A recent Wall Street Journal article “Time Bomb Looms for Aging America” highlights a growing crisis for older Americans nearing and entering the early stages of retirement. What the article’s authors uncovered in their research is that the generation reaching retirement age is in worse financial shape than the previous generation. This will be the first time this has occurred since Harry Truman was President.
The authors concluded that this group of aging Americans is nearing retirement with higher amounts of debt than previous generations, while their retirement nest eggs are on pace to provide them with only $8,000 a year in income, on average. More than 40% of the households headed by 55 to 70 year-olds lack sufficient financial resources to maintain their current standard of living in their retirement years. Poor financial decisions, demographic and/or economic factors are largely responsible for this situation. Let us look at a few of these contributing factors.
Median personal incomes of Americans aged 55 through 69 leveled off after 2000 according to the Urban Institute. Since 2000, changes to the economic landscape, changing job and workforce demands, and two recessions have had a devastating impact on the earnings of these Boomers.
The percentage of households with debt led by people aged 55 or older has increased to 68% in 2016 from 54% in 1992 according to the Employee Benefit Research Institute. The amount of debt per household in that demographic increased by 11% from 2004 until 2017, according to New York Federal Reserve data. These households also had more than six times the amount of student-loan debt in 2017 than 2004.
Americans are living longer because of medical advances and healthier lifestyles. This longer lifespan has come at a cost, however, and many Baby Boomers are bearing the brunt. The true definition of the “sandwich generation,” Baby Boomers have found themselves caring for both aging parents and raising their own children. Not only have Boomers shouldered a fair amount of the financial burden of caring for aging parents, they have also sacrificed earnings opportunities to care for their parents in a stagnating wage environment.
Healthcare Cost and Availability
According to the Kaiser Family Foundation health-insurance premiums have increased a staggering 281% since 1999! Overall inflation has risen only 47% in that same time. Meanwhile businesses are cutting back on health insurance offerings for retirees as well. In 1999, 40% of large businesses offered retirees health insurance before they became eligible for Medicare at age 65. Today, only 25% of large businesses offer the same coverage, according to Kaiser.
Baby Boomers are not without blame for their precarious financial situation approaching retirement. Early in their working careers the shift from defined benefit pension plans to defined contribution plans like the 401(k) accelerated. The responsibility for retirement planning shifted from the employer to the employee with this change. Many Baby Boomers made one, two or all three of the most common mistakes with 401(k) type retirement plans, and their retirement prospects have dimmed accordingly.
Some Baby Boomers neglected to save for their own retirement, or contributed too little to have any realistic chance of achieving a comfortable retirement income. Others invested too aggressively or too conservatively in their 401(k) plans. Investing in high-risk tech stocks in 401(k) plans is a recurring theme in numerous articles chronicling Baby Boomers’ depleted 401(k) accounts and retirement nest eggs.
Perhaps the most disastrous mistake made with 401(k) accounts, however, is dipping into them too early and too often. 56-year-old Kreg Wittmayer’s experience was highlighted in the WSJ article. Mr. Wittmayer started saving in a 401(k) in his twenties, but cashed it out after his divorce at age 34. He rebuilt his 401(k) savings again, but cashed it out five years later after losing his job. At 56-years-old, Mr. Wittmayer has a little over $100,000 saved for retirement, owes $92,000 in student loans, and doesn’t know when or if he will be able to retire. “It was just too easy to get at,” Mr. Wittmayer is quoted in the article, referring to his 401(k) accounts.
What Can Be Done?
It may be too late for some of the Baby Boomers described in the article to live a comfortable retirement, but there are things future retirees can do. Better financial education needs to be at the forefront of these efforts. Too few people understand the relationship between risk and return, the importance of saving for goals, or where to go for help concerning financial matters.
Social Security reform must also become a priority. The average Social Security payout is a little over $1,400 a month according to the Social Security Administration and is the only source of retirement income for far too many Americans. Without reform however, payouts will need to be cut by one-fifth in a little more than a decade. The problem is that neither political party wants to handle that tricky and unpopular matter, as reform will likely include a delayed retirement age, higher taxes, benefit cuts, or a combination of all three. Democrats were unwilling to tackle the issue under President Obama’s eight-year administration, and Republicans seem unlikely to tackle the politically unpopular matter until President Trump’s second term, should he be re-elected.
People simply must start saving for their own retirement and take ownership for their financial futures. Many lament the demise of the pension plan in Corporate America, but the truth is more Americans have more control over their retirement and their own careers than they did before. Workers must learn to save in company provided retirement plans, or take responsibility to fund their own IRAs in order to enjoy a comfortable retirement. Moreover, when they change employment, they must avoid cashing out those retirement savings and allow them to grow tax-deferred until retirement.
Finally, the financial services marketplace needs to find service delivery models that provide all Americans with competent financial advice at prices that all Americans can afford to pay. From comprehensive financial planning and wealth management services to basic advice and education, the financial services industry is undergoing changes and will continue to evolve to bring affordable advisory models to the marketplace.
What do you think should be done? We would enjoy hearing your ideas about how to improve retirement outcomes for Americans. Please contact us at 419-878-3934 or with your thoughts on the matter.
Sources: Wall Street Journal, Urban Institute, New York Federal Reserve, Employee Benefit Research Institute, and Kaiser Family Foundation.