Financial wake-up call: Recession affects baby boomers' money habits, say financial advisers

What's your biggest fear? If you're like most Americans -- 61 percent, according to a 2010 study by Allianz Life Insurance Co. of North America -- you're more afraid of outliving your assets than you are of dying. The number jumps to 77 percent for those ages 44 to 49, and 82 percent for those in their late 40s who have dependents. According to local financial advisers, the recent economic recession has heightened this fear and caused some baby boomers and seniors to step up their savings efforts.

"Most baby boomers were not prepared for this recession," says Rick Heuring, a partner with the CPA firm of Crouch, Farley & Heuring in Cape Girardeau. "The past two years have changed their way of thinking about their finances. They are still very uncertain about the new health care law and how it will affect them. They are not spending money on big-ticket items, not eating out as much, and are trying to find ways of cutting their monthly expenses, such as cable TV and cell phones. Many have postponed retirement so that they can get out of debt first."

Adding to this uncertainty, baby boomers have received news that for the second year in a row they will not receive an increase in Social Security benefits. Furthermore, says Heuring, bank CDs and savings accounts are paying very low interest rates, the stock market tends to be too volatile to invest for a short period of time, and there is no certainty about what boomers' tax situations will be in 2011, as Congress has not passed any legislation concerning taxes.

Cathy White, a CPA and partner with the firm of Begley, Young, Unterreiner & White LLC, has seen a significant drop in the value of most retirement accounts, and a number of her clients lost jobs in what should have been their peak earning years. She and Cheryl Mothes, a financial adviser with Edward Jones in Jackson, note that many baby boomer clients are "sandwiched" between saving for their own retirement and caring for their elderly parents or even their own children.

"I have seen a huge decline in the number of companies that offer a traditional pension plan for their employees," White adds. "Most of my clients who are in their 80s have some type of company pension in addition to Social Security. A surprising number also have paid supplemental health insurance that was provided by the company. Clients in their 60s looking at retirement are looking at other options, such as working longer or working part-time to supplement retirement income."

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Mothes agrees, noting that with few funds to spare and likely some debt, boomers are pushing back their retirement dates.

"The recent recession was a major wake-up call for all investors, but perhaps more so for boomers because they have a shorter time-horizon for saving," explains Mothes. "For many it adjusted their risk tolerance, or they learned that their investments weren't as conservative as they had thought they were. Many have tightened their belts with spending, are saving more to replenish their accounts, and are rebalancing their investments to be well diversified. In general, I feel they are paying closer attention to how much they are saving, retirement projections and appropriateness of their investments based on their true risk tolerance."

The good news, she says, is that baby boomers are "achievement-oriented," are defining retirement on their own terms, and are applying their strong work ethic to saving and investment habits.

"Let's face it -- boomers are the workaholic generation and are very goal-oriented," says Mothes. "Our clients are feeling more and more prepared and more confident, and I'm seeing them using their finances investing in something that will 'appreciate' rather than spending on something that will 'depreciate.' They are disciplined and using tools that are available to more closely monitor their progress toward their goals."

Baby boomers are also are dealing with fewer funds and more debt than their parents were at retirement age.

"Most of their parents pretty much had no debt when they retired," says Heuring. "Their Social Security and pension just needed to cover their everyday living expenses. Today, many people retire and still have a home mortgage, a car payment and possibly some credit card debt. A lot of this is because people have been living beyond their means while they were working."

Adds White, "Generally speaking, this generation is healthier and more educated than their parent's generation. They have longer life expectancies and will incur higher health care costs over their lifetime.  Often they married later than their parents and are juggling the costs and demands of raising children while trying to fund their own retirement accounts." 

On the flip side, Mothes says many modern retirement plans, such as 401(k)s and Roth IRAs, were not yet in existence at the time of their parents' retirement. Having such plans available likely prompts baby boomers to have the retirement conversation earlier, notes Mothes, with the biggest consolidation happening more than five years before retirement, according to Mast Hill Consulting in 2008.

"A number of clients are investing in annuities for a guaranteed rate of return on their investments and as a guarantee that they will not outlive their money," adds Heuring. "Many people today are saving more than they ever have. They thought that they would always have a job, that they would continue to get pay increases every year, and their home value would continue to go up. They no longer think this way."