As we enter the heart of the baby boomer retirements, one question continues to linger: have boomers saved enough to retire comfortably?
The great boomer dilemma
The Great Recession wound up wreaking havoc on millions of Americans' retirement accounts, including some boomers who were only a few years away from retirement. The end result was that some boomers entered retirement with a lot less than they initially projected. Some, in fact, are expecting to work well past their full retirement age of 66 in order to maximize their eventual Social Security benefit and hopefully save additional money prior to retiring for good.
As confirmation of that fact, the Insured Retirement Institute recently released a study that showed approximately 4-in-10 boomers have absolutely nothing saved for their retirement. These boomers are probably going to be heavily reliant on Social Security to supply their income in retirement, which is worrisome when you consider that the Old-Age, Survivors, and Disability Insurance Trust is facing a 23% benefit cut by 2033 if lawmakers can't figure out a way to boost revenue collection, cut benefits, or implement some combination of the two.
What boomers need is the potential to create substantial income while they're already retired. You may not think such a vehicle exists, but I'm here to tell you that there is a way to boost, and perhaps even double, your income in retirement.
The smart way to double your money in retirement
When it comes to investing, retired Americans tend to utilize extremely safe investment vehicles that preserve capital and potentially add a fixed amount of income to a nest egg. Good examples of "safe" investments include bank CDs, interest earned on a money market account, annuities, or the purchase of bonds, including U.S. Treasuries.
When lending rates were significantly higher in the 1980s and 1990s, a retiree could live comfortably off the interest earned from these investment vehicles. However, the Federal Reserve has been targeting record-low lending rates for more than six years now in an effort to reignite economic growth. The result has been low nominal return rates for fixed-income investors that are often well below the rate of inflation (as measured by the Consumer Price Index). In short, risk-averse fixed-income retirees are likely watching their real money (nominal gains as compared to inflation) evaporate before their eyes.
The solution might seem a bit perplexing since the market's 2008-2009 swoon is still fresh in the memory of retirees, but the smart way to potentially double your income in retirement is to invest in the stock market.
Why the stock market is your winning bet
Why the stock market? Compared to the aforementioned fixed-income investments, it offers the best historical return of approximately 8% per year. In context, inflation over the past 100 years tends to average closer to three-and-a-half percent. Buying stocks represents the smartest way for retirees (and all investors, for that matter) to outpace inflation over the long run.
You might also be thinking, "What long run! I'm retired!" You may be retired, but the average life expectancy in the United States has been rapidly climbing for decades. When the earliest baby boomers were born their life expectancy wasn't even an average of 70 years. Based on the latest estimates from the Centers for Disease Control and Prevention, the average American is now living 78.8 years. Based on an initial Social Security claim age of 62, or a full retirement age of 66, retirees are going to have an average of anywhere from 12 to 16 golden years to invest and collect additional income -- and this figure is only expected to rise over time.
This last sentence is particularly important because at a historical return of 8% per year an investment in an index fund such as the SPDR S&P 500 ETF would effectively double your money in approximately nine years. That's plenty of time for retirees to enjoy the spoils of their added income or to buffer their nest egg against the effects of inflation or medical costs.
Understand as well that the stock market doesn't have to be intimidating. If you don't have the energy to research individual stocks, then there are baskets of stocks created just for you known as ETFs or index funds. ETFs and index funds help lessen your risk by spreading their assets across dozens -- or even hundreds -- of stocks.
A word of caution
As a word of caution, one thing that is probably painfully clear to a majority of boomers, but which all Americans should be aware of, is that the stock market doesn't go up in a straight line. Although it has been a great wealth creator over time, the secret to its success is "time." You're likely to see a recession at least once a decade, which can have a negative effect on your investments. This does not meant you should try to "time the market," which has been shown to be impossible to do with any consistency over the long run, but it does imply that retirees may need to be patient with their long-term investments.
For example, investors during the Great Recession may have witnessed their index-based holdings lose more than 50% of their value. However, patient investors who didn't sell over that timespan are now up 30% or more, depending on the index fund they were invested in. Staying patient and disciplined and focusing on the horizon are the keys to making the stock market work in your favor.
One last trick to net additional income in retirement
One last "trick" retirees should consider that could make a big difference is the use of a Roth IRA (of course, this only works if you have earned income -- see here for more information).
Again, I can hear the cries: "I thought retirement accounts such as an IRA were for the working class?" Traditionally you'd be correct. However, unlike a Traditional IRA which has investment and withdrawal age limitations, a Roth IRA has neither. What this means is retirees can continue to contribute to their Roth IRAs each year regardless of age (as long as they're below the IRS' income limits), and they aren't required to begin taking withdrawals until they choose to do so. Best of all, as long as retirees don't touch the money they've added for at least five years, they'll get to keep all capital gains completely free of taxation!
Doesn't that sound nice? Double your money in the stock market and keep all the money earned without having to pay a cent in taxes? It does to me!