Give Boomers The Tools To Meet Investment Challenges Mutual funds and variable annuities can help
by Charles DiVencenzo
The leading edge of the baby boomer generation, the 77 million Americans born between 1946 and 1964, will turn 60 years old next year and they face retirement savings and investment challenges unlike anything faced by prior generations.
The financial professional must play an important role in bringing the whole picture together, from asset allocation assistance, to retirement investment and income planning, as the investor journeys toward retirement and beyond.
Mutual funds and variable annuities, insurance products with mutual fund subaccounts, are ways that the financial services professional can help accomplish this goal.
The coming crisis
From a savings standpoint, the majority of Americans approaching retirement clearly have not saved enough to support their desired retirement lifestyle. According to the "2004 Retirement Confidence Survey" developed by the Employee Benefit Research Institute, American Savings Education Council and Mathew Greenwald & Associates, 58% of workers say they are currently saving for retirement, yet 48% of those aged 45-54 and 44% of those aged 55+ have saved less than $100,000 toward their retirement!
Americans in general are not saving enough and even those who do save regularly are not investing their assets in a systematic way. The majority of Americans misunderstand the concept of asset allocation and its pivotal role in successfully investing for retirement and beyond.
A 2004 study, commissioned by The Hartford, showed that two-thirds of investors recognize the importance of asset allocation and, after reading a description of asset allocation prepared by Ibbotson Associates, nearly 8 in 10 claimed to be practicing it. In reality, however, very few investors are practicing actual asset allocation. In the same survey, when investors were asked to provide a definition of asset allocation, the majority of respondents cited forms of diversification.
Asset allocation is a specific allotment of monies into different asset classes, while diversification is a more general spreading of assets among various classes of assets.
Additionally, 45% of this same group had not made tactical changes to their asset allocation in the past 12 months. (See chart 1.)
Couple this with a shift to income planning from accumulation and the need for the help of a financial professional is heightened.
For decades, our focus has been on accumulating assets toward retirement. As an industry we have spent the last two decades communicating the benefits of saving for retirement over the long term. However, even for those who have invested diligently for many years and approach retirement with a decent nest egg, new challenges await.
