Boomers’ retirement offers opportunities, challenges

In four years, more than 4 million baby boomers annually will reach the normal retirement age for full Social Security benefits.

In four years, more than 4 million baby boomers annually will reach the normal retirement age for full Social Security benefits. Some of them will have taken early retirement at 62, though because of the lost decade in the stock market, far

fewer will have chosen that option than was expected a few years ago. Unfortunately, as they begin to retire, the early baby boomers will feel the impact of four financial tsunamis.

First, their retirement savings, already barely adequate because of their low savings rate, were diminished even further by the 2008 bear market. Although a significant amount of the losses has been recovered, most investors aren’t back to even, and many experts think that the climb the rest of the way will be slow and volatile.

Second, the value of their homes has been crushed by the bursting of the housing bubble. Early baby boomers are unlikely to see their home equity improve enough to help them downsize and add to their retirement income stream.

Third, many will be hit by the expiration of the Bush administration income tax cuts. Many more may be affected if the Obama administration backs away from its promise not to raise income taxes on singles earning less than $200,000 or couples earning less than $250,000 a year, or if it introduces a value-added tax to try to bring down the federal deficit.

Most experts agree that some combination of tax increases and spending cuts will be needed to cut the deficit to a reasonable level.

Fourth, at a time when many are looking to move significant parts of their retirement savings out of the stock market to less volatile, income-producing investments, the rates of returns on bonds, especially government bonds, are low, meaning generating income to supplement Social Security is difficult.

Further, anyone moving heavily into long-term bonds now will suffer a capital loss on them when interest rates rise.

And there is a danger that a wave of inflation could inflict further damage on retirees if the Federal Reserve, by accident or design, allows it to get out of control.

The situation presents both opportunities and challenges for financial planners and investment advisers.

The opportunities lie in helping baby boomers navigate the last few years of their working lives, the years when they should be topping up their retirement saving accounts and completing their retirement planning. They will need a lot of help.

The difficulties lie in developing investment strategies that will protect the long-term value of their retirement assets and provide them an income to supplement Social Security at a time of such uncertainty about the recovery of the economy and future investment returns, taxes and inflation.

The task of developing such strategies has been made more difficult by the fact that many investment assumptions long taken as verities — e.g., that the stock market would return 7% a year compounded, after inflation — are being questioned.

Planners and financial advisers will have to examine the lessons of the past decade, revisit their assumptions and models, and re-examine the advice that they give to clients who are approaching retirement in the light of any changes they make in those assumptions.

Those who do so will be invaluable to their baby boomer clients.