understanding-the-baby-boomer-retirement-crisisWhile there are numerous articles seemingly every day about the impending economic collapse and coming retirement crisis Boomers face, do you really understand what’s going on? If not, how can you possibly expect to be prepared? The following article spells it out in plain language. If you plan on being one of the Boomers who survives and thrives, now is not the time to get lost in sitcoms, sports or steamy novels.

The Impending Retirement Crisis in America
By Wayne E. Hanson

Ah, the good old days; the days when one was rewarded with a comfortable retirement after working long years in a solid company with a generous defined benefit pension plan. Back then it was called it was called the “three legged stool”. One’s retirement earnings were made up of the 1) company pension, 2) social security and the 3) private funds the retiree was able to squirrel away on his own. Most retirees leaned heavily on pension and social security as primary income sources.

Then, along came that new benefit called 401(k) that was intended to supplement earnings from the retiree’s regular pension benefit. All was good, for awhile. Employers then decided that the cost of maintaining two pension plans (defined benefit and defined contribution) was burdensome and unnecessary. Particularly burdensome was the defined benefit plan which was heavily regulated, required significant administrative support, and was costly due to plan funding, actuarial analysis, investment analysis, and PBGC premiums. Of course, we all know what happened after that. Defined benefit pension plans dried up like there was no tomorrow and 401(k) plans became the single primary company retirement funding vehicle for many U.S. employees.

In 1998, 52% of Americans over age 60 received income from a defined benefit pension. By 2010 that figure had fallen to 43%. The decline in the private sector has gone from 38% in 1979 to 15% in 2010 and these numbers will continue to fall; all the while companies are designating 401(k) plans as their pension plan of choice. Notably, a recent study showed that poverty rates were nine times greater in 2010 in households without defined benefit pension income.

Now it has become the personal responsibility of employees, not the employer, to ensure that the necessary funds are in place to fund a quality retirement. Some have taken this responsibility seriously and saved a great deal through their tax-deferred plans and put themselves in a good position to face retirement’s financial challenges. Some have not, and many do not today. The Employee Benefit Research Institute reports that 60% of households have a total value of savings and investments less than $25,000, excluding the value of their homes.

 

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The reasons for poor retirement preparation having 401(k) as a primary investment vehicle are many, but certainly insufficient funding, unsteady markets, and unsophisticated investment skills play into the problem. Above all, it appears that people fail to understand how much it costs to live in retirement, and/or lack the discipline to save as much as needed in order to meet their retirement financial requirements. Allianz reports that “transition boomers”, those aged 55 to 65, are starting late with their retirement income planning. A recent Allianz survey reported that 43% of people will not focus on retirement income strategies until they are less than five years from retirement. The same report shows that 16% will not begin to focus on retirement income strategies until six months to a year prior to retirement.

Certainly, we’re now at the point where serious questions are being asked about the overall preparedness of Americans to move into retirement. Articles abound about the need to work longer and save more in order to fund a comfortable retirement. Many of those that are unwilling to pay the price of later employment and added savings can expect a retirement fraught with financial shortfalls; potentially turning one’s retirement dream into a retirement nightmare.

The projected shortfall in retirement funding is compounded by the erosion of home equity; a source of funding that many retirees have seen as a potential income source in the past. And while social security appears to be in no immediate danger, the threat to this benefit cannot be ignored and certainly future changes will not work to better the lot of retirees.

A real danger does exist, however, where Medicare is concerned. This is an expensive benefit and one that, in the minds of many, needs to be amended to save taxpayer money. Unfortunately, this could work to the detriment of future retirees. With medical expenses in retirement estimated at $240,000 for a 65 year old couple retiring in 2012, according to Fidelity Investments, any takeaways in Medicare benefits will simply add to the retiree’s financial burden.

Working longer may not be a reasonable option for future retirees either, because working longer doesn’t always come down to personal choice. Many senior employees find themselves caught up in workforce reductions, and finding a new job in the latter part of one’s career can oftentimes be challenging, if not impossible. Health problems may also prevent senior personnel from continuing to work and build retirement assets.

The fact is we have a growing problem on our hands. The move away from a defined benefit pension plan to a defined contribution 401(k) plan has changed the retirement landscape in a lot of ways. With the burden now primarily on employees to save for retirement, we know that not enough is being done to adequately fund retirement accounts. According to recent data from the National Retirement Risk Index, the percentage of households that will not be ready for retirement at age 65 has nearly doubled to 50%. This is up from 30% in 1989. And in a recent poll coming out of a senior advocacy group, half of the baby boomers responding indicated they never expect to retire.

Those that choose to drop out of the system before adequate retirement funding is in place, face the burden of an underfunded and unfulfilling retirement; one in which they may become their children’s liability and/or taxpayer liability.

Some see the escalating shortfall in retirement funding leading to a retirement crisis in America. I concur.

Author, Mike Miller, writing for Reuters, summarizes the problem this way, “Today’s seniors are more affluent than the general population. But the generations that follow them, starting with baby boomers, will not be as fortunate. The decline of pensions, the erosion of Social Security and the housing crash all are pointing toward a new crisis of poverty among lower-class and middle-class seniors in the years ahead.”

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