Date: October 19, 2020

5 Reasons Baby Boomers Need a Financial Advisor

Nearly 20 percent of Americans are Baby Boomers, born between 1946 and 1964. Many Boomers have already retired, while the remainder have reached or are approaching retirement age. The common challenge shared by most Boomers is how to adequately fund their retirements so that they don’t outlive their money.

At Heritage Capital, we work with clients at all stages of their financial journey. And, while just about everyone can benefit from working with a financial advisor, Baby Boomers have specific challenges that call for real professional financial advice. In our experience, below are 5 issues that hit Baby Boomers the hardest.

Shift in Plan Landscape

Today, when discussing retirement accounts, most people think of IRAs and 401(k)s, which are examples of defined contribution plans. Employers and employees choose how much money to contribute each year (up to the legal maximum) and how to invest those contributions. There are no guarantees regarding investment performance. It was not always this way.

A few decades ago, pensions were the predominate retirement account. A pension is an example of a defined benefit plan, in which employers fund promised benefits and must make additional contributions if investments underperform.

The Baby Boomer generation lived through the transition from defined benefit plans to defined contribution plans. Many were mid-career when the retirement landscape shifted. For many, this shift stressed the retirement landscape, because benefits were no longer guaranteed. Instead, the amount of money you had in your retirement account was based on how much you contributed and how well you invested. Suddenly, Boomers could no longer count on promised benefits as they assumed responsibility for their own retirement accounts.

For many people, this created gaps in their retirement security that were never fully bridged.

A financial advisor should help you assess the risks of various investments and recommend how best to allocate your assets to balance the risks and returns of your investments. A financial advisor can recommend strategies to help fill the gaps created by the rise of defined contribution plans.


Have questions about retirement? Schedule a no-obligation consultation with the team at Heritage Capital and get the conversation started.


Time Horizon

Another consequence of the shift to defined contribution plans is that most Baby Boomers have not had a time horizon of 40-plus years to save in 401(k)s. The truncated time horizon is important, because it limits the time in which returns can compound.

Compounding is when you earn money on your earnings. It occurs when you reinvest interest, dividends and capital gains. Compounding increases the rate of investment growth as time passes. And time is the key to extracting the maximum benefit from compounding. The sooner you start investing your money, the sooner compounding can begin.

Younger generations that have contributed to defined contribution plans all their adult lives have the potential to reap larger benefits than Baby Boomers, who experienced only 20 or 30 years of compounding.

Here’s an example:

Suppose you earn an 8 percent annual return that compounds monthly. A Baby Boomer who invests $100 a month from age 47 to 67 would contribute $24,000 over the 20-year period, but compounding would provide a total accumulation of $59,295.

On the other hand, a Millennial who invested from age 21 to 41 would also accumulate $24,000. But even if the Millennial never contributed another penny, the total accumulation would rise to $471,358 by age 67, through the power of compounding.

Compounding is great, but not a cure-all. You can undo the benefits of compounding by taking excessive investment risks that erode your portfolio’s value. A financial advisor can help you harness the power of compounding without exposing you to the potential undue risks.

A Pair of Challenges

Baby Boomers, like later generations, were hit hard during the Great Recession and now by the pandemic. The difference is that Boomers were older than the subsequent generations when the Great Recession hit. Those who had put money into large mortgages and expensive investments experienced financial reversals at a critical time for their retirement savings. Suddenly, many homeowners found their mortgages and investments underwater. This left many Boomers scrambling to assemble an adequate nest egg.

The years of the Obama recovery, and its continuation during most of the Trump years, helped Boomers recoup much of their losses. Then COVID-19 hit, and many Boomers were cast out of work. Even worse, seniors are the most likely to suffer medically from the pandemic, putting a further squeeze on finances.

One job of a financial advisor is to help you position yourself to limit the financial damage inflicted by unanticipated events. You have many options that include rainy-day funds, reverse mortgages, creative insurance strategies and control of investment risk. A financial advisor can help you understand which options are right for you.

Recovery Time

Baby Boomers have less time to recover than younger generations do. The benefit of the 40-plus-year time horizon enjoyed by later generations is that they have plenty of time to take advantage of the long-term growth of asset classes, even when figuring in bear markets and investing mistakes. In other words, with enough time, the occasional bad year is overwhelmed by the long-term upward trend in stocks and other assets. Baby Boomers have less recovery time, thereby magnifying the damage done by negative returns.

At Heritage Capital, we understand the discipline necessary to protect Boomers from falling prey to sudden emotional moves that lock in losses. Those types of moves make it much harder to recover from setbacks within a limited time horizon. The more prudent solution is to allocate your retirement funds to a diversified portfolio of assets and strategies that reduce risk more than they truncate returns.

A fiduciary financial advisor will explore your specific circumstances before recommending specific investment strategies. (For more on what this looks like, click here.)

Early Retirement

No doubt about it, folks are living longer. For many, that means also working longer, partly to earn money and partly to remain engaged in interesting activities. You may intend to work longer, but do you have a plan for unexpected early retirement? As we touched on earlier, the pandemic has forced many folks to face the prospect of early, unwanted retirement, unable to earn income they were counting on to fund their later years.

If that describes your current situation, I urge you to contact me directly. Together, we can reassess your financial condition and work out new plans to help you make the best of a challenging situation.

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Paul Schatz, President, Heritage Capital