Middle income boomers squeezed by new retirement realities
by Scott Goldberg
Mr. Goldberg is President of Bankers Life, a national life and health insurance brand that focuses on meeting the needs of middle-income Americans who are near or in retirement. He can be reached at S.Goldberg@BankersLife.comWhat’s your number?
Go back a decade and that was the question most frequently being asked of Boomers whenever the topic of retirement was discussed.
It was supposed to get them thinking about how much they would need to save in order to be financially secure in retirement. More optimistically, it was designed to get them dreaming about all the wonderful things they would be able to do when they could afford to sideline their careers and downshift to a more leisurely pace.
Now, five years after the first wave of Boomers reached age 65, the Bankers Life Center for a Secure Retirement has checked in with one of its largest segments – the middle class – to see just how they were faring against their own expectations with its latest study: Paying for the New Retirement: Responsibilities and Challenges for Middle-Income Boomers.
Surveys were conducted with more than 1,000 middle-income Americans age 52 to 70 with annual household incomes between $25,000 and $100,000 and less than $1 million in investable assets.
No Idea…
Predictably, the findings were not good. Among those surveyed sprang the following results:
• Eight in 10 (79%) do not know what percentage of their pre-retirement income they are comfortable living on in retirement.
• Three out of four (75%) have not calculated a monthly retirement income number goal.
• Only six in 10 (61%) have done any active retirement planning beyond contributions to a retirement or savings account.
• Nine in 10 (91%) do not have a written retirement plan.
In other words, despite all the messaging around saving for retirement and coming up with a thoughtful plan for the years ahead, most middle-income Boomers appear to have no idea what their number is and, it can be fairly assumed, little inclination to find out.
Financially Literate, But Retiring in Debt
If the respondents themselves are to be believed, it is not because they are not financially aware. Most middle-income Boomers say they are knowledgeable about, and familiar with, their retirement options:
- Eight in 10 (84%) consider themselves to be somewhat financially literate and nearly one-half (47%) say they have a strong understanding of financial matters.
- Three in four (74%) say they are confident in their understanding of 401(k) accounts.
- Two of three (68%) believe they are confident in their understanding of IRAs
- One in two (51%) are confident in their understanding of annuities
- One in two (48%) are confident in their understanding of Roth IRAs
The problem is that many middle-income Boomers are just not in a position to significantly grow their retirement savings. Six of ten (60%) are spending at least as much as they earn.
In fact, if anything, they are going in the other direction.
More than eight in 10 (84%) nonretired middle-income Boomers are heading toward retirement with some level of debt – something that previous generations of retirees would surely have found shocking. About half (48%) are carrying a home loan, two in 10 (16%) have medically-related debt and one in 10 (11%) is encumbered by a student loan. Most of these borrowers (53%) insist that they will eliminate their debt before they retire, but among those actually retired only one-quarter (23%) are debt-free.
No goal, no plan, debt, and, in many cases, no excess income to further build their savings. This is the situation of most middle-income Boomers. Most do not know how much they need to save in order to retire securely, but even if they did, could they ever expect to achieve it? Only three in 10 (31%) believe they have sufficient savings to live comfortably to age 85.
Social Security and Lifestyle Adjustments
In all likelihood, it comes down to this. This next wave of retiring middle-income Boomers is going to look a lot like those who have retired over the last five years. Among that cohort, about half (51%) of the individuals rely on Social Security as their primary source of income.
Social Security is a fantastic program and for most middle-income Boomers it is the only pension they will ever collect. Only one in three (33%) nonretired Boomers expect to receive guaranteed post-employment income from an employer. But as generous as Social Security is, it was never designed to fully replace one’s wages. According to the Social Security Administration, the average claimant receives about $1,700 per month, or $20,000 per year. That’s hardly enough to finance any big retirement dreams.
So what else? For many, expect lifestyle adjustments.
Among those already retired, four in 10 (38%) have had to modify their living in some way to compensate for a financial shortfall. Nearly nine in 10 (88%) cut expenses, three in 10 (30%) sold possessions, two in 10 (20%) got a job, and one in six (15%) had to ask family or friends for help. Nearly one in 10 (7%) had to sell or remortgage a house.
Trimming back spending during retirement is nothing new. Financial planners have long estimated that retirees can meet their needs with about 80 percent of their pre-retirement income. But how many presumed that some of that income would be directed toward repaying debt?
Need of Some Good Advice
Despite the uncertain retirement outlook for middle-income Boomers, there are still things they can do to improve their situations.
- Research Social Security Options
Social Security is a complex program. Boomers should develop a well-informed plan for when they will claim their Social Security benefits – either through independent research, or ideally, in partnership with a financial professional. In particular, all Boomers should know their full retirement age. Delaying benefits until at least full retirement age can result in higher income checks for all remaining years ahead. - Get a Handle on Debt
Retirees tend to prepare for the costs they can anticipate, but most do not foresee the amount of debt they will carry into their retirement. Servicing debt obligations on top of other expenses, such as long-term care and various health-related costs can be a significant drain on limited resources. Boomers need to be realistic about the amount of debt they carry, how much they can pay down, and how it will affect their disposable income throughout their retirement. Reducing debt prior to retirement can benefit most situations. - Minimize Expenses
Fixed expenses reduce financial flexibility and make it more difficult to adapt to changing financial needs or unexpected expenses. Boomers that are able to reduce their fixed and discretionary expenses prior to retirement put themselves in a better position to navigate costs that are less predictable. - Seek Employment Income
Consider remaining in, or rejoining, the workforce in some capacity while retired. Whether full-time, part-time, or on a project or seasonal basis, employment income can help defray expenses and defer depletion of savings. Plus, many jobs provide access to valuable employee benefits. - Get Professional Help
An earlier study by the Center for Secure Retirement found that 59 percent of middle-income Boomers are not working with a financial professional. Nearly one-third (31%) of that group cited “a lack of savings” or belief that financial planners were “too expensive” as reasons for not seeking professional assistance. Yet, nearly nine in 10 (87%) people who work with a financial planner are either extremely satisfied or very satisfied. These inaccurate perceptions are yet another obstacle preventing Boomers from formulating sound financial plans. Both consumers and the financial services industry would benefit from closer collaboration.◊
Right on the money. This is all my clients need to read and learn from. GREAT reading.