Many boomers face grim retirement
Baby boomers can expect to have less to spend in retirement than their parents did. And that's without cuts to Social Security and Medicare.
Here's a watershed: Baby boomers are expected to have a lifestyle in retirement that's not as good as their parents' golden years.
That reverses more than a half century of American progress.
"This is the first time that Americans are going to be relatively worse off than their parents or grandparents in old age," Teresa Ghilarducci, director of the Schwartz Center for Economic Policy Analysis at the New School for Social Research, told The Washington Post.
While the prospects of aging boomers dim, some lawmakers are clamoring for cutbacks to Social Security and Medicare.
Let's assess the situation:
- According to a U.S. Senate committee report (.pdf file), the Center for Retirement Research at Boston College estimates that the "retirement income deficit" is $6.6 trillion. It's "the gap between the pension and retirement savings that American households have today and what they should have today to maintain their standard of living in retirement."
"According to the Employee Benefit Research Institute, only 22% of workers 55 or older have $250,000 saved for retirement. What's more, 60% of that same age group has less than $100,000 socked away. Clearly not enough to retire."
- The Post adds, "Overall, people ages 55 to 64 have a median retirement account balance of $120,000, Boston College researchers have found, which is enough to fund an annuity paying about $575 a month, far short of what they will need."
- The Post also says that "the Center for Retirement Research estimates (.pdf file) that 53% of American workers 30 and older are on a path that will leave them unprepared for retirement," compared with 38% in 2001 and 30% in 1989. This isn't a trend; it's a road to poverty.
- Half of workers have no retirement plan through their employer, the Post says.
Blame goes to the usual suspects -- stagnant wages and a Great Recession that obliterated a lot of middle-class net worth. Rising health care costs and increasing debt among older Americans are also singled out.
However, a lot of the recent coverage focuses on the inadequacy of the 401k to fund a secure retirement.
That makes sense. Wasn't a decline inevitable when the burden for retirement savings shifted from the employers via pension plans to the employees via 401k's, requiring everyone to be an investment expert when even the experts can't agree on how much to save and how to invest it?
In fact, the 401k was not intended to take the place of pensions and become the primary retirement vehicle for the majority of workers. Rather, it was designed as a perk for those at the top. And those are the people getting the biggest benefit. Ghilarducci says 80% of the tax break for 401k contributions goes to the top 20% of earners.
She has proposed a national annuity plan, funded by employee contributions, to supplement Social Security. California and several other states are looking into plans like that, says McClatchy Newspapers.
As things stand right now, you're pretty much on your own. What can you do?
- Sign up for the 401k at work if there is one (or, if you're self-employed, create a solo 401k) and have no less than 10% of your income automatically deposited into it. Increase the percentage as your income grows.
- Never borrow from that fund (although one in four households tap their 401k's to the tune of $70 billion a year, says HeroWallet). It's not a house down payment or college education fund or a backup if your job disappears.
- Avoid debt, and pay off what you have as you continue to fully fund your retirement plan. Imagine the financial flexibility of retiring without a mortgage payment.
- Seek professional help. Find a fee-only adviser who is qualified to help you analyze your savings plan as you near your preferred retirement age.
What's your retirement goal? How confident are you that you're going to reach it?
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Pension plans were deferred compensation. When companies ditched them, they kept the money. Workers should have gotten that money. Instead, they took a pay cut without complaint because it was money they weren't going to see for years. It's not a coincidence that 70% of people were prepared for retirement in the 80's, they were getting a pension.
Companies got rid of pensions because you can't budget a defined benefit for an undefined amount of time - ie workers living a lot longer in retirement. They should have made the pension a defined contribution plan - they put a certain amount away, when you retire, you get it and then you are on your own.
Part of the problem I see is that the switch was made from pensions to 401(k) programs without the requisite education of workers as to what it means and how they have to be serious about planning for and funding their own retirement plans. Workers were also inadequately (or not at all) educated about how to invest and manage their deferred compensation funds.
As more and more of the boomers have to stop working, voluntarily or involuntarily, there are going to be, sadly, many thousands of people who will be having very serious problems making ends meet. Social Security was never meant to be someone's only source of retirement income, yet that is all thatmillions of boomer will have when they stop working.
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