Retirement looks to be costly for baby boomers

The TV commercials talk about baby boomers’ dreams of staying active and traveling the globe after they retire – that’s why they need financial planning, so they can afford to live those dreams. But in reality, local financial planners say, the goals are less grand.
Baby boomers are likely to live longer than their parents, they have fewer savings, and the amount of money they’ll need is more substantial.
“It costs more to live,” said Paul Long, a registered investment adviser with Blue Chip Financial Advisors in East Providence. “So they need their assets to be not only healthy enough to retire now, but to be enough in 20 years. People are living to 100 now, so if they retire at 65, that’s 35 years that they have to save for.”
In large part, the increasing costs come from high medical costs.
According to Fidelity Investments’ latest health care cost estimate, a 65-year-old couple retiring in 2007 will need about $215,000 to cover medical costs in retirement. And that has been growing. In 2006 it was $200,000.
“The cost of living is far more expensive today than it was 20 to 30 years ago,” said Long. “Who thought 20 years ago that health insurance would be $1,000 a month? That’s like another mortgage.”
Another change from when boomers’ parents retired is that traditional pension plans are disappearing.
“Even some of the companies that were offering pensions are going to cash balance plans,” said Douglas Biggar, managing director of Weston Financial Group, a Wellesley, Mass.-based subsidiary of The Washington Trust Co.
“And let’s forget Social Security,” Biggar said. “Eventually there will be more people on Social Security than are working. There is a tremendous burden on the individual to pay for their retirement.”
So financial institutions are working harder to understand what it will take to cover baby boomers’ retirement needs.
“The big thing is to understand the potential life expectancy,” Biggar said. “With a married couple that is 65 years old, there’s a 50-percent chance one will live into their 90s, so when we run our models we expect that. We also look at their parents and how long they lived. Then we look at how much they are really going to spend. You have to figure it out. Those are the two keys.”
Deborah Pont, a spokeswoman for Fidelity, said getting consumers to understand their future prospects is a crucial step.
“We believe now is the time to motivate Americans to take action steps to save more,” said Pont. “As we see this shift from the pension world to 401(k) plans, you see the burden shifted on individuals, so it’s imperative that they know where they stand financially.”
To help individuals get an idea of where they stand, Fidelity has introduced myPlan, which includes myPlan Snapshot, an online calculator that with basic information gives individuals an idea of what they need for retirement.
But according to a Fidelity survey of 2,000 individuals older than 25 years old, Americans are, on average, “likely to face a 42-percent pay cut in retirement,” so once the need is determined, the real challenge is making the money last.
“When you retire, you need to pay more attention to you portfolio,” said Biggar. “You can earn 10 percent on the market, but the average person gets 3. The stock markets are volatile, so putting together appropriate portfolios that can resist the down side is necessary.”
And because of that, Long said new products are being created for people with fixed incomes that protect the principal of their investment.
“They’re now taking out income, so they have to have enough growth to compensate for that. The question is how do we preserve the assets so they don’t deteriorate?” said Long. “In 2001 and 2002 the market crashed, and people on fixed incomes got hurt bad. Now there are variable annuities which provide a safety net so their market value can’t go down. It pays a fixed interest rate and the money is also invested in the market, so it has upside potential growth.”
But despite the challenges that it brings, Biggar said that retirement for the baby boomers is also different from their parents in a positive way.
“They feel they’re going to have a longer, healthier life,” he said. “Retirement has become another stage in life that they look forward to.”