Published November 14, 2013
Investing is a very individualized activity since we all have different financial goals, risk tolerance and available funds.
The 2008 financial crisis hit many baby boomers’ nest eggs hard as the stock market plummeted and many boomers were left unemployed and forced to dip into savings—or worse: retirement accounts.
But now, five years later, Wall Street is rallying, the housing market has rebounded and the labor market continues its slow pace of recovery. But just because the economic climate has improved, that doesn’t mean saving for and protecting a nest egg becomes any easier.
Scott Shellady, senior vice president of derivatives for Trean Group in Chicago, offers the following tips on what boomers need to know about shoring up their finances so they don't spoil their retirement funds.
Boomer: What are the most common mistakes baby boomers make with their finances?
Shellady: The most common mistake is out living your money. Plain and simple. Also, many baby boomers tend to make some flawed assumptions, specifically the rate of return that most people are using are still way too high. Rates are staying lower longer. 2.75% on money for 10 years? That's a very difficult return for a majority of boomers.
Boomer: What are the most common misconceptions about baby boomers’ financial priorities?
Shellady: Boomers have enjoyed great economic cycles and most believe that they are secure, but retirement money goes quicker than anyone can believe. Sickness, economic downturns and children that need help all drain resources, so boomers need to continue to invest and harvest their own investments. We are living longer than ever before. When Social Security was instituted we lived a much shorter lifespan, we now live 10 years longer and that too is a big drain.
Boomer: What can baby boomers who were laid off or fired during the recession do to protect their retirement?
Shellady: Laid-off boomers will be in preservation mode since they need income protection as well as earning power, probably the two most difficult things to combine in finance. Boomers are older and more expensive. They need to find part-time income, and if possible benefits. I am sure we are all now familiar with the aging cashiers at our local stores. A good example of boomers doing the right thing.
Boomer: What should baby boomers be investing in, if anything?
Shellady: Boomers ages 50 to 70 are entering probably the most difficult market in our lifetimes. How much to save? How much to risk? How long is my horizon for returns? There used to be a set group of investing rules but those are increasingly being tested. So, to answer your investing question, we have to decide on what kind of world we think we are living in and what it will be when we eventually retire. The wildly held macro view is one that broadly bases its theory on equities and bonds. A 60 year old may typically have 60% in bonds and 40% in stock.
The older we get we would take money out of stocks and rotate into bonds. That may work in a 'normal' environment, but we are seeing unprecedented central bank intervention across the globe at levels we have never seen before. This has dramatically shifted the investing landscape. The 100-yearr treasury bond is yielding only 2.75% while the stock market is up 25% this year.
Can a 65 year old afford to be risk averse and leave 22% in investment returns sitting on the table as an opportunity cost/lost?
In order to take advantage on some of the equity returns because of the central bank intervention, there may need to be more exposure to stocks than a typical boomer may have or be comfortable owning. There should be no single stock exposure; stocks should be owned through mutual funds. This will help insulate against losing everything in one stock but give you the ability to stay invested in the sectors you like.
There will always need to be some capital invested in bonds but at 2.75% for 10 years, it makes it very difficult.
There are some arguments made for owning gold. I think that is an 'Armageddon' trade or even an inflation trade. The inflation aspect is understandable but you will never be able to use gold as a currency. It is not money. If the world does go to the dogs, you want to own lead, not gold.
For the foreseeable future, central bank intervention will be with us a few more years. Being a little more aggressive on equities vs stocks is probably the way to go in the short term. In the 10 year time horizon, being diversified and balanced to your own personal risk averseness is always a solid strategy.
Boomer: What are top financial concerns for baby boomers right now?
Shellady: No one will say it, but while the central bank intervention continues, we have no answer for our economic woes. Period. That is the nature of the intervention. We are literally biding time while trying to boost the economy with the hopes that true GDP growth is on the horizon. Right now, we cannot see any white knight in shining armour to get us out of this mess.
The last knight was the 'internet' and the economic boom it helped to foster. This intervention is really only helping asset prices like real estate and stocks. That is where this accommodation is going. Not to the man on the street and not to small business. The biggest fear that the literati will tell you is inflation. However, the only place that inflation has reared its head is in asset prices and equities as investment advisors continue chasing returns on their money. The real risk of low rates longer is deflation and the powers that be are very afraid and aware of this potential problem. When there is an economic problem, governments and central banks, when faced with a crisis will try and inflate their way out by lowering rates and printing more money. But, even after this huge intervention, we are not seeing inflation. Could we see deflation? It's an economic killer. Look at Japan. It is a psychological problem more than an economic one.
Unfettered inflation or deflation are both the two real risks facing boomers in the short term.