This article is the first of a series of blogs on what I feel is one of the biggest, single themes of our generation. From the many conversations that I have when providing financial advice to baby boomers approaching retirement, the big issue seems to be the affordability of retirement. The main concerns are:
Will I have enough to retire?
How do I generate an income stream to meet my ever-increasing living costs in this low-interest-rate environment?
What happens to Boomer spending?
So, to begin, Let’s take a look at what classifies a “Boomer”
Baby Boomers – “Boomers” – are generally defined as those born between 1946 and 1964, and who are today aged between 55 and 73. There are about 5.5 million Boomers in Australia, and as the years creep up on this post-World War II generation, they are looking for long, healthy, and secure retirement.
The importance of retirement to Aussie Boomers
It seems as though retirement, for many, is all they ever think about, especially the millions of Australian Boomers who are set to retire in the next few years. Many Boomers obsess over retirement as my father did for decades. They feel it’s what they worked for – it’s their dream. But these longed-for dreams could be shattered by the approaching Retirement Crisis.
The Boomer Generation explained
As a child, growing up in Australia in the 1950s and 1960s was a time of long hot summers, black and white TVs, climbing trees, hula hoops, cracker nights, neighbourhood parties, surfing and Rock ‘N’ Roll. Boomers were not only ‘the lucky generation’, but they were also the first generation to grow up in a reasonably affluent society. They enjoyed free university education, and the financial windfalls from two real-estate booms; the late 1990s/early 2000s, and again over the last decade.
When the Boomers first came into the workforce back in the 1970s, what they did was increase the demand for goods. A record number of people were buying their first home, their first car, their first table, their first chair, their first Hills Hoist. Everything they purchased was shiny and new. That demand created the inflationary environment of the 1980s, which subsequently created an enormous problem for the developed world to deal with.
As the Boomer generation moved through their lifetimes, they had a particular set of behavioural patterns that have affected the financial world. The Boomers as young adults didn’t want to be austere like their parents, who had lived through two world wars. What they wanted to do was spend. They wanted to be free of the shackles of their parent’s thinking and habits.
The approaching Retirement Crisis explained
The Boomer generation was the largest generation of people the developed world had ever known. As consumption became a large part of the economy, the Boomers in the 1980s were offered a piece of magic by the banks – they were offered credit. So suddenly, the credit boom took off. The Boomers stopped saving, and their income then went into the servicing of credit to buy more and more goods. This trend has continued in Australia for a long time, although the Global Financial Crisis of 2008 slowed it for a while.
As boomers started to move into retirement a decade ago, they were wealthier and had longer life expectancies than any previous generation. However, as the early Boomers move into their 70s, from a financial advice angle, they were also facing another challenge.
When providing financial advice in the 1980s and 1990s, I observed a common retirement strategy of the Boomers’ parents and previous generations, which was to use their home as a quasi-superannuation, by downsizing once they are in retirement and depositing the surplus from the downsizing into the bank. They would then live off the high-interest rate and/or use the capital in combination with the Federal Government’s Age Pension to provide their living needs in retirement.
But Boomers today are finding that the price of a villa or unit is just as much as they would receive if they sold their home. Also, with Central Banks in the developed world struggling to generate GDP anywhere near previous levels of decades past, interest rates look like they’ll be close to zero for at least the next decade, possibly longer.
As the Boomer generation is retiring, they’ve started to change their spending patterns. No longer are they buying the big-ticket items, like new furniture, or a new car every three years. They are usually comfortable in their family home and have a vehicle that they will only update every decade or so. Over a five year plus timeframe, they will be spending around 60% less than they used to spend. Multiply that calculation across the entire Boomer population and you’ll identify a dramatic economic effect, with low GDP and ever-decreasing interest rates.
The lower the interest rates go, the lower the income Boomers will receive on their nest eggs, so they will continue to tighten their consumption. By doing so, they are in effect sabotaging their own financial security in retirement.
Demographics is one of the most prominent economic narratives of our time. As a result of this, it has had a dramatic effect on the way we’ve provided financial advice in more recent years. The coming Retirement Crisis will ultimately provide millions of Boomers with their most significant life challenge. Find out next week just how significant this challenge will be in the next instalment of the Retirement Crisis blog series.
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