Late Boomers Think Savings

July 9, 2004
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GRAND RAPIDS — Though the retirement fate of baby boomers has been fodder for numerous news articles on the so-called “pampered and self-indulgent” generation’s lack of financial preparedness, a study released in May paints a less pessimistic picture.

A study conducted by The Urban Institute on behalf of the American Association of Retired People (AARP) used a model that projected all forms of retirement wealth and income for current and future retirees to the year 2050.

“How Will Boomers Fare in Retirement?” points to some signs for optimism for that generation of Americans born between 1946 and 1964.

The oldest of the boomers are about four years away from Social Security early retirement eligibility, while the youngest of them are about 20 years from retirement.

Projections on the retirement fate of boomers, it seems, depends on whether they’re early or late boomers.

According to the study, although the boomers are expected to amass more wealth and receive more income in real terms at retirement than did the two previous generations, they will not enjoy higher replacement rates, which AARP defines as the percentage of income during the working years that a person retains in retirement.

“Early boomers will have (economic) replacement rates similar to those of their predecessors, while late boomers are less likely to maintain their pre-retirement standard of living. Furthermore, the steady improvement in well-being we have come to expect does not show up in the second half of the boomer generation.”

Compared to older boomers, younger boomers will be less likely to maintain their pre-retirement standard of living, the study suggests.

The authors also note that their income estimates may overstate the adequacy of retirement funds at later ages because health-care consumption typically rises as retirees grow older.

“Finally, although financial planners typically suggest that retirees need about 60 to 80 percent of pre-retirement earnings to meet post-retirement consumption needs, it is unclear whether this goal is sufficient, especially in light of ever-increasing health-care spending,” the authors conclude.

Health-care costs are one of four major issues a person has to consider when saving for retirement, because it dramatically affects how a person should be investing, said Jim Dunlap, president of Huntington National Bank.

“Health-care costs are going to be predictably increasing every year,” he noted. “The majority of health-care costs for a retiree can run $7,000 or $8,000 a year right off the top, and that assumes you stay pretty healthy.”

“Most retirement plans are set up to have you live until you’re about 80, but there’s a 50-50 chance you’ll live beyond that now.”

A person who does stay healthy has to stretch retirement income further over time, he pointed out. People also tend to believe they’re going to spend less when they retire, but Huntington’s experience is that they don’t, Dunlap said. Then there’s market volatility and inflation to factor in.

“Literally, we tell people they ought to save to a degree that allows them to live off the same gross income they had when they were working.”

Dunlap recommends that the first step people take is to fully fund their 401(k)s, especially if there’s a company match.

“It is the quickest way for you to accelerate savings growth because it comes out before you ever touch it and it’s pretax dollars.”

There are catch-up provisions in 401(k)s, too, allowing a person to add incrementally each year and make up for past savings sins. The same is true for traditional and Roth IRAs, he noted. 

The problem is that many people cash in their 401(k)s when they change jobs and never refund it, Dunlap said. He said he’s also found that most 401(k)s are “woefully under diversified” and could use some investment counseling to remedy that.

Permanent life insurance and real estate holdings are other safety nets for retirement, he said. 

Scott Carano, a partner with Plante & Moran’s Grand Rapids office, said he thinks the real problem is that so many people in the 1990s relied on higher returns to meet their goals, and at least for the foreseeable future, he thinks, it looks like returns aren’t going to be as high as they were in the ’90s.

“The fundamental issue that most people need to realize is that that they’ve got to save. They have to somehow develop some kind of discipline — whether it’s a monthly savings program or committing to putting money away in a 401(k). That discipline is going to be so critical for a lot of people.”

Many people today are very heavily leveraged, Carano said.

“The problem for most people is they can’t save because they’ve got too much debt or they’re trying to support a much more lavish lifestyle than they can really afford. So they’ve taken out home equity lines or borrowed to buy the two cars and all that good stuff.

He believes everybody needs to compare their assets and liabilities and figure out what they’ll need to save to retire by a certain date.

A lot of the big mutual fund companies, for instance, have retirement savings tools available on line to help people with those calculations, he pointed out. They can also seek out the help of a financial planner.

“Part of it is getting their financial house in order in order to be in a position to save, and that’s going to be the discipline of getting your debts paid off and your credit cards taken care of. If you’re in your 50s and still have a lot of credit card debt, unless you’re going to inherit money or you’re going to have a big retirement plan that’s going to bale you out, that’s the first thing you’re going to have to get off your plate.”

William McGinniss, vice president of United Bank of Michigan’s Investment Center, said for people who have not started saving for retirement by age 50 the first thing they should do is make sure they’re using whatever plans or options that their employer provides, such as a 401(k) plan.

“That’s really where you start with the basic building block, especially if the company matches; you want to make sure you’re putting in as much as you can up to whatever the company matches, otherwise you’re just not maximizing that opportunity. And with those 401(k)s you should have a nice diversified portfolio to ride out the highs and the lows of the market.”

If people haven’t begun saving for retirement by age 50 there’s usually a reason, McGinniss noted. They may have a lot of expenses with children, college and related costs.

He said a mutual fund is usually a good way to get started for people who want to do something on their own, because a lot of mutual funds allow people to begin with a modest amount upfront and to draw automatically from a checking or savings account. 

“Before you know it, that can build up over a period of time,” he said. “Those are probably some of the easiest things a person can do to get started in that vain.”

There’s still hope for 50-somethings in that situation, but they really need to get focused, McGinniss said.

“The sooner a person starts saving, the less he needs to save and the easier it is for the savings to grow.

“Obviously, the longer you wait, the more challenging it becomes. On the one hand, you want to have growth because you don’t have a lot of time; on the other hand, you can’t afford to take a lot of risks because you don’t have a lot of time — so it’s almost a Catch-22.” 

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