By Linda Eden, CFP®

Perhaps because Mike and I are both baby boomers, we seem to be gravitating toward issues surrounding that group of people. The Boomers began celebrating their 65th birthday this year and will continue to do so at a rate of about 10,000 every day for the next 10 years. That very fact will force us to deal with many issues our society has put off far too long. Entitlement programs such as Social Security and Medicare come to mind as well as issues about aging, longevity and the consequences for future retirees. But many of these issues will not be unique to the Baby Boom Generation. They will be the reality for Generation X and Y as well.

The Great Recession may be slowly receding into the rearview mirror but the shockingly steep drop in stocks and retirement savings accounts have left a profound psychological impact on many investors. Perhaps even more so on younger investors.

Many Gen X and Y are the offspring of baby boom parents. They watched as their Boomer parents got the stuffing knocked out of them later in the game. That has had a clear impact on younger Americans’ sense of financial security and their willingness to invest in stocks for the long term. These modern day “depression babies” may turn out to be a blessing for the overall financial markets. Like their grandparents, who became the greatest savers of the last century, their attitudes toward money management have shifted toward more cautious approaches regarding debt and cash reserves. In fact, these days younger Americans’ tend to think of themselves as savers rather than investors.

That may be a good thing for the long-term economy, but will it bode well for them in retirement?

With Baby Boomers, inflation is the very thing they worry about the most for their own retirement. In the late 60’s, my parents built a house in Boulder, Colorado. It was a two story home with a full basement and was fully landscaped. The        cost… $21,000.  Today it can cost that much to buy a car! The cost of the things we will need to buy in a 25-30 year retirement will most certainly increase in cost too, just as they did for our parents.

While Gen X and Y are busy trying to hedge themselves against stock market volatility, they would do well to consider the negative impact inflation will have on their purchasing power in retirement. Loss of purchasing power may be the greater risk! These generations are likely to have all the challenges facing the Baby Boomers and perhaps more. They will likely have to wait longer to receive Social Security benefits and may receive less than current recipients are getting. They may have to pay a bigger percent of their healthcare costs in retirement as Medicare benefits are pared back. On top of all that, they will likely live longer due to advances in dealing with diseases such as cancer, diabetes and Alzheimer’s. Like most boomers, they can’t count on employer funded pensions as they are almost nonexistent.

As the burden of funding a 25-30 year retirement becomes more and more dependent on the individual and less on entitlement programs and pensions, both the Baby Boomers and their children will either need to make peace with market volatility or save an awful lot of money for a very long time if they want to continue investing most of their money in low-risk, low-return instruments.

That brings us back to what I see as the greatest challenge to all retirees, the ability to maintain purchasing power and a cash flow that rises with the ever increasing cost of living. In order to keep pace with taxes and inflation and maintain purchasing power over the long-term, we need to aim for investment returns that are about 4% greater than the current rate of inflation. If inflation averages 3%, then we’d need to earn 7%. Low-risk investments such as CD’s and Money Market accounts will not get you there. They are fine for emergency funds but not for maintaining purchasing power.

There is no guarantee that a diversified portfolio of stocks and bonds will make your money last as long as you do, but it’s one of the best ways I know to keep pace with inflation. So unless you plan to save large amounts of money, are blessed with a large inheritance or die prematurely, I can say with certainty… a retirement account invested solely in low-risk, low return investments won’t last the rest of your lifetime.

Linda Eden is a Registered Principal offering securities through Cambridge Investment Research, Inc., a Broker/Dealer, Member FINRA/SIPC. Investment Advisor Representative, Cambridge Investment Research Advisors, Inc., a Registered Investment Advisor. Legacy Wealth Management, LLC and Cambridge are not affiliated. Cambridge does not offer tax advice.

Copyright ©2011 Linda Eden. All Rights reserved. Commercial copying, duplication or reproduction is prohibited.