By Cyril Tuohy
From the perspective of a financial advisor talking to clients about retirement, the baby boom generation is the most bifurcated market with which they have ever dealt. There was no market quite like it before, and there will be none like it again.
How so? Within the same generation, the roughly 78 million U.S. adults born in the 18-year period from 1946 to 1964 present two wildly divergent retirement models: one solidly anchored in defined benefit (DB) programs (typically a company or government pension), the other rooted to a large degree in defined contribution (DC) retirement programs (typically 401(k)s or a variant).
Millions of older boomers, those having reached age 65 in 2011, will have the privilege of living off guaranteed income for the rest of their lives, courtesy of the largesse of defined benefit plans provided by corporate America at a time when America was the pre-eminent power in a post-World War II and post-Cold War world.
Late boomers were born in the 1960s and grew up in a more unsettled economic environment as U.S. companies were getting their first real taste of global competition. These late boomers became the unwitting guinea pigs for defined contribution plans, in which income is not guaranteed. These DC plans have become the de facto retirement savings mechanism for newer generations of U.S. workers.
What do these two very different retirement approaches mean, if anything, for financial advisors? Do they need to apply the approach they honed with older boomers to younger boomers? Is it enough to take a life or annuity product for an older boomer and tweak it for a younger buyer?
This tectonic shift in the way retirement assets are accumulated and managed is detailed in a report titled “The Great Divide: Financial Comparison of Early and Late Boomers’ Retirement Preparedness,” published by the Insured Retirement Institute (IRI).
Cathy Weatherford, IRI president, said advisors need to stay away from all generalizations. Instead, advisors should approach each client individually.
“One of the big takeaways from the report is to be cautious about overgeneralizing,” Weatherford told InsuranceNewsNet. “I hope advisors will look at this report and be reminded that it’s so important to take clients one at a time. Everyone will have their own unique retirement goals and challenges.”
Many late boomers, for example, have financial responsibilities that early boomers left behind long ago. A total of 34 percent of late boomers were supporting an adult child financially, compared with only one fifth (21 percent) of early boomers supporting one, the survey found.
Not surprisingly, the report also found that 43 percent of late boomers identified a defined contribution plan as a major source of income in retirement compared with only 36 percent of early boomers who did, a sign that “today’s consumer is responsible for saving, investing assets and managing withdrawals during retirement,” Weatherford said.
That’s where the financial advisor comes in. Surveys of boomers “continue to find that those who work with a financial professional are much more confident in their retirement plans,” Weatherford said. “They also are more likely to have determined a retirement savings goal, more likely to have retirement savings, and more engaged with their retirement plans.”
Whether retirees belong to the early boomer camp or the late boomer camp, “developing a holistic retirement strategy, saving and remaining engaged with your plan are the fundamental steps toward attaining financial security during one’s retirement years,” she said.
“The No. 1 reason boomers say they consult with a financial professional is that they consider the advisor to be the expert,” Weatherford said. “Any time an advisor can demonstrate their expertise by helping consumers manage retirement risks — this is an opportunity for the advisor to grow their business.”
Defined benefit plans have been on the wane for years as companies either closed their plans to new entrants or simply eliminated them altogether in an effort to remove liabilities from corporate balance sheets.
In 2012, for the first time, more Americans will be saving for retirement through DC plans than through traditional pension plans as DB plans fade into oblivion, according to a report issued last year by State Street Global Advisors.
In terms of total retirement plan assets, DC plans made up 26 percent of the $18 trillion in retirement plan assets in 2011, dwarfing private sector DB plans, which made up only 13 percent of all retirement plan assets, according to the Investment Company Institute.
Cyril Tuohy is a writer based in Pennsylvania. He has covered the financial services industry for more than 15 years. He can be reached at [email protected].
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