Baby Boomers Can Retire After All

By Harry Sit

I read a lot of gloomy views in the news about baby boomer’s readiness for retirement. Survey after survey say baby boomers don’t have enough money to retire. The latest 2011 Retirement Confidence Survey from Employee Benefit Research Institute (EBRI) contains many sorry statistics:

  • 68% of workers report they and/or their spouse have saved for retirement (p. 15) – which means almost 1/3 haven’t saved, ever
  • 59% of workers say they and/or their spouse are currently saving (p. 16) – good, at least most who have saved are still saving
  • 56% of workers have less than $25,000 in household savings and investments, excluding the value of their primary home and any defined benefit plans (p. 17, workers include those who are still young)

Despite all these grim statistics, I say baby boomers can retire after all. Why? Because generations after generations retired, both in this country and in other much poorer countries. I just don’t see how baby boomers in the United States will be an exception.

If someone doesn’t have any savings whatsoever, suffice it to say that person will probably not be able to stop working at age 66 or 67 and continue to receive income equal to 80% of his or her pre-retirement income. But it doesn’t mean that person can’t retire. The same EBRI survey also shows 26% of retirees and their spouses never saved for retirement (p. 15). That number was as high as 38% in 2009. These numbers are not that far off from the number of workers who never saved (32%). These retirees by definition still retired despite having never saved.

The EBRI survey also showed 54% of retirees have less than $25,000 in household savings and investments, excluding the value of their primary home and any defined benefit plans (p. 18). The percentage breakdowns among retirees are not that far off from the breakdowns among workers.

  Workers Retirees
Less than $1,000 29% 28%
$1,000 – $9,999 17% 14%
$10,000 – $24,999 10% 12%
Total < $25,000 56% 54%

Again, these retirees by definition still retired despite lack of assets. In fact, 80% of retirees actually retired at age 65 or below (p. 30).

People’s needs and wants are very elastic. A need only yesterday can become an optional want the next day. Things that were out of the question can all of sudden become a viable option. This dawned on me when I became a refugee for a day back in January. I was a well-off tourist only a few days before. A few days later all I wanted was to escape possible physical harm. When push comes to shove, what is a need and what is a want?

For retirees, are these needs or wants?

  • live in the same area as they did before retirement (versus moving to a lower cost-of-living area)
  • live in a single family home (versus renting a small apartment)
  • live independently (versus moving in with a child or relative)
  • live on their own income (versus getting help from family)

If you ask the hard questions, you will realize these are all wants, not needs. You can say doing any of the above isn’t maintaining the pre-retirement living standard. True, but if people didn’t saved enough or didn’t save at all, isn’t their pre-retirement living standard too high to begin with? Other people with the same income but saved adequately couldn’t spend as much.

When it comes to the headline question "Can I Retire?" the answer has to be a resounding "yes!" Baby boomers can and will retire. I have no doubt about it.

Does that mean you don’t have to save for retirement or people are over-saving for retirement? Of course not. When you have more savings, you will have more choices, and more pleasant choices. That’s all.

Reference:

Ruth Helman, Craig Copeland, and Jack VenDerhei, "The 2011 Retirement Confidence Survey: Confidence Drops to Record Lows, Reflecting ‘the New Normal’," EBRI Issue Brief, no. 355 (Employee Benefit Research Institute, March 2011)

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Posted on March 21, 2011 under News. Keywords: .

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9 Comments on Baby Boomers Can Retire After All

  1. KD on March 21, 2011
     

    I like that word – elastic. It is so true. From my parents experience, their consumption peaked in 40s and 50s and then started waning off. 80% of pre-retirement income is misleading for me atleast. May be it could be 80% of pre-retirement spending or even 100% of pre-retirement spending.

    Moreover, what people don’t have in retirement assets, they make up with social contracts such as baby sitting grand kids, paying for kid’s college when the parent is working in lieu of steady reimbursement in later etc.

  2. Jereme on March 21, 2011
     

    I think the word retirement has different meanings for different people. Possibly retirement might mean for someone to drop down to part-time work rather than full time? Or maybe it means taking that hobby to the next level?

  3. j schwartz on March 22, 2011
     

    it’s funny how research shows that Baby Boomers can retire because they have been saving…well the savings have all gone away due to higher prices (gas, etc) that have been effected by the economy changes.

  4. Jonathan on March 22, 2011
     

    I think that over time, less and less people will have pensions and a large percentage of their primary income will be Social Security. Not to get too political, but I’m really glad SS was not privatized so people could invest (as possible lose) their primary safety net.

  5. Dom on March 22, 2011
     

    Retiring and retiring in comfort and without significant money worries are 2 different things. I’m sure that in some cases people are forced to retire. If you have no savings but are too sick or disabled to work, what choice do you have? You spend your remaining days retired but worrying about the next utility bill or prescription…

  6. Jason on March 27, 2011
     

    If you have the money, you can retire. That’s what I tell all my clients.

  7. Joe Schlabotnik on March 29, 2011
     

    Elastic wants and needs. Nice concept.

    But getting a bit more mathematical about things, a lot of people who save using the typical 401k will have almost as much of an income as they used to. Got to make some broad, simplifying, only semi-valid, assumptions. Say a person earns $100 per year, pre tax. Assume for the moment that he makes the same amount of money each year for his entire career and all investments made by or for him (social security, 401k, etc) earn exactly the same rate as inflation.

    Each year he pays 6.25% of his income for social security, so he lives on 93.75% (=100 – 6.25) of pre-tax income. His employer kicks in another 6.25%. So every year he, via social security, he saves 12.5% of his income. Assume (big one here, but not as far off as you might think) that every dollar he puts into the social security system he gets back in inflation adjusted terms in retirement, no more no less.

    Say he is in his company’s 401k program, contributing 6% of his income, with a 3% match from his employer. This means that every year he saves 9% in addition to the 12.5% saved for him by the social security system. So now he is saving 21.5% of his pre-tax income. And he is living on 87.75% (= 100 – 6.25 – 6) of his pre-tax income.

    Do a brief hand wave and say that 87.75 is about 4 times 21.5. So it seems that every 4 years he saves 1 year worth of living expense. Say he works from age 22 to 62, which 40 years. So the combination of social security and 401k saves him 10 years of income. Some standards of portfolio analysis say you can withdraw 5% of your money per year and keep it constant in real terms. This 5% is at the upper end of what is acceptable, but I’m going to use it to push my point.

    Now say that he is going to aim for a three point landing 20 years down the road — he is going to die broke. So he does not need his portfolio to last forever, just 20 years. Now he can take away the 5% (or whatever) that is in excess of inflation, AND 1/20th additionally in the first year. So, assuming his portfolio grows at 8% a year, and inflation is 3%, then he can take out 5% for the real return, and another 1/20th because he is planning to die broke. So the first year he can take out 1/10 of his honey pot. His honey pot is exactly 10 years of pre-tax income, so he has preserved his income.

    The second year, he has only 19 more years to live. So he can take out the above-inflation return (I’ve been using 5%), and 1/19th of the honey pot. This remains (do the math) one year of his pre-tax income.

    Jiggle with my assumptions and it won’t come out so neat, but I think it comes close to preserving ones income level using just the 401k system and the social security system.

  8. Baby boomers retire on April 7, 2011
     

    The Boomers had the best situation in the world — plentiful jobs, cheap education, security in employment. They blew it all, overspent, sold out the following generations, and are now whining that the remaining little pieces of other generations’ wealth they didn’t sell, steal, outsource, offshore, or put up as collateral for their deadbeat debts should now belong to them.

  9. Al Kernek on May 29, 2011
     

    Retirement is a state of mind. For most Boomers, it translates to having control over your own time. By learning how to stretch retirement dollars and supplementing their income with part-time work or home-based businesses, most Baby Boomers can “retire.” For those who have no savings and monthly incomes below $2,000, retirement south of the border is a viable option. There are thousands of Boomers enjoying comfortable retirements in American enclaves in Mexico and Panama, for example. You just have to learn to think outside the box.

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