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Will Boomers Have Enough for Retirement?
It's no secret that the housing bubble and recession of the last four years has caused financial heartache for many of us. One group that has been especially hard hit is the baby boomer generation.
For years boomers have believed that they would retire in their mid-sixties and enjoy their golden years playing golf and traveling. They planned to fund retirement with a paid-off home that kept increasing in value, private savings via 401k and IRAs, and Social Security for which they had been contributing since their teens.
The burst of the housing bubble buried the first assumption. In many areas home values have dropped by 30 to 40% since 2008. (StandardAndPoors.com). Since the 3rd quarter of 2007, prices have continued to fall (FHFA.gov). For boomers, that's been a huge hit on their net worth.
Many retirement plans have also taken a hit. Depending on where the funds were invested many have seen their account balances drop to levels not seen since the 90's. Those who have studied the issue say that these accounts won't be able to provide enough retirement income.
"The median household headed by a person aged 60 to 62 with a 401(k) account has less than one-quarter of what is needed in that account to maintain its standard of living in retirement, according to data compiled by the Federal Reserve and analyzed by the Center for Retirement Research at Boston College for The Wall Street Journal. Even counting Social Security and any pensions or other savings, most 401(k) participants appear to have insufficient savings. Data from other sources also show big gaps between savings and what people need, and the financial crisis has made things worse." (compass-institute.com).
"The median 401(k) plan held $149,400, including plans from previous jobs, according to the Center for Retirement Research. To figure the annual income from that, analysts typically look at what the family would get from a fixed annuity. That $149,400 would generate just $9,073 a year for a couple, according to New York Life Insurance Co., the leading provider of such annuities- less than one-quarter of the $39,465 needed. Just 8% of households approaching retirement have the $636,673 or more in their 401(k)s that would be needed to generate $39,465 a year." (compass-institute.com)
The final source of retirement income for boomers was to be Social Security. But as of 2010 the trust fund was actually paying out more than it was taking in. And the trustees expect the fund to be exhausted in 25 years. "In the 2011 Annual Report to Congress, the Trustees announced: The projected point at which the combined Trust Funds will be exhausted comes in 2036 -- one year sooner than projected last year. At that time, there will be sufficient non-interest income coming in to pay about 77 percent of scheduled benefits." (Social Security Admin.)
So what's a baby boomer to do? Now is the time to take a good hard look at your retirement plans and how realistic they are. For most boomers, those golden years are quickly approaching. You can't pretend that they're somewhere in the distant future.
You should see a professional to work through all the math and different options. Much will depend on some of the estimates that you make regarding how much income you'll need, how your investments will perform and what inflation will be.
You can get a rough estimate on your own. Begin by estimating how much income you'll need. Traditionally workers were told that they'd need about 80% of their preretirement income after retirement. But your retirement lifestyle may mean you need much more or much less income. One way to estimate you needs is to start with your current expenses. Then subtract expenses that will disappear if you retire (2nd car, work clothes, continuing education, etc.). Then add any new expenses that would begin at retirement (extra travel to visit the grandkids, a hobby that you'll finally have time for, etc).
Adjust your estimate for inflation. Suppose you felt you'd need $50k per year in today's dollars, but you won't be retiring for 12 years. If inflation were 6% prices would double in 12 years, so you'd really need $100k. If inflation were 3% you'd need $75k.
Next you'll need to estimate how much savings you'd need to create your target income. For illustration let's pick a nice round number and assume that you'll want $100k per year. Next, you'll need to assume how much your investments will each each year. For our illustration let's say 8% per year. Then divide your desired income by the investment earning percent. In this case that would be $100k divided by 8% or $1,250k (one million, two hundred fifty thousand dollars).
Again, this is just a very rough calculation and depends in large part upon the assumptions you made. But, the point is simple. Unless you've saved more than most of your peers, you're probably short of what you need for retirement.
That means that you need to adjust your plans. Either as to how much income you'll have available, when you can retire or whether you'll even need to work part-time through your retirement years.
The calculation here wasn't meant to give you a definitive answer. That's not possible in a short article. Rather it was to demonstrate how important this information is and to encourage you to meet with a professional.
Unless you have already gotten professional help, you'd be wise to consult someone who can help them work through the various scenerios and assumptions. This is not the kind of thing that you want to get wrong. A mistake could mean that you run out of money sometime in your 70's or 80's.
Boomers are running out of time to get this done. We're quickly heading into a different stage of life. It's the wise person who anticipates that change and plans to make the most of it.
Keep on Stretching those Retirement Dollars!
Gary Foreman is a former financial planner and purchasing manager who currently edits The Dollar Stretcher.com website and newsletters. He's been featured in MSN Money, Yahoo Finance, Fox Business, The Nightly Business Report and he's a regular contributor to US News Money and CreditCards.com. You can follow Gary on Twitter or visit Gary Foreman on Google+.
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