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Quoted in
Journal of Financial Planning
(Dec. '09)
The Great Recession Creates a New Retirement Reality
By Amy E. Buttell
The stock market is recovering,
and the economy may not be far
behind as the Great Recession
begins to recede into history. But for
retirees, the newly retired and everyone
else contemplating retirement, the events
of the last 15 months are not going to be
forgotten anytime soon.
In fact, for the baby boomer generation,
the Great Recession may be a defining
moment in a similar way to what the Great
Depression was for an earlier generation.
Many Americans are not just cutting back
and sticking to a budget, they’re extending
their working years beyond planned retirement
dates and becoming more sensitive to
risk, say experienced planners.
Scars from the recent economic turmoil
are still evident, even for those who
haven’t been hardest hit by job losses or
foreclosure. Declining home values, lower
retirement plan values and a large dose of
economic uncertainty have incited even
the wealthy to be more cautious about
spending and more disciplined about paying down debt.
Earlier in the decade, things couldn’t have
been more different. Many Americans
counted on the rising equity in their homes
not only to pay for luxuries now, but also to
fund a comfortable retirement in the future.
Retirement plans and stock portfolios were
also up, so more people were comfortable
taking on more debt in the belief that the
bull market in both housing and stocks
would go on indefinitely. Link those shattered
beliefs with the growing expenses
involved in healthcare, longer life spans and
the expenses of caring for parents and children,
and it’s evident that a new retirement
reality is literally taking hold.
“I think this really is going to have a generational
impact on people,” says David
Twibell, president of Private Wealth Management
at Colorado Capital Bank in Colorado
Springs, Colo. “At some point, we’ll
all forget and go back and make the same
mistakes again, but I think there will be
some lasting impact over what we’ve seen
in the past couple of years.”
Here’s where the financial crisis has
impacted retirement:
Working Longer May Become a Necessity:
The new retirement reality is particularly
evident when it comes to retirement dates.
Retiring early or even at the traditional
ages of 62 or 65 is increasingly untenable
for many.
“Many people who spent heavily and
thought that everything would work out and
they could still afford to retire early are
either postponing retirement or, in many
cases, are working part-time,” says Lewis
Altfest, Ph.D., CEO of Altfest Personal
Wealth Management in New York, N.Y., and
an associate professor of Finance at Pace
University’s Lubin School of Business.
“Working longer will become fashionable
because of a practical consideration—people
will work part time, and at least some of
them won’t say they are working because
they need the money, but to stay active.”
Lynn Ballou, EA, CFP®, founder of
Ballou Plum Wealth Advisors, LLC in
Lafayette, Calif., is seeing many of her
clients who may have retired full-stop in
the past are now making career changes
into part-time employment, or less stressful
full-time employment, to bridge the gap
to retirement.
“I have talked to a lot of clients lately who
are thinking about their lives, who want to
live differently,” she says. “So now they are
doing something, whether it is quitting a job
to substitute teach or whatever.”
By working part-time, Ballou says clients
can avoid drawing down their retirement
savings for a few more years, helping to
preserve their assets.
Higher Expenses, Longer Life Spans Fuel Health
Care Concerns:
The baby boomer generation, sandwiched
between their children and their aging parents
who are living longer, are particularly
cognizant of the toll that a longer lifespan
and health care expenses can take on a
retirement portfolio.
“I think a lot of people are realizing that
they’ve got a limited window to save
enough money to get them through the
rest of their lives,” says Twibell. “We don’t
know how long the rest of their lives are
going to be. With medical advances, it may
be a lot longer than people expect now.”
According to AARP, seniors spend an
average of 30 percent of their income on
health care costs. And federal officials are
predicting that basic Medicare premiums
will increase 15 percent in 2010 to $110.50
a month—topping $100 a month for the
first time.
A 2009 study by First Command Financial
Services found that Americans grossly
underestimate the amount of money
needed for health care expense in retirement.
The study showed that Americans
expect to need about $33,000 above general
retirement savings to cover health care
costs; a mere fraction of the estimated
$166,000 in out-of-pocket expenses estimated
for someone retiring in 2009 and
living to 100.
Meanwhile, life expectancies continue to
increase, according to data from the Centers
for Disease Control and Prevention.
Back in 1950, the average 65 year old could
expect to live another 13.9 years. In 2005,
the average 65 year old could expect to live
another 18.7 years.
Longer life spans not only mean that
clients will potentially need to save more
so that they have the power to spend over a
longer period of time, but also can mean
higher medical expenses. With a health
care plan being debated in Washington,
there are more questions than ever about
what funds are available to pay for medical
care and how the system will be able to
handle the health care expenses of millions
of aging baby boomers over the next half
century. With government budget deficits
escalating, more of the spending burden
may be eventually pushed onto consumers,
resulting in even higher health care
expenses in retirement.
Altfest sees clients trying to save more in
case their medical expenses are higher.
“It’s a major concern, and people in general
tend to be conservative about their
spending to keep some in reserve for this
possibility,” he says. “But the most likely
hedge against medical expenses is going to
be the home. If things get bad, they’ll sell
their home and use that to pay for medical
or nursing home expenses.”
Changing Market Conditions Add Risk:
The recent severe market downturn and
volatility have caused clients to become
much more sensitive to risk in their portfolios
and in their lives, says Clint Edgington,
CFA, a principal at Beacon Hill Investment
Advisory in Columbus, Ohio.
“We obviously focus on portfolio risk,
but there is an appreciation for risk across
all aspects of a client’s life that wasn’t there
two years ago,” he says. “We’ve seen an
increased willingness to listen to discussions
focused on risk and the insurance
area.”
Not only are clients more sensitive to
risk, they are also reigning in their expectations
on the return side, says Dan West,
CPA, PFS, CFP®, a family CFO with
Moneta Group in St. Louis.
“People are setting their expectations
much lower for rates of return,” says West.
“They are also reducing their expectations
about what they will be able to do in retirement.
They’re more cautious about things
like acquiring a second home.”
Twibell is concerned about the havoc
that rising interest rates could wreak on
the portfolios of retirees, because an
increase in inflation of even 1 percentage
point—from 2.5 percent to 3.5 percent—
results in an amazing amount of extra
money people have to save to make it
through retirement.
“We’ve gotten very spoiled with very low
inflation for a long time, but seeing core
inflation of 3.5 to 4 percent is really, historically
not that unusual,” says Twibell.
Budgeting, Paying Down Debt in Vogue:
West is seeing not only a reluctance to
spend, but also a newly found aversion to
debt.
“Clients are asking themselves more
often whether they should spend money
now on something like a car or wait a few
years,” he says. “We are also seeing that
they are not only cautious about taking on
debt to the point that it is a bad word.
People want to pay down as much debt as
they can.”
Budgeting can be a challenge for baby
boomers, many of who have been used to
spending up to their income limits and
beyond, says Ballou.
“When we finally got our clients to open
their statements—and it was surprising how
many didn’t want to open their statements
when the market was down—we talked to
them about how much their lifestyle was
costing them and where they can make
some changes,” she says. “It’s kind of like
negotiating; it’s helping them negotiate with
themselves about where they are willing to
make changes … that old-fashioned needs versus-
wants conversation.”
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