What retirement issues face the second wave of Baby Boomers?

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What retirement issues face the second wave of Baby Boomers?

However, we are now beginning to see a second wave come through - the generation who are potentially facing an even more challenging and uncertain retirement. 

This generation of (currently in their 40s) retirees will be the first who will not necessarily have had the luxury of a final salary pension scheme.

For those that do not have the backstop of a final salary pension scheme, many have left themselves insufficiently prepared and have a lack of financial resources.

This is the generation which has seen the investment savings they did make potentially seriously impacted by the global financial crisis of 2008 and are now having difficulty, in part, matching their income expectations in retirement to their lifestyle expectations.

Individuals should be increasing their contributions as their earnings grow to save enough to maintain their standard of living in retirement.

The average retirement savings in the UK is still less than £50,000 and there is a definite imbalance borne out by a number of research papers as to the income expectation from these savings.

Pension freedoms were brought in to help encourage retirement saving by increasing the level of flexibility to access pension pots. But, to date, its impact has been minimal other than increasing the rate at which withdrawals are made, with some 1.5m pots already accessed by retirees and many of these in full.

Couple this with the challenges for funding the state pension scheme and a growing ageing population, and the signs are clear.

Individuals should be increasing their contributions as their earnings grow to save enough to maintain their standard of living in retirement - something many people are failing to do, at a dramatic rate.

This second current wave coming through holds less wealth with regards to property and investments, is deeper in debt, has a rising cost of living and will potentially face higher expenses than the current Baby Boomers.

This will make leaving work at 65 harder, with many having to consider working longer past retirement while reducing their standard of living. 

However, not all retirees lack financial resources, and some have been savvy and obtained sound financial advice, saving and then investing an increasing amount over the years to ensure they can have a comfortable retirement. The ever-present challenge is how to take this behaviour from the few to the many. 

Wealthier and healthier?

One reason for some reticence to invest could be attributed to the perceived uncertainty of investment markets.

An investor loses money, exits their investment in a panic and then loses out on both recovery and future growth. An example of this is the years that followed the financial crisis where markets have done, in the main, well for investors but, of course, only if you were in them. 

Cash investments over many years have seen extremely low interest rates, making it hard for savers, who eschewed the investment markets following the crises to make any real returns through the traditional savings and cash Isa accounts.

Longevity has risen consistently in recent years and although this rate of increase is starting to soften, the average Baby Boomer coming to retirement can still expect to spend almost a quarter of a century in retirement. This is set to increase for future generations.

Good news, you may think. But that said, they are not necessarily spending a long and wealthy retirement; even though people are living longer, without careful planning their financial future could be bleak.

There is much talk of Baby Boomers having a wealthier retirement than those before or after them and of being better off than working people.

Recent research shows that Baby Boomers in the US are less than 30 per cent of the population but now own up to 80 per cent of the country’s assets, with many having a relatively “rich” retirement.

But for those following in future years, without careful planning and investing, the picture could be very different.

More choice

Recently, there has been a realisation by many retirement investors, particularly among those unwilling to tolerate the risk and volatility associated with being invested in the markets, that holding most of their wealth in cash may well be safe, but in real terms this is causing the value of their retirement savings to move in reverse.

As such, the level of savers investing in broader diversified funds has increased, with many seeing the value of a broad portfolio of investments.

This, in turn, has led to a proliferation of multi-asset investment solutions, creating a wide choice for investors seeking diversification, increasingly accessible within the expanding pool of personal investment and advised platforms.

The upcoming large rise in the number of people retiring is something the industry is aware of and many product providers and fund managers are adapting their offerings to accommodate this.

The asset management industry must continue to develop products and funds to cater for the growing sustainable income needs of both current and future retirees; many will need their retirement funds to last more than 25 years and will also have an expectation of the legacy they leave future generations.

This is a challenge that is likely to continue and will almost certainly be a key focus for asset managers, both now and in the future.

Steve Hunter is head of business development at Seneca Investment Managers