Navigating Through the Retirement Income Crisis

April 7, 2016

Retirement for the so-called Baby Boomer generation is likely the most frequently-discussed topic in personal finance media today and for good reason. The financial headwinds facing this demographic are daunting, especially as each leg of historical retirement income (Social Security, pensions and retirement savings) is facing monumental changes and challenges. For many who are in the 55-67 age range, retirement could look quite different that what their parents experienced and possibly different from their own expectations.

Let’s review some recent statistics. According to a June 2015 retirement study by the U.S. Government Accountability Office (GAO), only 9% of Americans in the 55-64 age bracket had retirement savings of $500,000 or more, 30% had between $50,000 and $500,000, and a staggering 61% had less than $50,000 of savings, (most of latter had zero savings). Just 32% had any type of defined benefit pension plan to draw income in retirement, meaning most are depending upon Social Security and what little savings they have.

The Federal Reserve also published a report on retirement readiness last year, citing that 40% of those Americans earning over $100,000/year had no employer-sponsored 401(k) account whatsoever, and according to a 2015 Investment Company Institute survey, just 38% of Baby Boomers have an Individual Retirement Account, and of these, only 14% are making “catch-up” contributions to their accounts each tax year. In other words, only a low percentage of Baby Boomers are making some kind of effort to put away retirement savings for their future. Whether due to spending habits, other obligations or the general lack of wage-growth or employment issues, Baby Boomers are far behind and the aggregate shortfall reaches into trillions of dollars.
The National Institute of Retirement Savings recently stated that half of private sector employees have no access to a workplace plan – the lowest level since 1979. Not surprisingly, most of those with little to no retirement savings were in the lowest income brackets. Clearly, this issue prompted the President to implement the myRA retirement savings account and other initiatives to get American workers to put away even a little for their future.

Adding to the problem is Baby Boomer expectations of what retirement may mean for them. According to investment management company Black Rock, the average Baby Boomer expects to have approximately $45,500 (2015 dollars) of income throughout their retirement, yet the average retirement portfolio balance for those surveyed at retirement age was only $136,200. Depending on what variables used (rate of return, inflation, tax factors), this value might only deliver about $9000/year over the average life expectancy of a retiree, leaving about $36,500/year to be made up by Social Security, pensions and other sources. Some Boomers may be expecting to work part-time in retirement, but age, declining health and outsourcing may force them to leave the work-world before they’re ready.

With this background, the next four weekly blog posts in April will explore the Baby Boomer retirement crisis and offer potential ideas to help those in this situation. As always, call us if you have questions or we can help you with your own particular situation.