Your Money
2:35 am
Tue March 5, 2013

For Baby Boomers, Lessons In Financial Basics

Originally published on Mon April 1, 2013 12:54 pm

The oldest of the baby boomers came of age in the 1960s and are beginning to retire. Their younger cohorts are still putting kids through college and building careers. Baby boomers are a giant portion of the population — 78 million people, by one estimate.

They grew up in an era of rising living standards, but the Great Recession destroyed any sense of financial security — and many nest eggs. Financial planner Tim Maurer outlines a variety of issues boomers face.

Who is a baby boomer, and what defines their financial situations?

"The age range is vast — anyone from 48 to 67 — so we're really talking about a couple of generations within the baby boomer generation. Some of them are now in retirement. Their kids are out of the house. And some of them are still in the thick of getting kids through college in their peak expense years, but also their peak income-earning years. And obviously this is all taking place within one of the most confounding periods of time in financial history. There's an awful lot of confusion, a lot of market volatility and economic uncertainty, so a lot of questions on that front."

How much income can be generated in retirement?

"We're really looking at three different sources [of income]. If they're one of the few who still have a pension, that would be a great benefit. Then they will also have some sort of Social Security. The baby boomer generation is expecting quite a deal from Social Security, actually. Some of them will be getting up to $2,400 per month of income from Social Security. And then they have their retirement savings.

"An easy way of getting an idea of how much income your retirement savings can generate is that you add it all up and you multiply it by .04. That is the equivalent of 4 percent, which would be a reasonable rate of return that you can expect to take out of your investment dollars. If you take the pensions, add the Social Security and add 4 percent of the retirement savings that they currently have, that will give them a good idea of what they can reasonably generate in terms of income today."

What are their immediate financial issues?

"The baby boomers truly are our first sandwich generation, where they have concerns of their parents, who are still living, possibly having to help fund them in their old age. We're also talking about the expectation of baby boomers: This is the first generation that was expected to put their kids through school. ... Many of them did take on the financial obligations for their children's education."

What kinds of investments should boomers be in?

"Boomers have really [ridden] the roller coaster of the market because they grew up professionally in the 1980s; 1982 to 2000 was the longest bull market stretch that we've ever seen in this country. And so they grew up basically believing that if they just plowed money into the market, it was going to make all of their dreams come true. From 2000, 2001, 2002 — the three-year stretch where the bubble burst in the tech market and 9/11 hit — I think that they were all scared. If they were scared in those three years, 2008 really scared them into a cocoon, and they never wanted to come out again. And just over the course of the last several weeks was the [Dow Jones industrial average] reaching 14,000. So if they just did hang on for the ride throughout all of that volatility, now is the time when I'm saying to them, 'It is time to put together a truly diversified, more conservative, balanced portfolio that will be able to provide you with income throughout your retirement.' "

Is this a generation on top of estate planning?

"The generation is not, but I think few generations are. I think what's important about estate planning for baby boomers is now they are actually glimpsing needing to utilize these documents with a higher degree of probability. In other words, baby boomers are possibly glimpsing down the road when they will be leaving this Earth, and it makes the will that much more important, but because they have assets, because they have concerns about health care. It also makes the powers of attorney and the advanced directive, the living will document and the health care power of attorney all the more important as well. They should also be thinking of their parents, who are still alive, and that imminent need for their estate planning documents to be completed."

Copyright 2013 NPR. To see more, visit http://www.npr.org/.

Transcript

RENEE MONTAGNE, HOST:

Here is something that's not really news; that is, that there are so many baby boomers - some 70 million of them - that what happens to boomers affects much else. And today, we begin a weekly look at boomers' personal finances as they enter next stage, retirement.

Born after the Second World War, boomers grew up in an era of rising living standards. But the Great Recession destroyed many boomers' sense of financial security, and many of their nest eggs. The economy's slow recovery has left many still living in a financial limbo. To talk about some of the difficult decisions that millions of baby boomers face, we called Tim Maurer. He's a financial planner in Hunt Valley, Maryland.

Good morning.

TIM MAURER: Good morning, Renee. Thanks for having me.

MONTAGNE: Glad to have you. Now, let's define what this demographic is - the age range; how it defines their financial situation, compared to people of other ages.

MAURER: Sure. The age range is vast. We're talking about anyone ages 48 to 67. So we're really talking almost about a couple different generations within the baby boomer generation. Some of them are now in retirement. Their kids are out of the house. And some of them are still in the thick of getting kids through college in their peak expense years, but also their peak income-earning years. And obviously, this is all taking place within one of the most confounding periods of time in financial history. There's an awful lot of confusion, a lot of market volatility and economic uncertainty. So a lot of questions on that front.

MONTAGNE: So what are the key questions that come up? Perhaps the first question, maybe, a new client might ask you.

MAURER: Sure. Well, the first thing if they have retirement on their spectrum, they're going to want to know, how much income can I generate? Or that may be the question I am posing to them - how much income can you generate? We're really looking at three different sources. If they're one of the few who still have a pension, that would be a great benefit. Then, they will also have some form of Social Security. The baby boomer generation is expecting quite a deal from Social Security; actually, some of them will be getting up to $2,400 per month of income from Social Security.

And then they have their retirement savings. An easy way to get an idea of how much income your retirement savings can generate is that you add it all up, and you multiply it by .04. That is the equivalent of 4 percent, which would be a reasonable rate of return that you can expect to take out of your investment dollars.

If you take the pensions, add the Social Security and add 4 percent of the retirement savings that they currently have, that will give them a good idea of what they can reasonably generate, in terms of income today.

MONTAGNE: Now, there are plenty of other more immediate financial issues for the baby boomers. So talk to us about some of those. You mentioned college financing for kids.

MAURER: Yeah, the baby boomers truly are our first sandwich generation, where they have concerns of their parents who are still living, possibly having to help fund them in their old age. We're also talking about the expectation of baby boomers. This is the first generation that was expected to put their kids through school, almost as a moral imperative. Whether that's right or wrong, is another story; but that was the expectation. And many of them did take on the financial obligations for their children's education.

MONTAGNE: Generally speaking, what kinds of investments should boomers be in?

MAURER: Well, boomers have really- rode the roller coaster of the market because they grew up professionally in the 1980s. 1982 to 2000 was the longest bull market stretch that we've ever seen, in this country. And so they grew up basically believing that if they just plowed money into the market, it was going to make all of their dreams come true.

Now, of course, from 2000 - with 2000, 2001, 2002; the three-year stretch where the bubble burst in the tech market, and 9/11 hit, I think that they were all scared there. Well, if they were scared in those three years, 2008 really scared them into a cocoon, and they never wanted to come out again. And just over the course of the last several weeks was the market reaching 14,000.

So if, in fact, they did just hang on for the ride throughout all of that volatility, now is a time when I'm saying to them, it is time to put together a truly diversified, more conservative, balanced portfolio that will be able to provide you with income throughout your retirement.

MONTAGNE: And just finally, what do you hear from your clients who are baby boomers, about their estate planning? Is this a generation that's really on top of that?

MAURER: The generation is not, but few generations are. I think what's important about estate planning for baby boomers is now, they are actually glimpsing needing to utilize these documents, with a higher degree of probability. In other words, now - let's face it - baby boomers are possibly glimpsing down the road when they will be leaving this earth, and it makes the will that much more important.But because they have assets, because they have concerns about health care, it also makes the powers of attorney and the advanced directive - the living will document and the health care power of attorney - all the more important as well. They should also be thinking about their parents who are still alive, and that imminent need for their estate planning documents to be completed.

MONTAGNE: Tim, thanks.

MAURER: Thank you.

(SOUNDBITE OF MUSIC)

MONTAGNE: Tim Maurer is a financial adviser in Hunt Valley, Maryland. He also teaches financial planning at Towson University, in Maryland. We'll continue to explore the financial questions facing baby boomers, in the coming weeks. Transcript provided by NPR, Copyright NPR.

Related program: