Baby Boomer Reality Check

Rande Spiegelman
CPA, CFP®, Vice President of Financial Planning, Schwab Center for Financial Research

May 23, 2012

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 US Bureau of the Census, 75,858,000 births were registered from 1946 through 1964.

That means that between now and 2029, baby boomers will continue reaching 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

In the 2012 Retirement Confidence Survey conducted by the Employee Benefit Research Institute (EBRI),¹ workers aged 55 and older who responded to a question about their retirement savings said the following:

• 60% have less than $100,000 in retirement savings
• 40% have saved less than $25,000
• 31% have saved less than $10,000

As a point of reference, of all workers surveyed:

• 80% have less than $100,000 saved
• 60% have less than $25,000 saved
• 48% have less than $10,000 saved

Despite the apparent lack of adequate savings, 64% of all workers surveyed also say they believe they are "doing a good job of preparing for retirement"—even though only 42% of all workers surveyed have ever taken the time to create a retirement plan!

Evidently, there is still 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 more than 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, 50% of retirees have found that their actual retirement spending was equal to or higher than their pre-retirement spending.²

Don't count on inheritance

What about the multi-trillion dollar intergenerational wealth transfer so talked-about in the 1990s? So far, it has yet to materialize.

A report published by the AARP³ found that only one-fifth of baby boomers had received an inheritance by the end of 2004 and that the median amount was only $64,000. Those findings were updated in 2006 with the number of boomers who had yet to receive an inheritance remaining at 80% and the median amount for those who had received an inheritance dropping to $49,000.

Therefore, 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 so 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. And 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 by surprise.

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 (as Medicare has already put in place by adjusting premium costs based on adjusted gross income) 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:

• Create a plan. Run the numbers to see how much you should be saving, based on your best estimate of what you plan to spend in retirement. Get some help crunching the numbers if you need it, but be sure to use realistic figures for how much you need to accumulate and what rate of return you can expect on your investments (don't forget to take market volatility into account). Balance is key—you don't want to be overly optimistic and run the risk of missing your goals, but neither do you want to be overly pessimistic and sacrifice more of your current lifestyle than is reasonable.
• Save more. Once you've set a reasonable savings target, do whatever it takes to make it happen. Spending less so you can save and invest more is one way to get there. For example, saving an extra $2,000 per year (less than $170 per month) for 20 years could mean an additional $78,000 (rounded) when you're ready to retire,⁴ if you manage to average an annual compound return of 6%. Other viable options include retiring a bit later, working part-time in retirement (at something you enjoy), or spending less in retirement. Of course, these choices aren't mutually exclusive. A combination, to one degree or another, might work well for you.
• Do your own reality check. Manage your expectations and stay flexible. There's no magic formula. And, no matter how well you plan, the future remains fundamentally unknowable. The best you can do is put probability on your side through prudent planning, discipline and hard work. Being well prepared ahead of time will put you in a much better position to roll with the punches later on, when your options will be more limited.

The ultimate goal is a comfortable retirement—one in which you can maintain your desired lifestyle and "do your own thing" with as much peace of mind as possible. It's still doable, but time is running out.

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.