Retirement – it’s a time in life that so many focus on. It’s when you buy a property in southern Florida, and spend your days golfing and traveling the world. But for many Baby Boomers, the idea of retirement isn’t a relaxing one. In fact, for many it’s a fear that’s fast approaching – if it hasn’t already arrived.
Baby Boomers are reaching the magic “retirement” age in droves, with approximately 10,000 turning 65 each day.1 Unfortunately, it’s becoming increasingly clear that Boomers have not prepared appropriately. On average, Boomers expect that they’ll need approximately $658,000 in their defined contribution plans by the time they retire. The reality – these accounts on average are worth only $263,000, less than half of what many expect they’ll need.2
The increasing cost of retirement
It’s no secret that Boomers are going to need consistent income in retirement, but there are particular challenges that this generation may face in the years ahead, making the demand for income even more important.
First, retirees are living longer. While that may seem like a reason to celebrate, it also means there’s an increasing risk that Boomers may outlive their savings. Life expectancy for ages 65 and older has risen to 84.4 years.3 That means the average Boomer is spending 19 years in retirement. Take into account the average retirement savings for this group, and you’re looking at about $13,800 of usable money per year, or a little over $1,100 a month, just above the Federal Poverty Guidelines of $1,012 per month for a single person.4
Then there’s the risk of increased inflation. For a demographic that lived through a period of hyperinflation in the 1980s, they understand what it means to lose purchasing power. Couple inflation with increased longevity, and a small retirement account starts to feel even smaller.
So, as Boomers begin to transition from their accumulation to distribution years, they’re going to need to find additional income. One potential solution – an allocation to income-focused assets.
It’s no longer 1997
When you think about potential income assets, traditional options like CDs, Treasuries, municipal bonds, and corporate bonds may come to mind. However, interest rates, although recently rising, are still very low after falling steadily for more than three decades, meaning these traditional assets are no longer producing the sustainable levels of income that investors were used to 20 years ago.
Additional income risks
As noted earlier, inflation is finally trending higher. What’s this mean for Boomers seeking additional income? In order to avoid losing future purchasing power, they’ll need to look for assets that can adjust quickly to inflation. Since inflation typically puts pressure on interest rates, as rates move higher, assets with longer durations face challenges, but assets with shorter durations, on the other hand, have the ability to help mitigate this risk, capturing the increase in prices.
There’s also the “welcomed” return of market volatility. In order to potentially avoid market risk, Boomers will need to search for assets that behave differently than the broader equity markets.
A potential income solution – real estate
Baby Boomers looking for steady income in retirement may want to consider real estate. Historically, it has delivered higher income than traditional fixed-income assets.
Additionally, real estate generally has a low correlation to equities and bonds, helping Boomers diversify their portfolio, and potentially hedge against increased market volatility. Also, in today’s rising rate environment, real estate may provide some downside protection as the fixed-income markets continue to struggle with rising rates. And even though it’s true that real estate can suffer short-term interest rate shock, what really drives its performance long-term is a healthy, growing economy – similar to the current environment we’re experiencing.
Assessing the different real estate sectors
It’s important to remember that real estate casts a large net, and different sectors and investment structures may react differently.
Supply and demand fundamentals help drive the attractiveness of specific sectors. For example, there is currently high demand for affordable, updated apartments, but very low supply, making it a potentially attractive sector for investment.
Additionally, you should weigh a sector’s dependency on the economic cycle. Needs based-real estate and real estate driven by employment and GDP figures, like industrial real estate, is thriving in today’s economic climate.
And finally, there’s duration. Real estate has the ability to potentially hedge against inflation, but it depends on the duration of the lease. For example, hotels, storage, and apartments all typically have shorter lease durations, meaning they have the ability to capture property income that keeps pace with inflation. Retail, on the other hand, typically has longer leases, meaning it would have a difficult time reacting quickly to inflation spikes.5
What’s ahead for Boomers?
This is a pivotal time for Baby Boomers. To avoid a potential “retirement crisis,” they should consider additional sources of income as they transition from accumulation to distribution.