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What is a 'Baby Boomer'

Baby boomer is a term used to describe a person who was born between 1946 and 1964. The baby boomer generation makes up a substantial portion of the world's population, especially in developed nations: It represents nearly 20% of the American public. As the largest generational group in U.S. history (until the millennial generation slightly surpassed them), baby boomers have had and continue to have a significant impact on the economy. As a result, they are often the focus of marketing campaigns and business plans.

BREAKING DOWN 'Baby Boomer'

Baby boomers emerged after the end of World War II, when birth rates across the world spiked. The explosion of new infants became known as the baby boom. During the boom, almost 77 million babies were born in the United States alone, comprising nearly 40% of the American population. The population growth created a secondary spurt in the economy. More people created more consumer demand, triggering an increase in manufacturing and production. Average incomes rose during these decades, which further increased demand. This upward spiral created a long-lasting economic boom that raised the standard of living throughout the country and the developed world.

History of the Baby Boomers

Most historians say the baby boomer phenomenon most likely involved a combination of factors: people wanting to start the families that they put off during World War II, a socially encouraged tendency for people to marry at a younger age, and a sense of confidence that the coming era would be safe and prosperous. Indeed, the late 1940s and 1950s generally saw increases in wages, thriving businesses, and an increase in the variety and quantity of products for consumers.

Accompanying this new economic prosperity was a migration of young families from the cities to the suburbs. The G.I. Bill allowed returning military personnel to buy affordable homes in tracts around the edges of cities. This led to a suburban ethos of the ideal family comprised of the husband as provider and the wife as a stay-at-home housekeeper. As the boomers approached adolescence, many of them became dissatisfied with this ethos, which fueled the youth counterculture movement of the 1960s.

As suburban families began to use new forms of credit to purchase consumer goods such as cars, appliances and television sets, businesses also targeted their children, the growing boomers, with marketing efforts. The popularity of clothes, snacks, toys, TV and film tie-in products, and rock-and-roll records gave the economy an additional boost.

Portrait of a Generation

As the longest-living generation in history, boomers today are at the forefront of what’s been called a “longevity economy,” whether they are generating income in the workforce or spending their Social Security checks. According to a recent AARP bulletin, baby boomers continue to generate a powerful amount of economic activity. As consumers, they spend $7 trillion per year on goods and services. And even though they are aging – about half are 60 to 71 years old, the other half between 53 and 60 years old – they continue to forge new ground and explore new lifestyles, as economic, technological and medical advancements have provided them with many more alternatives in how and where they can spend their time.

Members of this generation pay a whopping $420 billion a year in federal income taxes alone. That’s not surprising when considering that 80% of the country’s personal net worth belongs to boomers.

Despite belonging to a hardworking generation that includes Oprah Winfrey, Bill Gates and other icons of economic success, baby boomers don't necessarily make forward-thinking decisions about their inevitable deaths.

According to the Pew Research Center, about 70% of Americans do not have a living will, which details their medical wishes, such as whether to be put on life support should they become unable to articulate their wishes.

When it comes to financial decision-making by baby boomers, however, the numbers prove better. More than two out of three older Americans have drawn up wills that stipulate how their assets should be distributed in the event of their own deaths. However, that still leaves over 30% of those over age 65 without such a document, leaving the door open for a host of potential legal and financial problems.

Closely related: the impact of aging baby boomers on health care systems. Celebrities such as Susan Sarandon, Meryl Streep, George Clooney and Bill Clinton may perpetuate the impression that this generation, which came of age during the freewheeling 1960s and 1970s, will stay active forever – and indeed, many are in better shape than their forebears at the same age. Still, the human body isn't invulnerable. Obesity, diabetes, hypertension and high cholesterol are all on the rise in the boomer population. Cancer and heart disease are the leading cause of death. And then there are the concerns beyond physical health: According to the Institute for Dementia Research & Prevention, it is estimated that 1 in 6 women, and 1 in 10 men who live past the age of 55 will develop dementia in their lifetime. So, it's anticipated that there will be more demands for government and health-related services.

Baby Boomers and Retirement

The first of the baby boom generation became eligible to retire in 2012. Today, with approximately one-third of them already at or over traditional retirement age, the boomers will be the first generation to truly blaze the trail through the landscape of retirement in the 21st century. And in many ways, the way they spend their post-work years will be different from that of their parents, or members of what's often called the greatest generation.

Why the Boomers' Retirement Is Different

  • Much Longer Retirement

Many people in previous generations worked as long as they could and few were fortunate enough to have a retirement that would be considered golden by today's standards. America's post-World War II prosperity made things better for the greatest generation, and there were plenty of people who were able to retire at the official age of 65 – and expected to die about five to seven years after that (based on life expectancy tables at the time). In contrast, a large percentage of the 77 million American baby boomers are going to live 10 to 25 years longer than their parents did; those retiring in their 60s can expect to live about 25 years more, at least. So their retirement period will be longer.

  • Higher Expectations

Not considering military stints in Europe or the Pacific, how much traveling did past generations of retirees do? Boomers' parents were Depression-era babies who practiced frugality and continued to pinch pennies throughout retirement. In stark contrast, boomers want their retirement to include the lush life, travel, relocation, new experiences and challenges that they're used to. Those who reach retirement age now are often healthy enough to run marathons, build houses and start businesses. Many of them are beginning to migrate to small towns that can offer things not commonly found in retirement communities, such as employment and education opportunities. Other boomers are choosing to move into urban areas to take advantage of amenities such as public transportation and cultural attractions. All this is expensive. Therefore, boomers need to plan for a much more costlier retirement than their parents ever would have expected.

  • Exotic Investment Options

The greatest generation had relatively few investment options: mostly ordinary bonds and certificates of deposit. Today's boomers, on the other hand, are faced with an ever-expanding universe of income securities. The investment industry has provided a lot of rope to invest, and a lot of new and exciting ways to lose it all.

  • Deregulation

If they felt like taking a risk, the boomers' parents might have bought some dividend-paying stocks. At the time, most of the dividend-paying industries, such as finance and utilities, were highly regulated. Decades of deregulation have caused these industries to become less predictable and more risky; hence, the certainty of previously assumed dividends or return on investements is now uncertain.

  • Rising, Instead of Declining, Interest Rates

In the 1980s, when the greatest generation started to retire, interest rates were about 18%. In 2010, rates were about as low as they get, at less than 1%. This long decline in interest rates provided a great return to bond investors. The boomers are facing the very opposite situation. Instead of an ever-declining interest rate, they are facing the likelihood of steadily increasing interest rates during their retirement.

  • Personal Savings Instead of Pensions

The greatest generation might have had a lower per capita income, but many of its members also had corporate or union pensions – which could be considerable, after working for a lifetime for the same employer, as was once common. But boomers wanted higher salaries, freedom to change jobs and the ability to save independently. Besides, traditional corporate pensions have been largely phased out now, giving way to 401(k) plans, IRAs, and other investment vehicles which put the onus on saving on the individual. And, when given the option, most boomers didn't start saving enough or early enough. As for that federal pension known as Social Security – there is concern that it could fall short badly. The problem is that the baby boomer generation is much larger than most of the generations that followed. This potentially means that there will not be enough taxpaying workers to support the Social Security payments to the aging boomer population. During the years baby boomers were in the workforce, there were six employees for every one retiree. But it is estimated that by the time the entire baby boomer generation reaches retirement age, that ratio will fall to three-to-one.

A Retirement-Fund Shortage?

All of these factors suggest that, when it comes to a retirement, boomers may have less savings than they think, and what they have may not be enough. AARP estimates that two out of five households headed by those aged 65 or older possess zero savings in retirement accounts. A TD Ameritrade survey found that difference between the sum that the average baby boomers feel they need to retire comfortably and the amount they have saved is $400,000. More specifically, according to research from BlackRock, the accumulated nest eggs of baby boomers fall short by an average $37,000 a year in generating the annual income they want in retirement. Boston College’s Center for Retirement Research estimates that more than half of working-age adults likely will see their standard of living worsen after retirement.
 
Debt is one of the biggest reasons why baby boomers struggle to fund their retirement. According to some studies, seniors have 50% more credit card debt than younger generations. Many are also still making mortgage payments, which adds to their lack of cash flow. In fact, the average baby boomer only has 60% equity in the home, according to a J.P. Morgan study. That can make it even harder to pay off their mortgage before retirement.

This is where the Great Recession has been a big problem for boomer retirement savings. Many boombers jumped into expensive investments, mortgages and startups in the late 1990s, only to find themselves struggling to make those payments a few years later; many found themselves completely tapped out or their mortgages underwater.  The subprime meltdown of 2008 in the mortgage industry and the following stock market crash left many boomers scrambling to piece together an adequate nest egg. Many of them subsequently turned to borrowing against the equity in their homes as a solution. While real estate prices are starting to rise again, some boomers still can't profit substantially from selling their current home in order to find a cheaper one.

With insurmountable debt facing so many in this generation, it’s no wonder savings have been put on the back burner. And even when they have put money by, boomers have been too conservative with their investments. By not holding enough of their portfolios in stocks, they’ve risked letting their nest eggs stagnate. Even though it’s important for older generations to be careful with their finances, not being aggressive enough while investing in younger days can make it hard to retire on time.

It’s hard to place much blame on boomers for saving inconsistently. They’ve been working within a healthy economy for the majority of their careers, and many assumed they’d be able to ramp up their savings in the decade or two before retirement. With the economy still sluggish, however, their incomes has been funneled to more immediate expenses.

How Boomers Can Prep for Retirement

There are some nontraditional plans baby boomers have for retirement. One idea might be the most untraditional of all: Don't retire. Or at least, delay doing so beyond the proverbial age 65 or 66 (depending on birthdate). Whether that means working longer, consulting or finding a part-time gig, being part of the workforce can help boomers financially and emotionally. “Rather than ‘retiring’ from work, boomers should consider working more independently as they age,” says Roger Whitney, a certified financial planner at WWK Wealth Advisors, a Fort Worth, Texas, firm. “This extra income during the early years of retirement can have a huge impact on staying financially healthy. In addition, the mental, social and physical benefits can lead to a happier life.”

Finances permitting, boomers should also wait to take their Social Security benefits until they reach 70. By postponing benefits, they can receive 132% of their original monthly stipend.

In estimating their retirement needs, baby boomers and their families would be prudent to consider that Medicare, the federal government’s health insurance program for those ages 65 and over, suffers what some experts consider an alarming funding gap. It does not cover long-term nursing home care in most cases. While Medicaid technically does cover it, there's a significant caveat. The program enforces strict asset rules that restrict all but the very low-income seniors from receiving nursing home care benefits. In most states, “countable assets” that exceed $2,000 are enough to disqualify someone.

In terms of investment strategy, retirees (or those about to be) should be asking for a sustainable cash flow from a diversified portfolio producing dividends, interest, capital gains and return of principal. They should set that portfolio's stock-to-bond mix based on their capacity, their need and their desire for risk, not current cash flow. It should be evaluated and adjusted periodically, based on the total return, within the acceptable risk parameters and the established withdrawal rate – rather than just on income and the hunt for higher yields. Empirical evidence shows that a dividend-focused investment strategy does not have a higher return than a total return strategy. In addition, a focus on dividend stocks usually increases risk because it decreases a portfolio's diversification.

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