Baby boomers face a unique set of retirement planning challenges when compared to their parents’ generation: higher inflation risk due to potentially increasing interest rates, longer life-expectancy, lower yields and a dearth of pension programs.
I’ve found that baby boomers’ expectations about what kind of lifestyle they want in retirement tend to be higher than those of the Greatest Generation, who learned frugality growing up in the Depression. Baby boomers want to travel, dine out, own multiple homes and take their extended families on vacations. At the same time, they’ve carried over this idea from their parents that they should be able to live off the interest and dividends from their investments, without dipping into their principal.
Baby boomers who just want to get by in retirement might be able to live off a combination of their Social Security check and their income from investments, but for anything beyond that, they’ll have to approach investing and planning for retirement in a different, potentially riskier, way.
The crux of it all is that having cash flow in retirement is more important than having income. Cash flow comes from a combination of sources: dividends, interest, capital gains and return of principal. Baby boomers have to get over the old stigma attached to invading principal. There’s no point in living poor and dying rich. High expectations coupled with a fear of running out of money are a crippling combination. The key is figuring out a sustainable withdrawal rate, so that clients can enjoy their retirement but not worry that they’ll go broke before they die.
Baby boomers need to protect against inflation by weighting their portfolio at least 30% toward equities. And as tempting as it might be to sit back and collect dividends rather than worry about the ups and downs of the stock market, dividend-paying bonds aren’t what they used to be.
Decades of deregulation have made dividend-paying industries less predictable and more risky. And just because a company is paying good dividends doesn’t mean it’s a good company–before the recent Gulf oil spill, a Kiplinger article I read listed BP as one of the dividend-paying companies that could be counted on.
The bottom line is that baby boomers are going to have to take on more risk if they want to get the most out of their golden years. That’s why it’s more important than ever they seek the guidance of a fiduciary financial adviser. These might not be the best of times for retirement planning, but if it’s done right, there’s nothing to fret about.
*This article was published by the Wall Street Journal.