(This essay is drawn from Nick's keynote address to the Innovative Real Estate Strategies conference.)
On April 7 of this year, my baby sister Kay turned 65 years of age. Assuming that April 7 was just an average day in the decade 2011-2020, so did 9,999 other Americans. For the age of the baby boom retirement wave is well and truly upon us: Every day for these next ten years, on average, 10,000 Americans, born between 1946 and 1955, will hit 65.
If they were perfectly rational, and able to consult their own highly instructive life experience, these 30 million-odd people would intuitively see what the central economic problem of their retired lives is most probably going to be. Moreover, they would apprehend with equal facility what the mainstream investment solution to that problem has historically been.
Kay's life is a pertinent example. On April 7, 1946, the day of her birth, a first-class U.S. postage stamp cost 3 cents. On her 65th birthday, first-class postage cost 44 cents. This would suggest, however anecdotally, that the basic problem in sustaining one's standard of living during the two-person, three-decade retirement of the average baby boom couple will most likely be what it's been all their lives up 'til now: the erosion of purchasing power.
Moreover, on April 7, 1946, the Standard & Poor's stock index closed around 18. On the day Kay turned 65, it was 1,333. This should suggest that one very effective way to combat the erosion of purchasing power over time has historically been to invest in diversified portfolios of high-quality businesses-both for their rising dividends and for their long-term appreciation in value.
The trouble, as any seasoned financial advisor will attest, is that this generation-raised on its parents' horrific accounts of the financial, economic and human devastation of the Great Depression-seems incapable of perceiving retirement primarily as a problem of purchasing power. Rather, they are obsessed with the safety of their principal, as if freezing the number of units of the currency they own-and fixing the income from that principal- would ensure a secure retirement.
Moreover, fed on their parents' cultural myth that the cause of the Great Depression was the stock market crash of 1929, these early boomers cannot see how effectively mainstream equities have preserved and even enhanced purchasing power during their lifetimes. Their worldview is closer to that of the generation which reared them: "The stock market is too risky."
Thus the fundamental challenge- and the great career opportunity-for today's personal financial advisor is in helping these children of the children of the Depression redefine risk and safety. Because for many if not most of the boomers now retiring, a purely fixed-income portfolio will at some point begin to fail their need for lifestyle-sustaining income during three decades of a rising-cost life.
At the same time, we must live in the real world, and recognize that these people, even if we are able to induce them to accept an equity exposure historically appropriate to their income needs, may not be able to hold substantial positions in equities through even normal episodes of equity volatility. It is perfectly true that the broad equity market has risen by a factor of 70 in Kay's lifetime. But that market has also declined an average of 30% 13 times in the interim. And this is not a generation that will ever be good at distinguishing between temporary volatility and permanent loss.
This, to me, is exactly the way in which well-structured real estate investments become one intelligent alternative for today's retirees. Because professionally managed investment real estate-as difficult as it is to generalize about-has historically been an effective generator of both inflation-hedged cash flows and asset values over time. And these characteristics-the ability of rents to rise in the long term, supporting increased income and rising asset values-are precisely what today's retiring boomers will so desperately need in the years and even decades to come.