Survive the Boomer Crisis
How did bankruptcy rates of baby boomers triple in under 30 years?
Driving the surge, it was widely reported a few years back, was a three-decade shift of financial risk from government and employers to individuals.
People are bearing an ever-greater responsibility for their own financial well-being as the social safety net shrinks.
The transfer has come in the form of, among other things, longer waits for full Social Security benefits, the replacement of employer-provided pensions with 401(k) savings plans, and more out-of-pocket spending on health care.
Declining incomes, whether in retirement or leading up to it, compound the challenge.
But it’s clear that a large part of the financial problems that baby boomers face today is because they have to fend for themselves in retirement.
And one of the ways they do that is to put everything in the stock market and keep their fingers crossed. (If you haven’t yet, be sure to watch this 3-minute video about why that’s not a good idea).
When Nixon took the dollar off the gold system in 1971 it was the beginning of the end of the economic stability of the American family. In 1974, U.S. Congress passed the Employee Retirement Income Security Act (ERISA) which led to retirement vehicles like the 401(k).
This act effectively forced millions of workers who enjoyed employer-provided defined benefit (DB) pension plans to instead rely on defined contribution (DC) pension plans and put all their retirement money in the stock market and mutual funds. Wall Street now had control of the U.S. citizens’ retirement money. The rules of money were completely changed and heavily tilted in favor of the rich and powerful.
This was one reason why the stock market boomed in the 1970s, and a whole new profession known as financial planning was created.
The great tragedy of this switch is that while the rules of money were changed, education about money was not. A majority of baby boomers were raised to understand the old rules of money: go to a good school, get a good job, get a house, save money and invest in a diversified portfolio of stocks, bonds, and mutual funds.
Unfortunately, those old rules of money don’t work in the new world of money — a world where you have to know how to invest to succeed.
And unfortunately, many baby boomers have outsourced their retirement investing to brokers who are broker than them, people who are really just sales arms for the financial industry.
Financial Ignorance Is Not Financial Bliss
Over the years, as I’ve traveled and talked to thousands upon thousands of people, many of them baby boomers, and I always hear people say things like:
“I’m making more money than I ever have in my life, but I just can’t seem to get ahead.”
“It seems like every time I get a little money saved up, a big expense comes up that takes it all away.”
“I can’t seem to get out of my credit card debt even though I only use them for emergencies.”
These statements and more are the symptoms of someone who suffers from a lack of financial control.
Most boomers left school not even knowing how to balance a checkbook, much less how to prepare a financial statement. So it’s no wonder they struggle financially. They never learn how to control their finances.
You can tell if people are in control of themselves by looking at their financial statements. Just because people have high-paying jobs, big houses, and nice cars doesn’t necessarily mean they are in control financially.
Most people simply increase their standard of living with each pay increase. In the process, they spend their income on expenses and liabilities without increasing their assets. The result is a continual feeling of being financially out of control — a feeling you can’t ever get ahead.
If you want to avoid the coming boomer retirement crisis, you need to learn how to make more money by taking control of your finances.
#1 Assess your financial situation
If you’re a boomer, the news I shared about the coming retirement crisis should be a wake-up call for you. Many of the people who have filed for bankruptcy were surprised it had come to that. They didn’t realize how expensive retirement would be and were not ready financially.
Today, they are bagging groceries to make ends meet, and that’s not enough.
The good news about a wake-up call is that it also presents an opportunity. Before you get too far down the path of financial ruin, take the time to honestly assess your financial position.
#2 Line up all your expenses in the expense column
First off, list out every expense that you have. This includes things like your groceries, estimated health costs, travel, and entertainment… all of it. And then assume they’ll go up by 3% to 5% per year, especially health costs, which by some estimates are expected to be 40% higher by 2035.
Oftentimes, we’re unaware of how much we truly spend. So it’s helpful to go over your bank records for the last couple of years to get a full picture of how much you truly spend and on what you spend your money.
#3 Determine how much money you’ll need to make in passive income to retire and cover your expenses
Next, list out your income in another column. Then, take your hand and cover your income.
What would you do if you didn’t have it and had to pay those expenses?
Frightening, isn’t it?
I like to do this exercise because it brings home the reality of how precarious our financial states can often be. The reality is that you don’t have an income when you retire to rely on, so your investments better do the trick.
Taking a look at your portfolio of investments, do you think you have enough cash flow to cover your expenses each month? If you’re like most people, the answer is no. Rather than have cash flow, most people have a strategy to pull money out of a savings account like a 401(k) each month. That is not income, it’s savings, and it will eventually run out.
So, the question you need to answer is this: how much cash flow would you need each month to retire comfortably and not worry?
#4 Begin investing for cash flow
Once you know how much money you need in cash flow to cover your expenses, it’s time to start investing in assets that produce cash flow like real estate or business.
You can start small and continue to reinvest your returns into more and more cash-flowing investments. If you have a large amount of money stashed away in retirement accounts, I would explore what it would take to move some of it into these types of investments, ones that will provide true cash flow and thus true peace of mind come retirement time.
Do that, and you’ll go a long way towards escaping the fate so many other baby boomers are facing.
Play it smart,
Editor, Rich Dad Poor Dad Daily