The Looming Crisis
As baby boomers approach retirement, we are finding out more and more are ill equipped for the path that lays ahead. Study after study, article after article, report after report all say the same thing: this is the first generation that will be unprepared for retirement.
Baby boomers are roughly defined as those born between the years 1946 and 1964. Soldiers returning from WWII settled down and created a population boom that we call the baby boomer generation today.
What changed from their parents' generation? For one, most who retired before 1990 had a defined benefit plan from their employers. Also, social security was expected to be sufficient for most of their living expenses and healthcare costs. But as price inflation in those two areas has skyrocketed, social security has not kept the pace with them. Lastly, the previous generation retiring at 65 could be expected to live roughly another 20 years. That is just not the case nowadays as retirees are living into the 100s.
As we transition from an economy where you work at one company for your whole life, have a pension, and receive social security and healthcare sufficient to get to 85 years old, to one where you can work at more than a dozen companies, have only a 401(k) (and likely get no employer contribution), and live to 100, many retirees haven't planned well enough to weather even the basic expenses in retirement.
The numbers are staggering. Some of the stats that we have compiled that are floating around out there include:
Between 30% and 40% have saved nothing for retirement
Women are 27% more likely to have zero saved for retirement
48% of boomers won't be able to afford their basic living expenses
The typical account for a worker nearing retirement is only $42,000
$6.6 trillion gap between what boomer have saved and what they will need
To put all these stats in perspective, it is said boomers will need somewhere in the neighborhood of $650,000 in their retirement plans to fund their retirement 100%. The average 65-year-old couple has $263,000 stashed away. Some may say they could get by with that amount. That they could make it last. However, compare that figure to the fact that medical costs for that same couple are estimated to be $220,000, and you can see why so many see a crisis looming.
There are ways boomers can get by, and they can expect to make what little they have stretch for the decades they are retired by living abroad, or in low tax states, or by having a 'working retirement.' As previously mentioned, we will cover many of these strategies in the coming weeks.
However, it's also a matter of expectations. Jet-setting around the world in five-star hotels, cruises, and spending lavishly will most certainly have to be cut back. Retiring at 60 or even 65 will be a thing of the past, and downsizing after the kids are gone a necessity.
It Only Gets Worse
If you thought the picture for boomers was bad, the generations following them to retirement are downright horrible.
Millennials picture a social security system that won't even be solvent by the time they near retirement. And, with healthcare costs rising 6.5% on average a year, they would need to fund their retirement at even greater amounts than the previous generation. According to Money.com, most are worse off than the previous generations (Gen X and the baby boomers). They're on track for 50% or more to not fund a dollar towards their retirement. If you add in those with a balance of $10,000 or less, the percentage jumps to 72% of millennials with $10,000 or less saved.
Strategies for Avoiding Catastrophe
Obviously, saving early and saving often helps. We go by the motto of socking 5-10% into your 401(k) from the first day on job one and never reducing that. Make sure any bonuses or special payouts are subject to that contribution rate as well. The only way to completely fund your retirement is to make use of the growth factor of time. By starting at 25 years old and continually contributing to your retirement, making use of all the available investment vehicles like 401(k)s and IRAs, the dream of retiring at 65 and living well in your golden years can be achieved.
Use an automatic savings plan and dollar averaging to reduce market risk. Typical are automatic contributions from your paycheck to your 401(k), monthly automatic transfers to your IRA, and so on.
The more you save, the less you have to rely on the market to return higher annualized returns.
Take advantage of tax deferred accounts and tax free growth. After-tax dollars can grow tax free in a Roth IRA. At the end of each year, if you socked away a decent percentage into your 401(k) and have an emergency savings account full and ready to weather a storm, any surplus after tax dollars can then be stashed in a Roth IRA to grow tax free to retirement.
Try picking up a side job and allocate that money specifically to retirement. Even a few hundred dollars a month, growing for 30 years, can make a world of difference in retirement.
And, how about working in retirement? We have an article in the works on this subject. But some studies suggest working in retirement, whether it's at your current career or a whole new one, can extend life expediencies as much as a decade.
As the kids go to college, you may find yourself still a decade or more away from retirement, it may be time to sell that 4,000 square foot home with $10,000 in property taxes for a maintenance free condo with 1,500 sq. ft. Downsizing can reduce not only your monthly mortgage payment but cut utility bills by half. The extra equity that you remove from the home can then be invested to bring your retirement date up closer to today or fund a home abroad (another article in the works).
How Yield Hunting Helps You Get there!
We like to think of ourselves as your outsourced financial consultant offering advice and helping to identify red flags that can derail your route to retirement. One of the things we like to do is analyze members' portfolios as a courtesy. While we do not offer financial advice, we do help point out potential issues from their current allocations.
We have been of the notion that investors today are taking on far too much risk - more than their profiles would typically accept. We have laid out the reasons why including a lack of volatility leading to complacency and a need for yield in a low interest rate environment.
Becoming a permanent investor is one of the best ways to accept higher risk if you know just how much risk is being taken. If you can generate enough yield to live on the income generation alone without touching the principal, you can position yourself in a way that avoids having to liquidate during hard times (when the market is down).
We also advocate having other non-correlated sources to draw from. If you are young enough, building up cash value life insurance can be a fantastic mechanism to save for retirement. If you are older, uninsurable, or already in retirement, then we have other solutions for replacing income during periods of financial stress. By not dipping into the portfolio during bear market periods, you bolster the health of the portfolio substantially.
Secondly, you will see more from us on how to generate 'tax alpha' which we think is severely under-reported by the financial media and by financial advisors. The problem stems from the cookie-cutter mentality of most advisory firms - acquiring the new client and moving on to the next with a minimal amount of ongoing maintenance work.
Another area we will be focusing more on is your de-cumulation strategy, otherwise known as distribution planning. While this can be part of your tax alpha strategy, it is highly dependent on the retiree's specific circumstances.
Strong investment management skills can only get investors part of the way to their goals. There is a myriad of other potential solutions, pitfalls, and strategies that must be considered and watched for as you close in on and enter retirement.