In the Service of Baby Boomers: A Seismic Mind Shift for Financial Service Providers

By Charlie Davidson

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SEPTEMBER 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.

By 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 income needs.

In 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.

Retirement Phases: Fast, Medium, Slow

The 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.

Retirees 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 activities.

In 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.

Finally, 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.

Financial Priorities and Safety Nets

Not 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.

Baby 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.

Financial Advisors and Institutions Must Adjust

This 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.

Second, 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 over time.

In 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.

To 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.

There 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.

Refocusing Goals

An 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 other. Financial 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 change.

Educating 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 into 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.

The 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.

Charlie Davidson is vice president of strategy and business development for Financial Profiles, Inc. (, which offers financial advice software, consulting, training, and support services to the financial services industry.




















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