Out of the Mouths of Baby Boomers – 5 Post-Financial Crisis Philosophies

Investing
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By  Richard M. Rosso

Learn more about Richard on NerdWallet’s Ask an Advisor

Years ago, it was a challenge to facilitate money conversations between baby boomers and their families. They were tight-lipped about personal money matters and less than willing to share the wisdom behind the mindsets and philosophies that drove their decisions. I wanted parents to openly communicate the good and bad. The money mistakes, the victories.

I was marginal at best in motivating boomers to open up.

Then the financial crisis hit.

Families galvanized as the Great Recession exposed cracks in household balance sheets. The pain of lost jobs, reduced incomes and, in more challenging cases, foreclosures and divorces brought emotions to the surface.

I recognized how the unprecedented financial vulnerability encouraged retired boomers to speak up—to share their money philosophies, especially when immediate family members moved back home due to economic hardship. Closer (literally) then they’ve been in years.

The experience stirred emotions. I observed a change as post-crisis conversations increased and were often initiated by boomer parents, bursting with passion.

The flood gates opened. They’re still open, and, I admit, a handful of the revelations surprised me.

Here are five of the most interesting philosophies shared by retired baby boomers with their children and grandchildren. Perhaps they’ll change your thinking.

1. “I never bought into saving every penny in the company retirement plan.“

I contributed only up to the company’s match and accumulated the rest of my savings in a brokerage account. My em­ployers were inexperienced at selecting 401(k) and company retirement ac­count providers. Choices were too limited or too much. Not enough adequate investment advice or education was provided either. Met the match, moved on.”

This advice was provided to a grandson who was starting his first post-graduate job and reviewing his employer’s benefits package. It’s drummed into our heads early on to maximize contributions to company retirement accounts—but it turns out that may not be the best advice.

The compounding that goes along with tax deferral can be significant. However, if the majority of your investments are sheltered in tax-deferred vehicles, you’ll lose flexibility to create a tax-effective income stream at retirement since all distributions will be subject to ordinary income tax rates.

If you’re five to ten years from retirement, it’s worth formulating a schedule by which a targeted amount of dollars is converted from a traditional IRA to a Roth conversion IRA every year. This process can minimize the eventual impact of adding to modified adjusted gross income, which then may trigger the 3.8% surtax on net investment income, as withdrawals from Roth IRAs are tax free.

Also, having the option to tap tax-free accounts can allow for flexible, tax-effective distribution strategies through retirement. Best to work closely with your tax advisor to determine how much to carve from an IRA to convert each year. You don’t want taxable IRA distributions to push you into a higher tax bracket, trigger Medicare taxes or increase your chances of phasing out of itemized deductions.

Your financial advisor can help with an analysis as you’ll need to pay current income taxes on the amount converted (from a non-IRA source, preferably) and should understand how long it will take, at an assumed rate of return, to break even or recoup the taxes paid.

2. “I rented almost my entire life.”

Candid advice, during a Sunday pasta dinner, from retired dad to his adult son who is renting after a foreclosure and contemplating another house purchase.

Over the last five years, the perception that owning a house is a critical component in achieving the “American Dream” has faded.

Renting is in vogue.

According to a Pew Research Center survey from 2012, home ownership ranks behind a secure job and health insurance as a ticket to being in the middle class.

According to friend and best-selling author James Altucher: “Between 1890 and 2004 (when housing prices began being tracked up until the peak of the housing boom, so I am giving zero credit to the decline in housing prices which have made these numbers a lot worse), housing went up a dismal 0.4% per year versus 8% for the stock market (source: Social Security Advisory Board).”

A house should be considered a place to reside, not an investment. In some cases, it’s a luxury. For the boomers (and their children) I serve, owning a home has become less of a need and has fallen to a mediocre (ranked 6 out of 10) “want.”

3. “I really like you here. Can you stay longer?”

A heartfelt confession from a widowed boomer mom to her immediate family of four—all living together under the same roof due to the impact of a job loss.

According to a recent study by Trulia, 44% of young people, specifically millennials (those born between 1980-1995) without jobs, are living with their parents. Several of the boomer couples I assist don’t seem to mind the kids living at home again, especially when grandchildren are in the mix. They have made the arrangement work. Families are closer now. The formerly career-driven boomers are catching up, making up for lost bonding opportunities with children and grandchildren in a way that is rewarding emotionally. While couples don’t want the living arrangement to last forever, they’re motivated to see loved ones gain firm financial footing before leaving the nest.

Since 2010, I have recommended new college grads live at home longer. The post-crisis economic climate requires a different attitude. Children create a written agreement to pay off debt (if applicable), to prove they are serious about preparing to launch. Action steps are included to focus efforts on paying down a substantial portion of debt obligation or building a cash reserve for emergencies.

Create an agreement. Call it a Financial Life Improvement Plan. You’ll need to sell the proposal and estimate the end results. Open up your entire financial picture to your parents, and meet monthly to discuss progress.

How serious are you?

Sign the agreement and provide your parents with a copy. I suggest asking for feedback and including bullet points indicating how you will assist the household, whether it’s taking on chores or paying a monthly rent based on an amount agreed upon by all interested parties.

4. “You’re going to have a rougher time than we did.”

Dad shared this sentiment with his daughter, a single mother raising two young children on one paycheck.

Boomers are less confident about the future, especially when it comes to how their kids are going to adequately prepare financially for retirement and college educations. They are troubled by the increase in college costs and growing dependence on student loan debt.

Boomers are explaining to their children how they believe retirement today is more challenging than it was for their parents. Going forward, the goal is to break it to the children that retirement (sadly) shouldn’t be considered a possibility until at least age 75.

They cite several legitimate hurdles for the family—longer life expectancies, the disappearance of traditional pensions, an inability to save, too much debt and the skyrocketing cost of college.

Mom wasn’t comfortable with my advice to focus solely on her retirement goal; we decided upon an “emotionally neutral” agreement by which she saves up to the match in her company retirement account and then automatically directs $50 a month into 529 college savings plans for her girls. Grandpa was willing to gift the initial investments to get the accounts started.

Never, I mean NEVER, use your 401(k) or otherwise forsake your retirement savings for college funding. I can’t stress this enough. There are numerous funding options for col­lege, including scholarships, grants and loans. You alone are responsible for retirement savings. Nobody is going to loan you a dime to fund retirement. If you must choose, select retirement over college funding every time.

5. “I don’t really like retirement all that much.”

A couple confesses to their recently married son who questioned why Mom and Dad were working part-time as consultants.

Boomers are meeting living expenses in retirement at a replacement ratio of 80% of pre-retirement income, which is sufficient; their passion to contribute keeps them going at a steady pace.

According to Gallup, many boomers are reluctant to retire. This is partially true. Some retire and then look to start new ventures. I hear the word “bored” from those who had stressful careers tied to tight deadlines or sales goals. A few decided to return to work solely to assist parents and children or bolster their financial situations.

Leave it to boomers to take responsibility for the plights of their immediate family. The main difference for those I call “productively retired” is their passionate demand for scheduling flexibility. They do not want to be tied to a 9-to-5 gig. They choose to work on their own terms as consultants for industries in which they thrived during their career.

For boomers interested in starting their own business, I suggest they look into the Small Business Administration. The information provided is surprisingly clear (for a government site) and extensive. The most popular business structure is the Limited Liability Corporation (LLC), offering the limited liability features of a corporate structure with the flexibility and tax benefits of a corporation.

Five years after the Great Recession, the negative effects still linger.

I no longer need to work as hard to get boomers to share their thoughts.

The children and grandchildren are grateful to listen.

So am I.