Retirement Risks are Rising for Boomers.. and Beyond

If you remember the slogan, “This is not your father’s Buick,” read on.

As a baby boomer, the life you live in your later years is also not going to be “your father’s retirement."

Baby boomers face a different reality and environment in which their parents retired, and it's going to be tougher for many boomers to enjoy a similar standard of living post work life.

The chart below comes courtesy of the Center for Retirement Research (CRR) at Boston College, and is based upon national data going back to 1983. Each line represents a different year and illustrates the amount of assets owned by various age groups compared to their income. As you might expect, at younger ages people have less accumulated wealth than their older counterparts. However, by age 60, the wealth-to-income ratio has increased to roughly four to one.

The chart emphasis that over the past 25 or so years, the pattern of wealth accumulation has been extremely stable- except in the most recent survey. As you can see by the dashed line, in 2010 wealth accumulation was lower across virtually all age groups, illustrating the impact of the severe recession. The steady high unemployment rates forced many people to draw down retirement savings and other accounts prematurely because they simply needed the money.

In addition, there was also a huge decline in the value of two significant assets classes: residential real estate and stocks. Compare how high the wealth-to-income ratio was in 2007, when both stocks and, to a larger degree, home prices were soaring. A year later, both markets went bust and so did the wealth people thought they had accumulated--as illustrated in the 2010 line.

The wealth-to-income ratio is a good predictor of how much income someone can replace once they retire. The fact that Americans at every stage of life are accumulating assets at a below-average rate is a trend CRR labels “particularly alarming.”

Here's the problem: Even if the wealth-to-income ratio at retirement age gets back to where it’s been historically--roughly four to one--the Center for Retirement Research warns that future retirees are still going to be in trouble. Changes in several factors have made financing today’s retirement more expensive than in the past and as a consequence, the retirees of today and tomorrow really need to be entering this stage of their lives with significantly more wealth than previous generations, not less.

Senior CRR research economist Anthony Webb, says the danger is that pre-retirees today may figure, “I’ve accumulated about the same amount [of assets] as my parents and they’re OK, so I’ll be OK.This is a false logic. Your parents may have been OK, but you’re going to live longer, face lower interest rates and have higher health-care costs.”

In addition, as you can see in the next chart, the shift from company-provided pensions to defined contribution plans such as 401(k)s, means that the burden of managing your assets in order to generate adequate income for as long as you live has shifted to the individual. Most are simply not up to the task.

Today’s historically-low interest rates make this task even more daunting.The interest-bearing investments retirees have typically relied upon- bank accounts and bonds- are not even generating enough of a return to keep up with inflation.

Low returns coupled with increased life expectancy, mean retirees need to reduce the so-called “safe” withdrawal rate of 4% that many use to estimate how much of their portfolio they can pull out as income each year. “The longer your life expectancy, the more cautiously you have to draw down your wealth,” says Webb. “If the number was 4% before, the number now [needs to] be less than four.” (1)

Which brings us full circle: For the foreseeable future, retirees need more wealth to generate the income they will require. “The message,” says Webb, “is that you need to save more. You need to work longer.”

The good news, based upon previous research by CRR, is that you don’t need to work until you’re 75 or 80. Working just a couple of years longer can make a huge difference.

1. Which is not to suggest that a 4% withdrawal rate is- or ever was- “safe.

Ms. Buckner is a Retirement and Financial Planning Specialist and an instructor in Franklin Templeton Investments' global Academy. The views expressed in this article are only those of Ms. Buckner or the individual commentator identified therein, and are not necessarily the views of Franklin Templeton Investments, which has not reviewed, and is not responsible for, the content. 

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