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Will the Pension Generation Be Able to Retire Comfortably?

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When it comes to consumer content on retirement planning, the industry is silent about the Silent Generation. It seems that most articles are related to the markets or the vast number of Boomers that are retiring every day. As a result, there are many living Americans in their 70s and 80s who are not getting the financial planning information they will likely need down the road.

But why? This generation has assets, lives comfortably, and often subsidizes expenses for younger family members. According to the Federal Reserve Study of Consumer Finances, in 2010 those 75+ had the highest median family net worth. The Silent Generation is also part of the pension generation. They often worked hard in exchange for a guaranteed income stream in retirement. Anything they saved on top of that was gravy. As part of a firm that works exclusively with those who are 55 and older, I see the same situation time and time again. Before I manage anyone’s assets, I do a financial plan. Despite significant savings and strong income streams, when you throw in a few stress tests, the results aren’t always as positive as you may expect.

The Cost of Inflation

One risk that these folks will likely face down the road is the loss of purchasing power. An item that costs $1 today will likely cost more than $1 tomorrow, due to inflation. Private pensions and Social Security have cost of living adjustments or COLAs to cover that risk. That said, you probably know that both of these systems are under enormous strain due to the decline in the ratio of workers to retirees as well as the market downturns over the last 15 years. As more Boomers retire, there will be fewer people contributing and more people collecting. (This is expected to start happening by 2017, according to a 2009 report from the Social Security and Medicare Board of Trustees.)

The good news is that these problems usually can be planned for mathematically by changing one of the inputs or outputs. One of the easiest outputs to change is the COLA. According to the Center for Retirement Research at Boston College, between 2010 and 2013, 17 states enacted legislation to reduce or suspend their COLAs. Whether your pension plan is from the state, the federal government or a corporation, it is likely underfunded. If this trend continues, the Silent Generation may want to look to their investments to close the gap between their pensions and their expenses.

The Risks of Being Too Conservative

Those of the Silent Generation tend to be extremely conservative when it comes to personal finances. As of 2013, the Cogent Investor Brandscape found that they had only 11% of their assets in “high risk” investments. Their parents lived through the Depression, and those parents’ cautious financial habits tended to be passed along: Pay off your mortgage as soon as possible. Take advantage of CDs and government bonds. Make sure to spread your investments among several different institutions to diversify and ensure FDIC coverage.

These aren’t all bad things, but times have changed. With 30-year fixed mortgage rates hovering around 4%, it often makes sense to keep a comfortable monthly payment. It will allow you to take a tax deduction as well as invest the extra money in hopes of earning a higher return than 4%. Therein lies the problem. In my experience, the bulk of their investments are held in CDs. The days of the 5% CD are long gone. Even the days of CDs that keep up with inflation are long gone. Many of the lessons passed along to the Silents are no longer applicable. Those CDs that are sitting at 1% interest over five years are losing purchasing power every day. Diversification through different financial institutions is no longer necessary. You can employ a custodian such as Charles Schwab, Fidelity, or Vanguard to hold the money while you have a whole world of investments to choose from. You are not investing or betting on those institutions. You are simply paying them in one way or another to keep track of things. That last piece, keeping track of things, becomes more and more important—and tends to become more and more difficult—as you get older.

A portfolio that is held through four different banks and safety deposit boxes consisting of CDs, money markets and stock certificates may make you feel comfortable, but it may leave your beneficiaries confused and frustrated by the hoops they will have to jump through to settle the estate. Retirement plans can be simple because they are legal contracts. As long as there are beneficiaries named on the account, the assets will pass outside of the court system directly to those individuals.

CDs, money markets, and other “non-qualified” assets aren’t so simple. They will pass outside of your probate estate only if they are owned by a trust, owned jointly, or have a POD (Pay on Death) or TOD (Transfer on Death) naming beneficiaries. Because most people don’t even know what a POD or TOD are, they are also surprised when they are forced to pay attorney and court fees to get a $5,000 CD out of probate. There are alternatives to this eclectic investment strategy, but by the time you explore them, it is often too late.

The Big Unknown: Health Care Costs

We saved the scariest risk for last. What about health care costs? Even the world’s finest crystal ball probably wouldn’t enable you to plan perfectly for these risks, but there are measures you can take to either transfer or responsibly retain these risks. Financial planning, if done right, is often about examining the worst-case scenarios. For this generation, that may include a COLA freeze, an investment basket featuring 1% returns and a health situation that requires custodial care. What then? Your guess is as good as mine. There is long-term-care insurance, which can help transfer that risk to an insurance company. But what happens when your premium doubles and you’re living on an income stream that doesn’t keep up with inflation? That scenario won’t seem far-fetched at all for those who have already experienced it.

Is this article meant to scare you? No. It’s mostly meant to open your eyes to the threats that could be coming down the road because of the 10,000 Boomers that are joining you in retirement every day. If you were driving down I-95 and the road was closed 20 miles ahead because of an accident, wouldn’t you want to know before you got there? A generation that was taught safe and generally good money habits may want to consider adjusting with the times, and rethinking habits that they have known for the last 50 years. A generation that, for the most part, didn’t have to do financial planning as it is done today, now has to.

CDs are insured by the FDIC and offer a fixed rate of return, whereas the return and principal value of investment securities fluctuate with changes in market conditions. This information is not intended to be a substitute for specific individualized legal advice. We suggest that you discuss your specific situation with a qualified legal adviser.This story is an Op/Ed contribution to Credit.com and does not necessarily represent the views of the company or its partners.

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