It may not be the news baby boomers want to hear, but many are looking woefully unprepared for retirement.
A recent study from the Insured Retirement Institute shows that roughly four-in-10 baby boomers don't have a cent saved toward their retirement. This includes close to a third of still-working boomers and half of already retired boomers. Furthermore, a separate study released in February from the Employee Benefit Research Institute pinpointed that early boomer retirees who aren't prepared for retirement are facing an average shortfall of $71,299 per individual in a family.
This lack of preparedness for retirement likely means that some boomers will be leaning on Social Security to provide a substantial amount of income during their retirement.
Baby boomers' Social Security woes summed up in one chart
In general, the Social Security Administration suggests that retired worker benefits are only designed to replace 40% of a workers' wages. Thus, boomers expecting to replace more than 40% of their income with Social Security benefits may not be able to meet their day-to-day or month-to-month living expenses.
A study released in September from AARP, Perspectives of Future Social Security Beneficiaries Ages 45-64: Detailed Findings, primarily questioned boomer-age adults regarding their priorities and expectations during retirement as it relates to Social Security, their knowledge of the program, and their expectation of solvency for the program. One question in particular probed pre-retirees ages 45 to 64 on what share of income Social Security was expected to make up in terms of household income in retirement. Of the 1,170 people surveyed, here were the responses:
As you can see above, about half (49%) of the respondents appear to have heeded the advice of the SSA. On the flip side, the other half (51%) will be leaning heavily on Social Security income in retirement, including the 9% who expect it to comprise 91% to 100% of their retirement income.
The problem here is that the Social Security program is facing concerns of its own. The ongoing shift in baby boomers from the labor force into retirement is continuing to weigh on the worker-to-beneficiary ratio. By 2040, this ratio is expected to fall to just 2.1-to-1 from 2.8-to-1 in 2014. As more retirees become eligible for Social Security benefits, there simply won't be enough revenue generated by the labor force to support them. The end result is that within the next 20 years the Old-Age, Survivors and Disability Insurance Trust will have exhausted its cash reserves and could be facing a 21% benefits cut should Congress have not figured out a remedy to boost payroll tax revenue, cut costs, or do some combination of the two.
Also not helping is the fact that Americans are living longer than ever. The typical person who makes it to age 62 has an average life expectancy today of another 21 years. The longer beneficiaries live, presumably the bigger the burden put on the Social Security trust funds.
Ways boomers can boost their retirement income
From the perspective of some baby boomers, their retirement outlooks may appear hopeless. However, even with boomers losing much of the advantage time can afford in terms of building a nest egg from the ground up, there are still moves to consider making that could have a positive impact come retirement.
For starters, boomers who are expecting to rely heavily on Social Security should consider working beyond the normal retirement age of 65 if their health will allow it. Working longer should allow boomers to use their job-based income to cover daily and monthly expenses instead of their Social Security benefits. On average, each year that an eligible worker holds off on claiming benefits between ages 62 and 70 increases their benefit by 8%. This cumulative increase between age 62 and 70 could make a big difference to those who'll be reliant on Social Security income during retirement.
It's also worth noting that the SSA calculates workers' benefit payments using their 35 highest-earning years. Working an extra couple of years could actually have a positive effect on your overall benefit by removing any previous low-earning years, or years where you didn't work at all (which are factored in as $0).
Because the average American has a 21-year life expectancy upon reaching age 62, it could also be a great idea to use any extra income (especially if you remain in the workforce) to open or contribute to a Roth IRA. Unlike a traditional IRA, which requires you to take minimum distributions by age 70.5, and restricts any additional contributions beginning in the year you turn 70, a Roth has no minimum distribution requirement, it will allow you to continue to contribute regardless of your age, and any investment gains are completely tax-free, as long as you don't make any unqualified withdrawals. A 10- to 20-year investment time horizon within a tax-advantaged account could make quite the positive impact on a retiree's outlook.
Lastly, some boomers may want to consider taking a more aggressive investment approach. This doesn't mean buying penny stocks or throwing your eggs in a single basket. Instead, it means investing a substantial portion of your savings into the stock market -- an idea that has often been considered taboo for retirees and those about to enter retirement. The stock market has grown at 8% per year on an historical basis, meaning retirees could double, triple, or perhaps even quadruple their initial investment over a two-decade period. The downside, of course, is that there's greater risk and volatility associated with investing in stocks compared to, say, bonds and bank CDs, but the earning potential is so much greater.
In sum, while baby boomers face an uphill battle to prepare adequately for retirement, that doesn't mean they're out of options.