The year 2011 brings the first wave of Baby Boomers turning 65. Every single day in America there are 10,000 people turning 65 and this will continue on for the next 18 years. Let’s review what a typical 65-year-old Baby Boomer has experienced the past decade or so.
In the late nineties, a typical Baby Boomer would be in his or her peak earning years. Around their 54th birthday, in March 2000, the stock market began a precipitous decline as the Tech Bubble unwound rather ungracefully. On 9/11 they were 55 years old and in that sacred final 10 year stretch before retirement (some cashing in on the bull market of the 90s and taking an early retirement). From March 2000 until the Fall of 2002 the stock market would take a long and slow decline of around 47%. While one would hope they weren’t all in stocks, many had been aggressively in tech stocks and saw declines perhaps as sharp as the NASDAQ’s 80% decline. Life continues on with an Enron here and an Iraq War there, but otherwise their net worths seem like they are on the upward trajectory. Most importantly, their single most valuable asset, their home, is rapidly rising in value.
Enter: The Financial Crisis, stage right.
The stock market (and more or less the real estate market) peaked around October 2007 with plenty of recession signals in the air. The stock market was about 20% above March 2000 highs. Steadily the markets declined, the Baby Boomer was comforted by talks of a “mild” recession and that subprime was “contained” and “wouldn’t spread” (for future reference, when the authorities that be use references imply fire or disease, check your canned goods supply). Bear Stearns is fire sold, but the stock market still hasn’t crossed the technical bear market decline of a 20% decline. The summer of 2008 was laden with rumors, but it still didn’t ring “run for the hills” (at least the stock market didn’t feel that way). Then Lehman, AIG, Wachovia, WaMu, Countrywide, etc. and the stock market culminates in a 54% decline in March 2009.
The remaining section of this Baby Boomer story is yet to be seen. The stock markets did recover very well, housing… not-so-much. And here in 2011 the Baby Boomer hits the magical 65 retirement age amidst a very volatile summer, a country with political gridlock we haven’t seen in a very long time and our peers in Europe with problems perhaps greater and less “containable” than our own crisis. This is not a recipe for a relaxing retirement. Is it probable that this Baby Boomer will see the stock market go through another 50%ish decline at some point in the next 10 years? If not within 10 years, very likely within their retirement.
Enter: Advice
As a financial advisor who specializes in Baby Boomers, this is often the story I paint for them. Half of the reason is to make them feel better. It’s completely natural that they aren’t relaxed and are glued to the news. However, the point of all of this is to acknowledge the near certain possibility that the stock market will experience a very large decline within their retirement years. It’s simply what it does. It is crucial that people anticipate this and expect it. Truth be told, with each of these declines, for those who stayed in, the market decline became nothing more than a historical event and perhaps a loss of time as they waited for it to recover. Ultimately, the temporary loss of principle – which, to emphasis, was temporary – has not caused them to make any major retirement changes. Yes, there are some who bet the farm, mortgaged their houses and used the money to invest in other real estate and it’s all upside down and they were forced into bankruptcy and foreclosure.
Yes there are some, but for the most part it’s the younger generations that are losing their homes. What has worked best for most people is to point their funds toward their intended goals and to evaluate whether or not those goals are sustainable and make any necessary changes. Retirement savings are meant for income and this becomes the investing goal: to draw a set amount of money from those funds every month for the rest of your life. Some clients had intended to travel and have fun in their retirement years, but are being more conservative because of the poor economy. With these clients, we focus their goal down to numbers and to create a “bucket list” of what they want to do and then to evaluate whether or not this can fit into their plan.
There is hope for the Baby Boomer, but the days of sloppy investing are behind us. Investing must now be specific and purposeful with continual recalibration of goals. It is the only way to prevent a temporary loss in the market from becoming a permanent loss when an investor panics out at the bottom.
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