6 Items Keeping Boomers up at Night

While you can make the argument that investment markets have returned to normalcy over the last 12 months, there are still major concerns for those who are currently going through or about to go through the transition to retirement. Here are six issues of primary concern for the pre and early retiree

Inflation

According to a labor Department report in December, the cost of living only rose 0.1 percent last year. Looking at the price of various commodities, paints a very different picture. The Federal Reserves current round of quantitative easing has sparked a debate amongst politicians about its longterm affects on inflation. Sustained annual inflation about 3% could have a significant affect on a retiree’s purchasing power.

Parent-Child Sandwich

A prolonged recession has put some established boomers in the position of needing to support aging parents and unemployed children. Reports show many twenty-somethings have moved back in with parents in an effort to curb cost of living. According to 2010 Census Bureau data, 5.5 million Americans aged 25 to 34 live with their parents, up 38 percent from 2000. Last Novembers unemployment rate for people aged 20 to 24 was 14.8 percent.

Statistics show the same at the other side of the generational divide. A 2009 survey by the National Alliance for Caregiving showed 21 percent of caregivers for older adults said the economy had forced them to live together in the previous 12 months. An earlier study by the group found, on average, that families caring for older adults spend 10 percent of their income to do so.

Gold Bubble Bursts

Are Boomers going from bubble to bubble to bubble? Boomer investors irrational exuberance began in the tech sector in the late 1990’s; moved to a more tangible asset class in real estate in the early 2000s; and has poured into commodities (a traditionally volatile asset class) in the last few years. The price of gold is up more than 170 percent since the beginning of 2006 and hit a record of $1,431.25 an ounce last Dec. 7. Billionaire George Soros has predicted that the gold rush can't last, calling the precious metal "the ultimate asset bubble" at the World Economic Forum last January.

Bond Bubble Bursts

Speaking of bubbles, the other asset class that has seen a flood since the financial crisis in 2008 is bonds. Traditionally seen as a more conservative instrument than equities, bonds may be at the center of a perfect storm considering that interest rates are at historic lows. The relationship between interest rates and bonds is such that as rates rise, bond principal values fall.

Not Saving Enough

A 2010 Employee Benefit Research Institute survey shows 13 percent of workers aged 55 or older are "very confident" that they have enough money to live a comfortable retirement--down from 27 percent in 2000. Only 53 percent of older workers have actually tried to calculate how much money they will need in retirement, the survey said. The options for slow-savers are few: They can save more, work longer, or cut back on their spending. The EBRI survey found that 42 percent of older workers don't plan to retire until age 66 or later, up from 20 percent in a 2000 survey. Sticking one’s head in the sand will surely compound the situation. Figure out your capital need and hash out a savings plan sooner rather than later.

Too Much Company Stock

Still a problem I see with prospective clients working for well-established large corporations is the over-weight in company stock in their retirement plans. According to the Profit Sharing/401k Council of America, 18.1 percent of retirement plan assets last year were invested in employer stock. No matter what you think you know about the company you work for, there is still a prudent amount of exposure to have of your employer’s stock.


While this all seems like doom and gloom for the transitioning retiree, these are risks that can all be reduced or eliminated. While the risks and planning principals change during this part of your financial life, you can put an infrastructure in place to get through it.

Thoughts on measuring risk in an investment portfolio

Often when I meet with prospective clients to review their retirement holdings, their portfolio’s risk is measured in a ratio of equities-to-fixed income investments. This has been the traditional way to measure the overall risk of a portfolio, with the weight moving from the equity side to the fixed side as a client ages.

While this may be a simplified way of expressing risk, it may also be just that—too simple. I would make this argument for 2 reasons:

• Some bonds may be more risky that some stocks. It stands to reason that a debt instrument from an emerging market company could conceivably have more risk than an established dividend paying equity investement in the US domestic market

• Risk Changes over time. Volatility in the Emerging Markets asset class certainly is different today than it was 10 years ago, just as the risk of Real Estate or commodities has been an evolving factor over the last couple of years

To account for the changing risk levels regular and consistent analysis should be conducted. This process results in portfolios designed to take advantage of more attractive opportunities for investment while maintaining risk levels established by the analysis. It also allows for a portfolio to adapt as risk changes—of particular value when volatility spikes in the market for the pre-retiree investor.

A portfolio’s stock-to-bond ratio is greatly affected by whether the risk in a portfolio comes from a small allocation to emerging markets, a sizable allocation to high-yield bonds, or a moderate overweight of the equity allocation. However, an adaptive risk analysis can measure these options and determine to what degree a client’s risk tolerance can handle each.