What will retirement be like for the Baby Boomer generation? Known for a spendthrift attitude of “live for today” and not a frugal “save for tomorrow” mindset, many baby boomers have not saved for retirement. Therefore, they feel they are not in a comfortable long-term financial position.
According to a March 2011 Associated Press-LifeGoesStrong.com Poll, median retirement savings for boomers is $40,000, a figure that includes the 24 percent who say they have nothing saved for retirement. For those who have money in retirement savings, the median stands at $100,000.
How boomers are planning for retirement
The poll also discovered that boomers still consider Social Security as their top source of retirement income, even though the Congressional Budget Office makes no secret of the fact that Social Security is slated to run dry in 2037. Poll results show the following rankings of retirement income options:
- Social Security (65% extremely/very important)
- A workplace retirement savings plan (42%)
- An employer-paid pension plan (41%)
- A personal savings account other than an IRA (35%)
- Personal investments other than a retirement account (31%)
- An IRA (31%)
- Money from the sale of your home (17%)
- Money from other family members (9%)
Source: AP-LifeGoesStrong.com Poll, March 2011
Boomers thought this day would never come
Many boomers have not been preparing for retirement, as these statistics underscore (www.money-rates.com):
- Low savings rates. According to the Bureau of Economic Analysis, personal savings rates have been declining steadily, from 9.59 percent in the 1970s to 8.60 percent in the 1980s, to 5.49 percent in the 1990s and 3.19 percent in the 2000s.
- Accelerating bankruptcy rates. According to a study by the Administrative Office of U.S. Courts, the average age of personal bankruptcy filers is increasing, and Americans 45 and older represent the fastest growing age group for bankruptcies.
- Grim retirement outlook. According to the most recent Retirement Confidence Survey by the Employee Benefit Research Institute, 70 percent of American workers are behind on their retirement planning and saving, and only 13 percent say they are very confident of having a comfortable retirement.
With the drastic downturn of the economy in 2008, boomers had an unprecedented and terrifying look at what retirement could look like as they watched their investments fluctuate.
Elizabeth Duke, Federal Reserve Bank Board of Governors member, notes that, “Boomers are spending less and rethinking retirement planning. Across the board among recession winners and losers, more than 66 percent of boomers said they intended to work at least a year longer than they had planned in 2007. ”
Duke also noted that boomers have greatly altered their spending. “Among boomers who lost six months or more of assets in 2008 and 2009, only 28 percent said in 2009 that if things improved for them, they intended to spend more. But of those boomers who gained assets during 2008 and 2009, only 18 percent said they were willing to increase their spending, even if things continued to get better for them.”
Generally, boomers had a confidence about their finances that the previous generation, their parents who are babies of the Great Depression, did not have. Companies appreciated that the sheer number of baby boomers who had a confident spending style meant good business. For example, in 1986 when the first boomers were turning 40 , Mercedes sold 99,000 cars in the U.S. Then in 2006, when boomers turned 60, Mercedes sold 250,000 cars in the U.S. But in 2009, sales to boomers were down by a third. Kristi Steinberg, head of the Mercedes North American market research operation, says that her nagging fear is that sales won’t recover for a long time because boomers are not spending like they used to. She isn’t sure if this is a short-term result of the struggling economy or if the spending spree is truly over for this generation.
Members of every generation naturally slow down their spending before retirement. Boomers’ parents peaked their spending around age 47 before pulling back and saving for retirement. Consulting firm McKinsey & Company confirms that until 2009, boomers had been reaching their spending peak at about age 54. Experts assume that the change in economic times and the boomers’ resulting views on spending will tighten the purse strings earlier, causing a change in U.S. growth from 3.2 percent (the average since 1965) to 2.4 percent over the next 30 years (McKinsey & Company).
Boomers, at 79 million strong and about one-third of the American population, are now spending less and saving more. This shift to frugal living creates better retirement preparedness and an unexpected turn for the U.S. economy. Mercedes and other companies expected boomers to alter their spending habits, but not this soon and not so abruptly. Now companies are attempting to appeal to boomers in different ways and trying to entice the attention of younger people in Generations X and Y.
It is not too late for boomers to significantly boost their retirement outlook. There is time to make the most of their remaining working years and find ways to more effectively save money. Money-Rate.com suggests these methods:
Work longer. The Centers for Disease Control says that since 1950, life expectancy after age 65 is now 18.6 years, an increase of five years. Therefore, it could make sense to add a similar amount of time to the length of a career. Extending a career not only gives you some extra saving years, but it also decreases the number of years you’ll depend on a savings in retirement.
Diversify your investments. If your investments are spread among a variety of investment vehicles, risk is better managed. Even conservative vehicles like bank accounts may need to be diversified to make sure you don’t exceed Federal Deposit Insurance Corporation (FDIC) insurance limits.
Use laddering to manage interest rate risk. Savers are in a dilemma about where to put their money because savings and money market accounts have extremely low interest rates. Certificate of Deposit (CD) rates are higher, but the money is not available immediately. You can work around this problem by laddering CDs – that is, depositing money in CDs with different maturity dates. This allows you to capture some of the highest rates available today in longer term CDs, while money becomes available on a regular basis.
Be a smarter banking customer. It may take some hunting around, but find a bank that offers advantages and cost savings. For example, free checking accounts are available. Additionally, you can find savings account and money market rates that are four or five times the national average. Once you find a good rate, keep an eye on the market and be prepared to switch if a better opportunity arises.
Monitor progress toward your goals. Set goals for retirement savings, and monitor your progress toward those goals regularly, making adjustments as needed.
These practical and actionable ideas can help baby boomers start paying attention to money in a whole new way. Baby boomers are experiencing a fundamental shift in attitude toward spending and saving, and a significant improvement is underway for their retirement years. The economy downturn has shown boomers they need to rely on themselves sooner rather than later for setting up the kind of retirement they desire. According to Duke University, “The baby-boom generation, by virtue of its sheer size, has had an outsized influence on the economy as it has entered every stage of the life cycle, and [this] is no exception.”
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