Rethinking Retirement
By: Bollin

Millions of baby boomers are facing a rather daunting prospect for the future: faring worse in retirement than their parents’ generation did. For today’s baby boomers and subsequent generations, the reality of retirement has changed inexorably, with more of the burden of a comfortable retirement falling upon their own shoulders. We are already seeing the workforce move into more of a phased retirement, working fewer hours, in second or even third careers, in stark contrast to the abrupt work stoppage around age 65 of past generations of retirees.

So just how bad could things be for the baby boomer generation? According to a recent study by the Center for Retirement Research, Is There Really a Retirement Savings Crisis? An NRRI Analysis, almost 45% of American households are at risk of not maintaining their current standard of living in retirement. An even more alarming statistic from the same report is that 36% of Americans in the top-third of wage earners is at risk of not living as well in retirement as they do currently.

One of the challenges baby boomers are facing is that the rules of the retirement game have changed significantly in recent years. Pension plans have disappeared at an alarming rate over the last two decades, leaving an increasing number of baby boomers to fend for themselves, often at an advanced age where time for saving and investing is working against them. Another factor that is working against the baby boomers is the increased cost of retirement. The US Bureau of Labor Statistics has identified an inflation index for the elderly, called the CPI-E. An extensive analysis of the CPI-E shows that over the last 20 years that the annual inflationary increase for retirees’ healthcare, housing and other expenditures actually rises 0.5 to 1% faster than normal inflation.

While economic realities have changed the retirement landscape, that doesn’t mean that baby boomers aren’t guilty of making retirement planning mistakes themselves. In a recent study by Bell Retirement Advisors, 68% of affluent baby boomers were counting on their homes as a significant asset to fund their retirement. Almost a quarter of those baby boomers said that their homes represented 50% or more of their retirement savings. As we’ve seen with the recent real estate market, home values don’t always keep appreciating in value, and they don’t always sell within 30 days of putting them up for sale.

But there are plenty of reasons to remain optimistic that many baby boomers will be able to comfortably enjoy their retirement. A recent Spectrem Group Report, The IRA Rollover Market 2007, found that the Rollover IRA market grew 38%, from $353.4 Billion in 2004 to $489.3 Billion in 2007. More importantly, the number of individuals performing IRA rollovers grew 26%, from 5,819,000 in 2004 to 7,346,000 in 2007. It also appears that all age groups, not only baby boomers, are realizing the importance of professional advice in handling their financial affairs. The study found that 58% of 401(k) rollovers valued up to $50,000 worked with a financial advisor. Individuals with 401(k) rollover amounts of $100,000+ worked with financial advisors 71% of the time.

And consumer behavior isn’t the only positive sign; the government appears to be helping as well. The Pension Protection Act of 2006 (PPA) appears to be having a significant impact in helping workers prepare for retirement more effectively. The AARP study, Enhancing 401(k) Value and Participation: Taking the Automatic Approach, examined the effect that automatic 401(k) enrollment had on employees in the year since the PPA was introduced. Plans utilizing automatic enrollment, or opt-out programs, were found to have put the bottom 25% of the wage-earning workforce on pace to replace 52% of their wages in retirement. Plans using the traditional opt-in programs, where workers choose to participate in their company’s 401(k), were found to be on pace to replace 23% of their wages in retirement, for the same bottom 25% of wage-earners.

The retirement landscape has become increasingly more complex for baby boomers in recent years. A number of factors have made today’s retirement reality more challenging: increased longevity, rapidly rising healthcare and extended care costs, and the burden of assuming more responsibility for one’s own comfortable retirement. It is also an exciting time for baby boomers to plan for retirement. The retirement planning industry has evolved light-years from the days of annuities, CDs and municipal bonds into multifaceted strategies designed to provide retirees with the income they need today and the portfolio growth to sustain them in retirement for 30+ years. And saving and tax-deferral opportunities have multiplied tremendously in response to the decline of formalized pension and define benefit plans.

As many baby boomers are finding out, a comfortable retirement isn’t a pipedream from the past, for those willing to rethink what the concept of retirement means to their generation and plan accordingly.

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