Youngest Boomers Are Unprepared For Retirement

The baby boom generation is approaching its “peak burden” years on the U.S. economy.

This year, the largest and final group of baby boomers born from 1959 to 1964, dubbed the “peak boomers,” will start to turn 65. By the end of the year, all boomers will be 60 or older. The Peak Boomers Impact Study, a new report from the Alliance for Lifetime Income’s Retirement Income Institute, details how most of the individuals in this last segment are not financially prepared and cites different factors that contributed to their precarious financial position.

An analysis of data from the Federal Reserve and the University of Michigan’s Health and Retirement Study found that 52.5% of peak boomers have $250,000 or less in assets. Another 14.6% of that cohort have $500,000 or less in assets, meaning “nearly two-thirds will strain to meet their needs in retirement,” the report said. Experts generally estimate that retirees need to replace 70% to 80% of their working income to maintain their lifestyles in retirement. Social Security is designed to replace only about 40%. The report also found wide disparities in peak boomer retirement readiness along gender, racial and educational lines.

The peak boomers have been blamed for failing to save for their own retirement, but the reality is that they experienced a very different economic situation than their older peers. The peak boomers were at the forefront of the dissolution of the retirement three-legged stool, which consisted of pensions, Social Security and personal savings.

In 1980, about two-thirds of private-sector workers were covered by a defined benefit pension, which provides former workers with a fixed monthly check based on their past earnings. Those pension plans declined rapidly, and currently, only about a quarter of peak boomers are covered by such plans.

As defined benefit plans were supplanted by defined contribution savings plans such as 401(k)s, employees were forced to become responsible for their retirement savings. They needed to decide how much to contribute, how those funds should be invested and how to manage withdrawals in retirement. In the early days, there was very little guidance available and there were some truly terrible investment choices.

The youngest boomers were also adversely affected by the Great Recession, which was the longest economic downturn since World War II and stretched from late 2007 through mid- 2009. Home values plummeted, joblessness soared, and the S&P 500 lost more than half its value. This downturn hit when the youngest boomers were in their top earning years.

The employment rate for peak boomers declined from 98% at age 44 to 77% at age 50. At 50, most peak boomers should have had at least a decade of work ahead of them. Yet, many in that cohort never returned to the job market. By age 57, only 61% of them were working. Not only were many peak boomers out of the workforce, but average earnings dipped from about $79,000 at age 44 to $69,000 at 47. And their earnings never fully recovered.

The report did include some options for older adults to make ends meet. In my opinion, there are few good choices. Working longer, tapping the equity in your home or using annuities to provide lifetime income were the major solutions given.

Working longer is not always an available option due to health concerns or layoffs. Seniors are reluctant to tap into their home equity because they want to stay in place. The other option was to purchase a private annuity that would provide a lifetime income stream. While more consumer-friendly, lower- cost annuities are becoming available, there is still the problem of needing a large upfront cash investment to provide adequate lifetime benefits.

Peak boomers face an uncertain financial future. Many of them won’t be able to maintain the lifestyle they want in retirement and face the prospect of outliving their savings and becoming dependent solely on Social Security. The report calls for establishing a goal that protects up to two-thirds of people’s retirement income. As a society, we also need to examine alternatives to housing, health care and transportation costs.