WHAT CAN BE LEARNED FROM THE BABY BOOM GENERATION?
By: Tim Butt
In one word…WISDOM
“By three methods we may learn wisdom: first, by reflection, which is the noblest; second, by imitation, which is the easiest; and third, by experience, which is the most bitter.”
The greatest wisdom that can be learned from the generation of baby-boomers is indeed the most bitter; the consequences of poor planning and procrastination when it comes to retirement. Study after study, poll after poll, and article after article continue to reinforce the fact that the vast majority of Baby Boomers are woefully unprepared for their retirement years.
A recent poll by the Employee Benefit Research Institute1 (EBRI) found that only 13 percent of baby-boomers are ‘very confident” about their ability to finance comfortable retirements. This is the worst number in the poll’s 21-year history. In another survey conducted by Country Financial,2 approximately 50 percent said they had NO confidence in their retirement plans and this same percentage have had to decrease the amount they are putting away for retirement due to the current economy.
What is most disturbing, the ERBI research shows that 56 percent say their savings is less than $25,000 and nearly 30 percent have less than $1,000 put away for the future. And although 87 percent of baby-boomers are “not very confident” about their ability to finance comfortable retirements, the research did not find any evidence that this group of people are changing their behaviors.
There is infinite wisdom the Gen-‘Y’ and Gen-‘X’ generation can and must draw from these studies, research and polls…to ensure they do not experience the same painful and bitter consequences and realities the majority of baby-boomers are having to face.
Why did this happen and how? There are many reasons, some outside the control of the baby-boom investor, however, most were within their control. They:
- Were the first generation that began the transition from pension plans (defined benefit) to Individual Retirement Accounts like 401(k) accounts (defined contribution), offered by most of today’s private employers. This was a major transition in individuals’ retirement; one that shifted the burden and responsibility of planning and saving for retirement from the employer, directly to the employee. This transition first began in 1978 and has become the norm for retirement savings. The impact of this on the baby-boom generation cannot be underestimated…but it can be learned from.
- Experienced two major market meltdowns, ‘bubbles’, in the past decade that cost investors 50% of their investment/portfolio values and retirement savings…simply because they assumed too much risk.
- Did not make retirement planning a priority.
- Did not calculate retirement needs and set goals and objectives.
- Did not start to save at an early age.
- Did not save enough.
- Did not save on a consistent basis.
- Did not pay into their retirement account first, as the number one financial priority.
- Did not understand the degree of risk they were taking in their investments.
- Did not consider the increase in life expectancy
- Did not pay any attention to the excessively high fees paid to their advisor and the financial services industry that was building wealth for the industry and those that work in it…at the expense of their investment returns.
- Turned complete control of their investments over to an advisor (most being commissioned sales rep).
- Chased after stocks or fund managers that were ‘hot’…but only after the ‘sizzle’ had long faded
- Allowed emotions to drive financial decisions.
So, what is all this leading to for Baby-Boomers? The vast majority of baby-boomer retirees, maybe as high as that 87% figure that are “not very confident”, will be faced with options never thought of as they consider the reality of their ‘golden years.’ They are entering an age of a ‘new normal’ when it comes to retirement with redefined expectations. They either will have to:
- Work beyond their original planned date to retire…if the job is still available.
- Work for the remainder of their life…at a low-wage job with few if any affordable benefits.
- Reduce their standard of living in these years including little to no travel, trying to ensure they don’t outlive their savings and covering any health care costs.
- Move in with their kids.
- Take greater risk with their investments…the worst possible option, but easiest to consider!!!
- Or, a combination of the above
As the baby-boomers with retirement savings recognized the potential shortfall in their retirement accounts over the past decade, they became desperate knowing their limited options. This was a huge mistake as their desperation drove decisions based on their emotions. These emotional decisions chased highly speculative investment products that had excessively high fees, substantially greater risk, and were based on past performance. These were products the financial services industry was all too willing to sell and the investors paid the price when the two artificially-induced bubbles burst!
“It is a characteristic of wisdom not to do desperate things.”
– Henry David Thoreau
What do the Gen-‘Y’ and Gen-‘X’ generations have going for them to make sure they do not experience a similar fate when it comes to their retirement:
- Desire to control decisions and be self empowered
- Recognition of the value of wisdom learned from others
- Access to information and the truth
- Availability of low-cost funds and brokers to ensure their investment dollars are building wealth for THEM…not an advisor and the financial services industry.
- Internet-based companies providing resources to educate, inspire and empower the Do-It-Yourself investors
“Nine-tenths of wisdom consists of being wise in time.”
– Theodore Roosevelt
What should the Gen-‘Y’ and Gen-‘X’ investors do to ensure they are prepared for retirement? Here are a few suggestions for starters:
- Commit to start planning and calculating your retirement needs today…not tomorrow
- Start savings for retirement the instant you have a job, any job.
- Pay yourself first, saving a minimum of 10% of your gross earning.
- Participate in your employers sponsored 401(k), 403(b) or ROTH 401(k) if your employer matches any percentage of your contributions…this is free money, take advantage of the maximum they match.
- If you have a 401(k) or similar plan from a previous employer, roll it over into a self-directed account at a low-cost broker to gain complete control, increase diversification and minimize ALL fees
- Commit to enrich your knowledge and understand the critical foundational principles to a successful investment strategy.
- Understand the power and consequences of your choice when it comes to determining whether you invest with the industry or become a self empowered investor.
- If you choose to become a do-it-yourself investor and I hope you see the value in such, be certain to select a company that will partner with you on your journey by providing flexible educational resources that accommodate your available time, lifestyle and financial needs and one that will adapt with you as your financial needs change over your lifetime.
Being a co-founder of The Self Empowered Investor, you may think I have a bias relative to what I feel is in your best interest and you would be correct! We are passionate about helping investors of all ages and why The Self Empowered Investor was founded on these two foundational principles:
1. Teaching you to become your own most trusted financial advisor.
2. Ensuring your investment dollars are building wealth for YOU…NOT your advisor and the financial services industry.
There are many on whose shoulders I stand and am forever grateful. These financials titans have gained their wisdom in the noblest way, that of reflection, hard work and a passion to help others. I have gained much by imitating these financial geniuses and titans, learning from their infinite wisdom and sharing the same passion to help others. The Gen-‘Y’ and Gen-‘X’ investors have the added fortune of drawing on the real-life experiences of the baby-boomers to ensure their retirement years are just as they dream and plan; one with the comfortable lifestyle earned, investments that continue to build wealth for them and the wisdom knowing their peace of mind was a direct result of being an informed self empowered investor.
Will you accept the age of this ‘new norm’ for retirement as defined by the baby-boom generation or will you redefine through WISDOM and becoming a self empowered investor a new retirement ‘norm’ that will provide the ability to finance a comfortable retirement lifestyle at the age of your choosing? The choice is yours! You can act today, or ignore the wisdom like the baby-boom generation did and accept the same bitter consequences.1 http://www.ebri.org/pdf/briefspdf/EBRI_03-2011_No355_RCS-2011.pdf 2 http://www.countryfinancial.com/jamie.imus/articles/retirement/areYouSavingEnoughForRetirement