Why Boomers Need Bigger Nest Eggs Than Their Parents

Baby boomers are finding out quickly that they'll need a bigger nest egg than their parents, especially those that are retiring.  The reasons are simple;

1. Few boomers have a defined benefit pension plan.  Companies have slowly done away with pension plans, opting to offer 401k plans which puts the responsibility (and the liability) on the participant not the company
2. Boomers cannot count on home equity.  While home equity is likely to rebound to some extent, the days of home equity funding retirement are long gone.
3. Interest rates are significantly lower than any time in recent history.  Replacing income utilizing today's fixed income options will require five times what it took a generation ago
4. Life expectancy has increased dramatically
5. Health care costs have increased significantly

Check out the realistic retirement plan link for a quick and easy way to see where you are at currently.  

Alternatives To Fixed Income

By 2030, 20% of the US population will be over 65 (its 13% now).  It has been commonly thought that as boomers age into retirement that they will slowly move assets from equities to fixed income, CD's at the bank or the mattress thus causing a market meltdown, the reverse we saw in the 1980s and 1990s.

This may not necessarily be the case.  With interest rates at all time lows and fixed income paying virtually nothing and the prospect of slowly rising interest rates, (which will destroy the principle in bond funds), boomers and retirees are faced with little choice but to look at income producing dividend stocks.

Dividend paying stocks are usually the safer of stocks however there is always the possibility that share prices tumble and of course, any company can cease paying their dividend at any time for any reason.  Many did in 2008!

BUT with little choice and no where to go, my guess is that retirees and boomers will migrate to dividend paying stocks anyway.  This will force more companies to be prudent with their balance sheets allowing them to pay and increase dividends or else they end up on the wrong end of a very large trend.

This will be good for long term investors and companies alike.

1%

1% may not sound like much but over time, its a huge cost which lowers your investment returns. Its ok to pay for advice but you must know what that advice is really costing you. 

See the chart off to the right from the SEC.gov. This shows what the difference is between paying 1.5% and 0.5%. After 30 years (and we should all be long term investors) at average return of 8% with an initial investment of only $10,000. The difference is $22,634 in your pocket! 

Many investors utilize a stockbroker or financial advisor for advice and of course, thats not free, usually the fees range from 1-3%. So now consider that for every $10,000 you hand over to a stockbroker or financial advisor, after 30 years, you will have given them well over $20,000.

Its a lot of money, a huge cost which lowers your investment returns in a big way so you better be sure you are getting something in return, some great advice, some hand-holding during the tough times, etc. but just don't expect higher returns.

Fact is that over 90% of professional money managers cannot beat the S&P 500 with any consistency. 

So just keep it in the back of your mind that while paying for advice may seem like a good idea, and sometimes it is, just remember that 1-2% is a lot of money over time and only you can decide if the advice you are getting is worth it.

Bad Investments Cost More Than You Think

I had a client that put well over 100k into a chinchilla farm.  I had another client throw real money to buy Ostrich eggs and had a friend sink money into a 'B' movie.  Of course, I had many clients lose all their money buying into sure things on the pink sheets, OTC bulletin board, private placements and Canadian Venture Exchange.

The commonality is obviously stupidity but besides that, the real monitary cost is hard to measure.

Sure you can look at whatever your investment was and write it off versus gains in another year but its more than that, its what we call opportunity cost which is simply the next best alternative.

For example, say you sank $100,000 into one of the above investing disasters fifteen years ago.  You would have missed out on fifteen years of growth at 'X%'.  Assuming just a measily 2% would be $134,000 today.  At 10%, you'd be missing $417,000 today, not just your original 100k.

So when looking at investments, keep the lost opportunity cost in mind.

Remember that successful investing has as much to do with not losing money as making money and remind yourself that as a boomer, you do not have the time to make up from bad investments.

Welcome

Welcome to my blog.  Baby boomers are a unique group of people.

We have been thrown together as a group based on our birth year.

We are much maligned and much praised.

Few things get me as fired up these days as stereotyping does but that's exactly what I am about to do with this blog.

The reason is that a lot of the questions and concerns are indeed common and similar to people our age so I thought that a blog and a book aimed specifically at boomers was a good idea.

I hope you agree!