Why aren’t the baby boomers retiring?
- February 17, 2014
It’s not just because they were burned in the financial crisis and they’re scared of getting bored.
Since the early 2000s demographers have predicted that from 2011 we would see the mass retirement of more than 15 per cent of the population – baby boomers who were born in 1946 and beyond. But I have to say there’s not many of our baby boomer clients planning to retire in the next 12 months.
With record low interest rates, a more competitive Australian dollar and a more optimistic economic outlook this should be the window of opportunity business owners have been waiting for to sell-up. So why isn’t it happening?
If your balance sheet is in good order, why would you sell what promises to be a healthy semi-retirement income?
The first reason is financial. A lot of small business owners with self-managed super funds saw a considerable portion of the value of their investments decline between 2008 and 2009. While the share market has improved during the last 12 months, there is still considerable volatility globally in equities markets.
Small business owners who had diversified their investments into commercial and industrial property also suffered substantial devaluations over the last five years – between 15 per cent and 40 per cent.
Five years ago retiring business owners were looking at bank interest rates of around eight per cent, which meant a $1 million SMSF portfolio could earn an income of around $80,000 to $90,000 a year, without touching the capital.
That same million-dollar portfolio would be more likely to earn $30,000 to $40,000 in 2014. This is not enough to provide for their retirement, let alone luxuries like overseas trips.
A lot of investors generally lost confidence as their passive investments fell in value during the financial crisis of 2007/2008 and they are now much more cautious.
So, for many people, their small business, which might be producing a return of 10 per cent to 20 per cent on capital invested, is still their most familiar, controllable and lucrative investment.
If your balance sheet is in good order (and most are looking much better after the belt tightening of the financial crisis and if cash flow is positive), why would you sell what promises to be a healthy semi-retirement income?
The second reason for the delay in small business owner retirement is the fear of boredom.
Most business owners I talk to say that while they would like to take a little more time out to travel, they could not imagine what they would do if they were retired and at home all day.
Most are talking about “hybrid retirement” strategies where they will head off for two or three short overseas holidays a year (say a month at a time) but then return to work. Alternatively they may take a day or an afternoon off a week for golf or to look after grandchildren.
But their intention is certainly to work longer – often well into their 70s. In fact many of our small business clients in their 60s are gearing up once again to invest in infrastructure, plant and equipment and even new premises, as values are still generally very good.
The most significant impact of this baby boomer retirement slow-down will be on succession planning.
In family businesses, we are seeing an increasing number of Generation X and Y children wanting to follow in their parents’ footsteps. This is a very noticeable trend and the opposite of the 1980s and 1990s when many children moved away from the family business.
For non-family businesses we are also seeing an increase in demand to assist in set up advisory boards and executive management structures.
This means an owner in his or her 70s can remain in the business and derive a better income from profit share and dividends than from cashing in – and relying on their savings or SMSF.
Nick Hatzistergos is chairman of national chartered accounting and advisory firm, William Buck.