The baby boom may end with a whimper.
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The expansive generation that first crowded public schools in the 1950s and elbowed its way into the labor force in the 1970s is now retiring. And the timing couldn't be worse.
Yields on bonds and stock dividends have tumbled, heaping more financial pressure on a group that never saved like their parents and grandparents. Pension plans also have largely disappeared from the private sector, home values aren't any higher than they were 10 years ago, and Medicare is a perennial target of budget cutters in Congress.
Altogether, baby boomers may be leaving at the worst time in a generation or more.
"It'll cost more to retire," says David Blanchett, head of retirement research for Morningstar Investment Management. And "there are certainly more risks facing retirees today than there were for past generations."
Previous generations, for instance, could rely on defined benefit plans, or pensions. Pension plans, which provide a fixed monthly income for life, regardless of what's happening on Wall Street, have been vanishing as employers shift the investment risk associated with retirement to their employees.
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And, right now, those risks aren't paying off.
Market data analyzed by Research Affiliates at the request of Bankrate show that typical stock-and-bond investments probably won't support retiring baby boomers like they did 30 years ago.
For example, someone who retired in 1980 with $355,000 in a portfolio of 60% stocks and 40% bonds would have received an average annual return of 6.9% over 30 years. That person could have withdrawn 4% every year and the portfolio would still have grown to $1.3 million by 2010, according to Research Affiliates.
A retiree in 2013 may not have that kind of luck. Yields have dropped to around 2% for stocks and 10-year Treasury notes. And while yields certainly could rebound in the future, they might not rise fast enough to save those who are retiring right now.
What is it like to retire now vs. the good old days?
Research Affiliates, which uses current market yields to estimate future returns, projects that someone retiring today with a similar 60-40 portfolio would run out of money in 25 years. It could be depleted even faster if inflation and interest rates rise as they did from the 1960s to the early 1980s.
Returns on annuities also have taken a tumble lately, thanks to lower interest rates.
In 1990, for example, an annuity that guaranteed a lifetime income stream for a 65-year-old man required an investment of about $9 for every $1 it paid back, according to Blanchett. Twenty years later, a similar 65-year-old would need to invest $15 to get $1 in guaranteed annual income. And that $1 has only about half the buying power after 20 years of inflation.
Dividend and bond yields have remained so stubbornly low this year, in fact, that financial planners have started to throw out historical assumptions about what someone can safely withdraw in retirement. Until recently, a 4% annual withdrawal strategy was considered safe; retirees could withdraw $40,000 a year from a portfolio worth $1 million, for example. But this has been called into question, and the shift is sending chills across the country.
If you want your savings to last, planners are saying, you may need to take out less from your portfolio than you'd planned.
"A lot of retirees will have significant shocks to their lifestyles when they retire, or sometime after that, because of this savings crisis and funding crisis," Blanchett says.
Besides adjusting to life without a paycheck, boomers also will need to figure out how to pay for higher health care costs while Congress cuts into Medicare. Even the best-laid retirement plans could be dismantled by a sudden hospitalization or an extended stint in a nursing home, says Jack VanDerhei, research director at the Employee Benefit Research Institute.
"That's what's going to take down most couples and make them short on money," VanDerhei says.
EBRI estimates that there's a growing gap between what people are saving for retirement and what they actually need. VanDerhei says that the gap, which includes income to pay for uninsured health care costs, amounted to $4.6 trillion in 2010. Last year, it grew to $4.8 trillion.
Who's to blame?
The Federal Reserve is taking a lot of heat for squeezing yields to next to nothing, and for good reason. The Fed has pumped billions of dollars into aggressive bond-buying programs meant to push interest rates lower and, hopefully, stimulate the economy. But by doing so, bond yields have dropped, penalizing savers.
Baby boomers also must share some of the blame for a general lack of retirement preparation. The personal savings rate has been on the decline for the past 30 years, according to Bureau of Economic Analysis statistics. Americans are currently saving roughly 4 cents on the dollar of disposable income. That's less than half of what they were saving in the 1970s and 1980s.
"We have a baby boom generation that spent almost entirely what they earned during their peak earning years," says Chris Brightman, head of investment management at Research Affiliates, who analyzed data for Bankrate regarding the retirement of baby boomers.
"Now they're looking forward to 30 years of retirement and expecting to earn from their investment portfolio enough to live a similar lifestyle with no drop-off," he says. "But that cannot happen."
What to do?
The retirement of baby boomers can be salvaged. They still have a lot of ways to bolster their savings, especially for those willing to put in some effort and get a little creative. Here are a few suggestions:
Don't punch out just yet. If you can hang on to your job for a few years longer, you'll save more money toward retirement. You'll also get higher Social Security benefits. And yields may improve enough to generate a better return. "It's infinitely easier to work a couple more years into 65, 66, 67, than to basically retire at 65 and find out when you're 70 or 75 that you don't have enough money and then try to get back in the labor force at that time," VanDerhei says. The Center for Retirement Research at Boston College estimates that 65-year-olds will need to stay at work for another five years to ensure a successful retirement.
Take advantage of catch-up contributions. People age 50 and older can contribute as much as $23,000 in a defined contribution plan, such as a 401(k), and $6,500 in an individual retirement account.
Diversify your assets. Don't buy the same low-risk investments that everyone else is chasing. "You have to start thinking about moving beyond stocks and bonds," Blanchett says. "Build a more diversified portfolio that has (real estate investment trusts) and commodities and foreign bonds."
Talk to your kids. Tell them how you're doing. "That's an important conversation you need to have," Blanchett says. "If you're not ready for retirement, and you retire, and then things go poorly, you're probably going to need to have your kids take care of you. That's expensive for your kids, and it creates a lot of potential family issues, too."
Get some expert help. "Unless you have a tremendous amount of financial acumen, you shouldn't decide on whether to retire unless you have some type of financial professional audit your circumstances and tell you you're going to be OK," VanDerhei says.
Bottom line, it's not a time to be passive. Navigating a risky, high-cost, low-yield world will take a tremendous amount of effort. Over their final few decades, boomers will need to draw on the same traits -- flexibility, creativity and determination -- that have characterized their generation.
After all, their toughest challenge still may be in front of them.
"Baby boomers are going to work longer than they'd originally expected," Brightman says. "They're going to have to save more than they'd planned. And they're going to have to consume more modestly in retirement."