relationships to
achieve a desired well-being. Financial advisors are ideally
positioned to serve this market. Most of the available self-help
tools focus on wealth accumulation, not on phased-income
and time-released cash flow strategies during retirement.
The tools available today become decreasingly relevant as
one enters the phases of retirement.
important aspect of a financial advisor’s job in dealing
with baby boomers is listening and, according to Forrester
research, validating information. While this discipline
appears to be somewhat in line with what advisors already
do, the act of listening to and validating baby boomers’
goals is much different. Grouping goals together may be
impossible, because many of them will conflict with each
advisors and institutions cannot focus on isolated “one-off”
goals. Successful advisors will focus on helping seniors
establish a tailored wealth-distribution process for ensuring
an adequate quality of life. Life insurance, long-term care,
estate planning, equities, fixed income, and annuity programs
may all come into play and must be woven into a complex
timeline and roadmap that is adjustable as circumstances
baby boomers and validating their concerns are crucial because
the decision-making timeline for their retirement plan success
is dramatically accelerated. Just before or shortly after
they’ve retired, many seniors will find themselves
visiting a financial planner. At a time when they will have
the most money they will ever have, new retirees will be
forced to make almost instantaneous decisions about asset
allocation, asset distribution, and product deployment.
All facets and nuances of wealth distribution must be articulated
an easily understood process. Communication will allow advisors
and institutions to effectively serve baby boomers in their
various stages of retirement life. As advisors approach
this market segment, they must remember that the process
becomes the product.
financial services industry is in the process of adapting
to the opportunity of helping baby boomers distribute their
retirement funds wisely. Doing so, however, requires a sizeable
shift in thinking and industry practices. A process-oriented
consulting approach will help bridge the education and age
gap between advisors and baby boomers. This contradicts
the traditional industry practices in other market demographics
because baby boomers are different. The varying phases of
retirement will force seniors to decumulate their funds.
This decumulation should be structured by a formal written
plan recognizing the phases of retirement and the unique
needs and events that occur within those phases. This will
become a baby boomer’s roadmap to the future and hopefully
will create a sense of financial well-being.
Davidson is vice president of strategy and business
development for Financial Profiles, Inc. (www.profiles.com),
which offers financial advice software, consulting, training,
and support services to the financial services industry.