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Baby Boomer Reality Checkby Rande Spiegelman, CPA, CFP®, Vice President of Financial Planning, Schwab Center for Financial ResearchApril 23, 2008 Can you identify with any of the following catch phrases? What time is it kids? Your next stop—the Twilight Zone. Does she or doesn't she (only her hairdresser knows for sure)? I want my Maypo. Beam me up, Scotty! I can't believe I ate the whole thing. Hey, Mikey likes it! Yabba, dabba, doo!!! If so, chances are you're a baby boomer (and watched way too much television when you were a kid, by the way). You're certainly not alone. According to the U.S. Bureau of the Census, 75,858,000 births were registered from 1946 through 1964. That means that between 2011 and 2029, baby boomers will reach the traditional retirement age of 65 at the rate of about one every eight seconds (even assuming some boomers are no longer with us). But is retirement at 65 still a reasonable goal for the vast majority of baby boomers, let alone early retirement? Indications are that things may not be so groovy after all. Baby boomers need a reality check According to the 2008 Retirement Confidence Survey conducted by the Employee Benefit Research Institute (EBRI),1 about 60% of people age 45 and older have less than $100,000 in retirement savings (close to 40% have saved less than $25,000 and nearly 30% have less than $10,000). Of all workers surveyed, 73% have less than $100,000, 49% have less than $25,000, and 36% have less than $10,000 saved. Despite the apparent lack of adequate savings, 71% of all workers surveyed also say they believe they are "doing a good job of preparing for retirement"! Evidently, there is a disconnect between perception and reality when it comes to how much we will need to spend in retirement and how best to fund that spending. It shouldn't be too surprising, then, that roughly half of those 45 and older say they have never tried to calculate how much they need to save for retirement. Here’s one last sobering statistic—despite wishfully thinking their spending needs would drop in retirement, 52% of retirees found that their actual retirement spending was equal to or higher than their pre-retirement spending (with nearly 10% saying their post-retirement spending was much higher). Don't count on inheritance What about the multi-trillion dollar intergenerational wealth transfer so talked-about in the 1990s? So far, it's yet to materialize. A 2006 report published by the AARP2 found that 80.8% of baby boomers had yet to receive an inheritance as of the end of 2004, and, of that group, only 15% expect to receive an inheritance in the future. The 20% or so of baby boomers who had received an inheritance by the end of 2004 received a median amount of only $49,000 (more than 95% of all such bequests were $100,000 or less). What's more, those who received significant inheritances were generally better off to begin with, with over 60% of all inheritance dollars going to families in the top 40% of net worth. Most baby boomers shouldn't count on an inheritance windfall to bail them out. In fact, given the current state of boomer retirement savings, perhaps the best we can hope for is that the parents of baby boomers will have enough to support themselves during their own retirement. After all, saving for retirement becomes even more difficult for a baby boomer sandwiched between dependent kids and dependent parents. Not your father's retirement Not long ago, retirement planners talked about the three-legged stool of retirement income: Social Security, traditional company pensions and personal savings. But that three-legged stool seems more like a pogo stick these days. Traditional pensions are on the wane—replaced by contributory plans such as 401(k)s and 403(b)s—and there's widespread skepticism regarding the long-term viability of Social Security. The parents of boomers could rely on pensions and Social Security for the bulk of their retirement income. Generation Xers, who entered the workforce at a time when the uncertainty of pensions and Social Security was already apparent, have more time to adjust. But the shifting realities of retirement seem to have caught the bulk of baby boomers unaware. Speaking of those more self-reliant Gen Xers, one has to wonder how long they'll put up with shouldering the burden for their boomer predecessors should Social Security projections prove true. For boomers, the advice used to be, "Don't trust anyone over 30." For the Xers and beyond, "don't trust anyone over 65" might be more appropriate. Some likely scenarios for the future of Social Security, in addition to increased FICA taxes, might be reduced retirement benefits, means testing or a higher eligibility age. All the more reason for boomers to focus on their own ability to save and prepare instead of relying on others and hoping for the best—particularly at a time when life expectancy and medical costs continue to rise. Stretching exercises Maintaining a supple body as you grow older takes some effort, but the benefits are worth it. Likewise, maintaining flexibility in your financial life takes a little work, but can pay off down the road. Here are a few "toe-touching" exercises you can do today to help ensure your financial well-being and independence in retirement:
If you haven't already, put a plan in place. Get help if you need it, but get going. It might seem hard at first, but saving and investing a little extra now could have you shouting Yabba, dabba, doo!!! come retirement time. 1. The Retirement System in Transition: The 2008 Retirement Confidence Survey, April 2008, EBRI Issue Brief No. 316, Employee Benefit Research Institute, ©2008. 2. In Their Dreams: What Will Boomers Inherit? Research Report, John Gist, AARP, Public Policy Institute, Carlos Figueiredo, AARP Public Policy Institute, June 2006. 3. Projected value assumes additional retirement contributions are made at the beginning of the year. The views and opinions provided here are for general informational purposes only. Any examples provided are for illustrative purposes only and should not be considered predictive of actual future events. Nothing contained herein should be considered as a solicitation or a recommendation to take any specific action regarding an investment strategy, as specific planning strategies referenced herein may not be suitable for your individual circumstances. It is important that you consider this information in the context of your own unique tax situation and within your own investment strategy. The information presented does not consider your particular investment objectives or financial situation. (0408-4091) Return to Top |
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