Through a combination of procrastination and bad timing baby boomers are facing a personal finance disaster just as they're hoping to retire. In January this year, more than 10,000 baby boomers a day began turning 65, a pattern that will continue for the next 19 years.
The boomers, who in their youth revolutionized everything from music to race relations, are set to redefine retirement. But a generation that made its mark in the tumultuous 1960s now faces a crisis as it hits its own mid-60s. "The situation is extremely serious because baby boomers have not saved very effectively for retirement and are still retiring too early," says Olivia Mitchell, director of the Boettner Center for Pensions and Retirement Research at the University of Pennsylvania.
Today, I sees a lot of new empty-nesters who spent all their years and money raising kids, putting them through school and clothing them in the right brands. "Now their kids are gone, and they realize they've done nothing to prepare for retirement. Many prospects come in to see us today and think they have all this money and they ask how they're doing, and they're shocked when I tell them they are in trouble. When they were kids, they thought that if they had $100,000, they were rich. Today, that doesn't go very far."
There are several reasons to be concerned:
- The traditional pension plan has disappearing. In 1980, 39% of private-sector workers had a pension that guaranteed a steady payout during retirement. Today that number stands closer to 15% and getting smaller, according to the Employee Benefit Research Institute.
- Reliance on stocks in retirement plans is greater than ever; 42% of those workers now have 401(k) accounts. But the past decade has been a lost one for stocks.
- Many retirees banked on their homes as their retirement fund. But the crash in housing prices has slashed a third of a typical home's value. Now 22% of homeowners, or nearly 11 million people, owe more on their mortgage than their home is worth. Many are boomers.
Failure to save
Too many boomers have ignored or underestimated the worsening outlook for their finances, says Jean Setzfand, director of financial security for AARP, the group that represents Americans over age 50. By far the greatest shortcoming has been a failure to save. The personal savings rate - the amount of disposable income unspent - averaged close to 10% in the 1970s and '80s. By late 2007, the rate had sunk to -1%.
The recession has helped improve the savings rate - it's now back above 5%. Yet typical boomers are still woefully short on retirement savings. Boomers in their 50s and 60s with a 401(k)account for at least six years had an average balance of less than $150,000 at the end of 2009.
Signs of coming trouble are visible on several other fronts, too:
- Mortgage debt:
Nearly two in three people age 55 to 64 had a mortgage in 2007, with a median debt of $85,000.
- Social Security:
Nearly 3 out of 4 people file to claim Social Security benefits as soon as they're eligible at age 62. That locks them in at a much lower amount than they would get if they waited.
The monthly checks are about 25 percent less if you retire at 62 instead of full retirement age, which is 66 for those born from 1943 to 1954. If you wait until 70, your check can be 75 percent to 80 percent more than at 62.So, a boomer who claimed a $1,200 monthly benefit in 2008 at age 62 could have received about $2,000 by holding off until 70.
- Medical costs:
Health care expenses are soaring, and the availability of retiree benefits is declining. "People cannot fathom how much money will be needed to simply cover out-of-pocket medical care costs," says Mitchell of the University of Pennsylvania.
A 55-year-old man with typical drug expenses needs to have about $187,000 just to cover future medical costs. That's if he wants to be 90 percent certain to have enough money to supplement Medicare coverage in retirement, according to the Employee Benefit Research Institute.Because of greater longevity, a 65-year-old woman would need even more to cover her health insurance premiums and out-of-pocket health expenses: an estimated $213,000.
Boomers both need and want to work longer than previous generations. But unemployment is near 10 percent, and many have lost their jobs.
The average unemployment period for those 55 and older was 45 weeks in November. That's 12 weeks longer than for younger job-seekers. It's also more than double the 20-week period this group faced at the beginning of the recession in December 2007.If financial neglect turns out to be many boomers' undoing, challenging circumstances are stymieing others.
Add this all up, and there's a "slow-burning" retirement crisis for boomers, says Anthony Webb, a research economist at the Center for Retirement Research. "If you have a crisis where the adverse consequences are immediately clear, then people understand that they have to do something," Webb said. "When the consequences will be felt 20 or 30 years in the future, the temptation is that we kick the can down the road."
As a result, he believes many won't change their behavior.
For less affluent boomers, it won't take that long to feel the pain of poor planning. Concerns about financial trouble will hang over many of those 65th birthday celebrations in 2011.
Many seem to view their plight through rose-colored granny glasses. An AARP survey last month of boomers turning 65 next year found that they worry no more about money than they did at age 60 - before the recession or the collapse of home prices. But in an acknowledgement of reality, 40% of boomers said they plan to work "until they drop."