On paper it would seem like getting from Point A to B when it comes to retirement would be pretty easy. However the data suggests otherwise, with Americans in increasing numbers struggling to reach their retirement number. Arguably no generation is struggling more than baby boomers.
Why baby boomers are missing the mark
Why are baby boomers struggling to retire comfortably? It's actually due to a confluence of factors.
For starters, lending rates have been pegged at historic lows for six-plus years, curtailing baby boomers ability to earn "real" returns (actual gains after inflation is factored in) from fixed-income investments.
Additionally, the onus of retirement savings has been steadily shifting. Prior to the 1980s defined benefits plan, such as a pension, provided the bulk of Americans' savings in retirement. These days defined savings plans, such as an employer-sponsored 401(k), are the primary retirement vehicle for working Americans. It means if workers aren't actively participating in their own retirement vis-à-vis contributions, then there's a good chance they'll fall short of their needs in retirement.
Lastly, a number of baby boomers were scared out of their equity investments between 2007 and 2009 during the Great Recession and wound up missing some, or all, of the rebound in equities.
But, getting a true feel for just how badly pre-retirees (those aged 55 and up) are prepared for retirement has been tough to gauge ... until now.
Baby boomers are really struggling
In May, the U.S. Government Accountability Office released a study that analyzed the 2013 Survey of Consumer Finance data for all households aged 55 and older. Its findings showed that nearly half (48%) of all households have some form of retirement savings (i.e., a 401(k) or an IRA), another 23% have a defined benefits plan that offers retirees a monthly benefit during retirement, and a whopping 29% have neither a defined benefits plan nor retirement savings.
The GAO really dug deep into the statistics behind this unprepared 29% and discovered that 65% of them either don't own their home, or own their home with debt still left to be paid. Furthermore, the average profile of a baby boomer in the 29% shows they have just $1,000 in financial assets, annual income of just $18,932, and a net worth of only $34,760. Those are terrifying statistics that imply a substantial number of boomers will be relying on Social Security to fuel their retirement. This is concerning because the Social Security's Old-Age, Survivors and Disability Trust could be facing up to a 23% benefits cut by 2033 if Congress can't figure out a way to boost revenue, cut expenses, or enact some combination of the two.
Based on the findings of the GAO, it estimates that somewhere between a third and two-thirds of current workers are at risk of being unable to maintain their pre-retirement standard of living. Of course, one should also understand that different assumptions about how much may be needed during retirement creates a pretty wide margin for error in the GAO's estimates.
Getting boomers back on track
Despite this margin for error, the GAO's retirement study demonstrates that the struggle boomers could be facing in their golden years is very real.
The good news is that it's never too late for boomers to make changes prior to retirement. This isn't to say they may not have lost valuable years and the ability to compound their savings, but it doesn't mean they should be waving the white flag, either.
To begin with, a lot of boomers have the right idea about putting off their retirement a few years, or longer, in order to continue working. The benefits of working longer are twofold for boomers. First, it offers them the ability to save additional money prior to retirement. More importantly, working longer could allow boomers to put off having to file for Social Security benefits. Every year that you hold off on claiming Social Security benefits between the ages of 62 and 70 allows your benefit to grow by 8% per year. Being able to claim 132% of full retirement benefits by age 70 could be critical for boomers looking to closely maintain their pre-retirement standard of living in their golden years.
Secondly, boomers should consider going against the conventional wisdom of seeking conservative investments in their golden years. Instead of piling into low-yield bonds and CDs that aren't going to outpace inflation, I'd suggest that boomers actively look into stocks which give them an opportunity to grow their wealth. Boomers have to keep in mind that life expectancies are on the rise, meaning they may have decades ahead of them to allow their wealth to grow in the stock market.
Another important aspect to getting boomers back on the right track is ensuring that they're living within their means. For some boomers this may mean cutting back on certain expenses during their retirement. From downsizing their home to coupon clipping, boomers are going to need to be fiscally responsible if they're to make their money last throughout their retirement.
Finally, it's never too late for boomers to take advantage of tools that could shield their income from taxation. Opening and contributing to a Roth IRA (which for those aged 50 and up would allow for a catch-up contribution of $1,000, or a maximum per-year contribution of $6,500) would allow boomers to grow their money completely free of taxation as long as they don't make any unqualified withdrawals. Best of all, Roth IRAs have no minimum distribution requirement, and the accountholder can continue making contributions past the age of 70 (something you could never do with a Traditional IRA).
About the only wrong move a boomer can make here is to wave the white flag in defeat. It certainly won't be easy for baby boomers to right the ship, but the tools to improve their financial outlook are at their disposal if they're willing to take action.