Six Reasons Retirement Will Be Different for Boomers

Baby Boomers seem to do everything a whole lot different than previous generations. Morningstar.com looks at six key reasons retirement for Boomers will be nothing like their parents' lives. For physicians in this age group, the "golden years" may look even less similar.

From their work ethic to their personal health and individual lifestyles, Baby Boomers seem to do everything a whole lot different than previous generations. This week investment research website Morningstar.com took at look at six important reasons why Boomers’ retirement will look nothing like their parents’ lives in retirement.

While the common perception is that Boomers’ parents — known as the Greatest Generation – focused on saving and preserving capital while living off interest and dividends, Morningstar says the same strategy may not work out for Boomers. (For many physicians in this age group, the landscape looks even less similar to what many people consider to be a “traditional retirement.”) Morningstar counts down the six reasons why:

Boomers Will Live Much Longer. Boomers may not have invented the term “early retirement,” but they’re certainly embracing it. Workers in previous generations, particularly those who lived through the Great Depression, typically worked well into the so-called retirement years, hoping to earn and save as much as they could. But a recent surge in early retirements by Boomers -- brought on by the financial crisis and subsequent economic slump -- was cited as one of the reasons for a sharp decline in Social Security's surplus funding. A record numbers of eligible Americans began receiving Social Security benefits in 2009, according to the federal government -- more than 2.7 million new beneficiaries started receiving benefits in 2009, up 20 percent from the previous year.

For physicians, the number early retirees may be even greater than average over the coming years. A 2009 IBD/TIPP Poll of 1,376 physicians found that 45 percent said they’d consider taking an early retirement if the Obama administration healthcare reforms were passed. (Expansion of managed care, dwindling government reimbursements and general job dissatisfaction were reasons doctors have cited in previous physician surveys on reasons for early retirement.)

Boomers retiring in their 60s can expect to live about 30 years in retirement, which is a lot longer than their parents’ typical longevity, according to Morningstar. Bottom line: Boomers will need their savings to work harder and stretch farther than ever before.

Boomers Have Higher Expectations. Apart from serving in military conflicts overseas, the Depression-era generation generally didn’t do much traveling outside the U.S. Many Boomers, on the other hand, consider expensive foreign travel and vacation homes part of the norm, Morningstar says. As a result, their expenses in retirement will likely be far greater than that of their more-frugal parents. Conventional wisdom says retirees should plan on saving at least as much to pay for 80 percent of your current expenses, but for Boomers it’s likely to be more prudent to plan on saving to cover at least as much as you spend today for non-healthcare-related expenses.

Reliance on Personal Savings, Rather than Pensions. The move away from large corporations funding traditional defined pension benefits and toward workers participating in their own employer-sponsored retirement accounts began in 1981 with the introduction of the 401(k). Morningstar said that while the Greatest Generation had a lower per capita income, it also had corporate pensions in addition to Social Security benefits. But while Boomers eventually embraced 401(k)s, most waited far too long to start saving and so many may not have amassed enough to make up for the income-replacement shortfall after Social Security kicks in.

Physicians nearing retirement may find themselves with an even greater disadvantage due to the fact that most didn’t enter the workforce and begin saving until their early- to mid-30s. And with higher-than-average student-loan debt, they will have had less disposable income available to fund their retirement accounts.

Rock-Bottom Interest Rates. When Boomers’ parents started to retire in the 1980s, interest rates were about 18 percent, according to Morningstar. Today, interest rates and yields of all kinds are at or near record lows, and with the economy still in a general slump there are no signs of letup. The long decline in interest rates over the last three decades provided a great return to bond investors, but for Boomers will likely find a very different scenario heading into retirement.

Exotic Investment Options. The Greatest Generation generally had one investment strategy: Save every possible penny in secure, reliable investments, such as government-insured bank savings accounts, Treasury bonds, and dividend-paying blue-chip stocks. Boomers, on the other hand, have relied heavily on the stock market — and all of its myriad investment “opportunities” – to invest for the future through employer-sponsored plans, according to Morningstar. As a result, as the site so aptly puts it: “The investment industry has provided a lot of rope, and a lot of new and exciting ways to lose it all.Deregulation. Dividend-paying stocks were about the riskiest fixed-income investments most Depression-era investors could stomach. But back then, the major dividend-paying industries — think finance and utilities -- were highly regulated, Morningstar says. After decades of deregulation, that’s no longer the case: As the recent financial crisis drove home, lack of government oversight has led to riskier, more dangerous practices that make even the least “risky” dividend-paying stocks a possible crapshoot.

So what’s a Boomer to do?

Morningstar recommends that investors establish a sustainable withdrawal rate and build a diversified portfolio focusing on total return, rather than focusing on dividend-producing, interest-paying securities.