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COMMENTARY: WHAT'S LEFT FOR THE LATE-BLOOMING BOOMER?The first boomers to retire may get the lion's share of those stellar returnsIf you came along toward the middle or end of the baby boom, you probably have a lot in common with Dennis Freeland, a dentist in Melbourne, Fla. Freeland, 41, is a husband and father--and a fierce saver. Like the quintessential younger child whose older siblings got to the cookie jar first, ''I'm always the last,'' sighs Freeland. ''They always change the rules just before I get there.'' You, too, may be used to treading water in the demographic backwash. The earliest postwar babies--President Clinton among them--hit the job market first and now occupy the top ranks, leaving you and your younger peers wondering whether your turn will ever come. The first boomers also blew into the housing market first, pushing prices up, up, and out of reach until bungalows in Santa Monica, Calif., commanded half a million bucks. Then they plunged their 401(k)s into stocks, pushing the Dow Jones industrial average to incredible heights. But by the time the peak earning and savings years for Freeland and other late boomers roll around, will they again be too late to reap the gains their older siblings already received? This is not an idle concern. By 2011, early boomers will be retiring en masse--even if they've postponed retirement a while to continue working. Some economists figure that spells bad news for the markets--and it's something that can only diminish future returns on retirement nest eggs. ''Pension funds are going to be a source of selling pressure, rather than buying pressure, on stocks and bonds,'' says Stanford University economist John Shoven. ''GRIM REAPER.'' Shoven and Sylvester J. Schieber, of benefits consultant Watson Wyatt & Co., estimate that from 2010 to 2030--the period spanning Freeland's maximum earnings, savings, and retirement years--the average after-inflation annual total return on stocks might not be today's accustomed 8% but something closer to 5%. Returns on other assets--bonds and real estate, for example--would be similarly suppressed. Say you're 43 today, expect to retire at 65 in 2020, and by 2015 will have saved $1 million. At 8% a year, that sum would grow to $2.1 million by 2025, when you'd be 70 and would likely have to start taking distributions. But if Shoven and Schieber are right and your nest egg grew at just 5%, you would have $500,000 less--a 25% reduction. ''Even my friends call me the first cousin of the Grim Reaper,'' says Schieber. Truth is, guessing what shape financial markets will be in 20 years ahead is a fool's errand. Two decades ago, the Shah ruled Iran, the Federal Reserve was one of Washington's most maligned institutions, and even getting the Dow back to 1000 seemed a stretch. Still, an increasing number of Americans believe the current bull market in financial assets will last for years. ''Now is absolutely the worst possible time to talk about'' this issue, observes Thomas F. Lydon, president of Global Trends Investments, a Newport Beach (Calif.) investment advisory firm. Clients, he finds, ''don't want to hear it--it's like banging your head against a wall.'' For example, a recent survey of retirement savers conducted for American Century mutual funds found that 14% expect their portfolios to deliver average annual returns of at least 20% over the next five years. That's double the number expecting such hefty returns only two years ago. BUSINESS WEEK's own nationwide poll of consumers 45 and older (page 88), conducted by Louis Harris & Associates, indicated similar bullishness. Investors who haven't retired yet expect returns of around 16% for stocks and 13% for bonds, while those who had retired anticipate only slightly less. Indeed, Scott Lummer, chief investment officer at San Francisco-based advisory firm 401k Forum Inc., says his neighbor ''thinks 20% returns are an entitlement.'' Lummer says the guy even dipped into his retirement fund to buy a Harley-Davidson motorcycle--''the classic dumb thing to do.'' If Shoven and Schieber are right--and they do have demographics on their side--the market will be simply unable to provide anywhere near the rich returns Lummer's neighbor foresees. That could leave many mid- and late boomers without enough in their retirement accounts. If you're in that age group, what should you do? Think about taking these three steps toward preparing yourself for what may lie ahead: -- First, reconsider your assumptions. If you're counting on having $2 million in 2025--or whatever--it makes sense to look hard at the returns you're assuming will take you there. Over the long haul, all-stock portfolios have returned an average of 10% to 12%, not adjusting for inflation. But most people don't--and shouldn't--have all their money in stocks. A portfolio composed of a mix of assets will probably return less, on average, than one that's entirely in equities. So your best bet in projecting your returns is to err on the conservative side. Suppose, as do the retirement planners at T. Rowe Price Associates, that your investments will grow by 9% annually and inflation will be 4%. Is that too conservative? Perhaps, given today's high market returns and quiescent inflation. But you could wind up pleasantly surprised if you're too pessimistic, and well protected if you're on the nose. -- Second, diversify intelligently. Just because returns on stocks may be suppressed as boomers retire and liquidate their portfolios doesn't mean you should avoid stocks altogether. ''It's a rather bad idea to try to time the market and sit it out in cash,'' says Shoven, who notes that the liquidations he sees will likely be spread out over decades. ''You're not going to spend 30 years in cash and be happy about it.'' But neither should you try to squeeze every last bit of potential return from stocks. From 1956 through 1997, stocks were losers in nine years. The average loss was 10.5%, and in the worst case, 1973, it was 26.5%. So don't get greedy. Although bond and money-market funds return less, they can add stability. Use these to hedge your portfolio. -- Third, think about revising your savings plan. Assuming a lower investment return on your retirement portfolio implies either scaling back your ultimate savings goal or putting aside more now to reach it. If you can, save more. If you can't save more from your ordinary budget, look for extraordinary opportunities--bonuses or other windfalls--that you can stash in your retirement portfolio. You also may want to join the millions of folks who are retiring later and working longer, allowing them to contribute more to their retirement funds. William J. Goldberg, a Houston-based partner of the KPMG Peat Marwick accounting firm, says that perhaps the No.1 issue among the senior executives he counts as clients is when to retire. Should it be at 62, they wonder, or 65? The issue, Goldberg says, boils down to this question: How much am I actually getting paid for working those three extra years?'' The good news, he says, is that the answer is easily quantifiable. SELL TO ASIANS? Shoven and Schieber don't assume aging boomers will cause a market meltdown, just reduced returns. For one thing, says Shoven, corporations could respond to a weaker market by paying higher dividends or repurchasing shares to support the value of their stock. The demographic weight on the market might also be lessened if younger investors, perhaps in Asia or elsewhere, buy the stocks boomers are expected to sell. That's why Schieber suggests you avoid fleeing to the supposed safe haven of real estate and instead keep your portfolio full of assets that would be easy for foreigners to buy. ''The less fungible the asset, the more it's going to get hit,'' he notes. ''It's pretty hard for the Chinese to buy your house, but they can buy your stocks.'' Expecting less, hedging bets, biding time--none of these are fun, especially when the guy just ahead of you is getting more today. But if you're in the trailing half of the boomer generation, you should be used to that by now. Dennis Freeland finds little use in worrying about it. ''What I look at is how I'm going to take care of myself, not what the next guy is doing,'' he says. ''So I just save money. The people in America who do all right are the people who save money.'' It's just that they may have to adjust their earnings assumptions and savings habits to protect themselves against the graying of their generation.
By Robert Barker RELATED ITEMS
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Updated July 9, 1998 by bwwebmaster
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