Urgent Retirement Planning for Boomers
By George F. McClure
The financial press is reporting that consumer
debt is down, owing to an upswing in the savings
rate. Part of the upswing comes from individuals
who have been paying off credit card debt or
student loans, while foreclosures have cut some
mortgage debt. But another source of increased
saving is Boomers who have realized that they
need to step up savings as retirement looms. The
first wave of Baby Boomers reach age 65 this
year. Over the next 18 years 78 million of them
will reach that age. The last wave will have
time to tweak their retirement plans before the
A common thread for Boomers is
the realization that they should have started
earlier to save more.
Over 50 years, the U.S. savings
between more than 12 percent and near-zero.
The personal savings rate
averaged 5.8 percent in 2010, up from a low of
1.4 percent in 2005, and back to a level last
seen in the early 1990s.
The average household net worth
at the end of 2010 was $505,000, counting
savings, financial investments, and real estate.
Household debt averaged 116 percent of
disposable income — the lowest in six years. The
peak household debt
was 130 percent of disposable income, reached in
The shift from defined benefit
(DB) pension plans to defined contribution plans
makes management of retirement income a more
daunting task. With defined benefit plans the
plan sponsor is obligated to make good on the
benefits, usually a fixed dollar amount. In
1983, 62 percent of workers who had at least one
pension plan had the defined benefit type. By
2007 this had shrunk to 17 percent. The
percentage of workers with only defined
contribution plans in the same period grew from
12 to 63 percent. A fortunate few
had both types of plans
— 26 percent in 1983 and 19 percent in 2007.
Most private defined benefit
pension plans have a fixed payment for the life
of the retiree, or a lower fixed payout if a
reduced pension for the life of a worker’s
surviving spouse is also elected. Many
government-sponsored plans have a cost-of-living
adjustment over the retiree’s lifetime that
helps offset price inflation. But while private
DB pension plans must comply with federal
standards for fund reserves to meet future
liabilities, government plans are not required
Strategies for managing
income in retirement
The old rule of thumb was that
planning for an income replacement ratio of 70
percent to 80 percent of pre-retirement income
would be comfortable in retirement. The
difference would be savings from avoiding work
commuting costs, from paying off a home
mortgage, no longer saving for retirement, and
falling into a lower income tax bracket. That
income would be made up of three components: a
Social Security benefit, a pension payout, and
dipping into savings for the rest.
But today even the replacement
is being challenged.
Maybe 90 to 100 percent should be the retirement
goal. Retirees may want to travel, at least
while they are young enough to enjoy it, and
that could consume funds otherwise not used. One
advisor advocates living on a reduced income for
a year to see how comfortable (or not) it is.
Income not spent during the trial could be
diverted into the retirement nest egg.
Coping with longevity
How long a retirement should you
plan for? Look at your parents for a clue; if
they were long-lived you probably will be too.
The average life expectancy for a 65-year-old
today is another 18 years — to age 83. For a
65-year-old couple, the odds are better than 50
percent that at least one of them will live
beyond age 90.
Annuities are financial products
that can guarantee an income for a long time —
even a lifetime or more than one lifetime.
Insurance companies selling them take into
account interest rates — the lower the
prevailing interest rate the lower the payout
from an annuity. Very few have payouts indexed
to inflation and those that do are quite
expensive since another unknown is injected into
the bet you are making with your insurer about
your longevity. An immediate annuity starts
making payments to the owner when purchased.
Deferred annuities begin payments at some time
in the future — some far into the future. One
such product is
Guarantee. The advantage is that
the income can kick in when other resources have
been depleted, but there are two disadvantages:
you may not live long enough to reap the benefit
and the effects of inflation can erode the
For those who may be thinking
about long-term care insurance, it can be
considered in the mix of alternatives. The
younger your age when such insurance is
purchased, the less expensive it is. An idea of
the cost can be gotten through a
quick online survey
of your needs from IEEE's long-term care
The longer you live, the greater
the specter that inflation will seriously
diminish the purchasing power of your nest egg.
There is a 4 percent rule — that if you begin
retirement drawing 4 percent of your nest egg
each year for living expenses, investment income
on the balance will likely keep you from running
out of money for a long time.
A survey by the Society of
Actuaries of people ages 45 to 70 showed that 37
percent felt that running out of money would be
their greatest challenge if they lived to 100.
For 23 percent, managing health care costs was
the biggest worry. Nursing home expenses were
uppermost for 14 percent. Managing savings in
the face of inflation over such a long time was
the main concern for 9 percent.
With a nest egg containing a
60 percent stocks and
40 percent bonds, a retiree using
the 4 percent rule has a ten percent chance of
exhausting his nest egg by age 97. If he stepped
up the withdrawals to 6 percent per year he
faced a ten percent chance of running out of
money at age 82. There are numerous variations
on this theme, but none comes with a guarantee
of purchasing power for retirement. Currently,
interest rates are very low (penalizing both the
saver and the retiree), and blue chip stocks are
just now recovering from the decline since 2008.
Folks counting only on their
401(k) plan for retirement are finding that the
outlook is grim.
A Wall Street Journal study found that
for the median household headed by a person aged
60 to 62 with a 401(k) account, the account has
less than one-quarter of what is needed to
maintain its standard of living in retirement.
Even counting Social Security and other savings,
their retirement income will fall short of an 85
percent replacement ratio. At last count there
were 802 comments on this article.
Most 401(k) plans contain
largely tax-deferred funds. As they are rolled
over into an IRA in retirement, the tax must be
paid on funds withdrawn according to
IRS guidelines for
Required Minimum Distributions,
starting at age 70-1/2.
Various strategies can be tested
calculators. Charles Schwab,
Fidelity, T. Rowe Price and Vanguard, among
others, offer them.
In 2007, the National Retirement
Risk Index (NRRI) showed that even if households
work to age 65 and annuitize all their financial
assets, including the receipts from reverse
mortgages on their homes,
nearly 45 percent will
be ‘at risk’ of being unable to
maintain their standard of living in retirement.
That is, these households are projected to have
replacement rates that fall more than 10 percent
short of a target rate designed to maintain
their pre-retirement living standard. The target
rate varies from 65 percent to 85 percent.
The Employee Benefit Research
Institute issued in February an assessment to
show what the effect was of the financial and
real estate crisis of 2008 and 2009 on the risk
of insufficient retirement income for Early
Boomer households and how much additional
savings would be needed each year until
retirement to make up for the losses. The
simulation models showed that to maintain a 50
percent probability of retirement income
adequacy there would have to be another 3
percent of compensation saved each year until
retirement. To boost that to a 90 percent chance
of adequacy the added saving required would jump
to 4.3 percent of compensation.
Looking only at those
households that had
exposure to the market crisis in
2008 and 2009 from all three fronts (defined
contribution plans, IRAs and net housing equity)
shows a median added saving percentage for Early
Boomers of 5.6 percent for a 50 percent
probability and 6.7 percent for a 90 percent
probability of retirement income adequacy.
The Trade-off: Retirement Age
Versus Nest Egg Size
Retirement ages assumed in
studies of retirement preparedness strongly
affect their estimates of preparedness. Most
studies estimate how financially well prepared households will be for
retirement when their primary workers retire at
a fixed age — typically 62 or 65. However,
barring disabling injury or illness, workers can choose when to retire, just as
they choose how much to save. The longer they
work, all else being equal, the more prepared
for retirement they are likely to be. Most
studies of retirement preparedness do not treat
how working just a few years longer and saving
somewhat more of their income can greatly
improve older workers’ financial status even if
they have not saved much until they near
retirement. Americans in their early 60s can
typically expect to live another 20 years or so.
By extending their working lives, they shorten
the period of retirement that they need to
finance while giving themselves more time to
save and to earn returns on any assets they have
already accumulated. Every year they continue to
work reduces their likely period of retirement
by several percent and increases the value of
their assets by the annual rate of return, plus
any additional saving. Moreover, by waiting to
apply for Social Security benefits, workers can
substantially increase their annual benefits,
thus cutting the share of their retirement needs
that they must finance from their own assets.
For instance, although the oldest boomers will
be eligible to receive 75 percent of their
normal retirement benefit if they apply at age
62, they will qualify for 100 percent if they
apply when they turn 66 and 132 percent if they
wait until age 70.
Budget Office study quoted above
is still widely circulated. It shows that, for a
50th percentile married couple,
delaying retirement from age 62 to age 70 will
cut the needed personal retirement assets by
Growth in life expectancy for
65-year-olds over the next 70 years was
published in the URL below.
U.S. News & World Report
ten of the ways
Baby Boomers, because of their sheer numbers,
will reinvent retirement.
George F. McClure is
Technology Policy editor for IEEE-USA Today’s
Engineer and the IEEE Vehicular Technology
Society's representative to IEEE-USA's Committee
on Transportation and Aerospace policy.
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