Are retiring Boomers the richest generation or headed to the poor house – the argument continues
Are Baby Boomers headed toward a Retirement Crisis? A hell-in-a-handbasket woven of inadequate retirement savings and a holey social safety net? Or, alternatively, are Boomers the wealthiest generation in history? Will we have to work until the day before our funeral? Or can we afford to quit our crappy old jobs and retire? Could both be true? Can we still live a glass half full retirement 2020?
The view from 2017
When we wrote our original take on the contrarian view of the so-called Retirement Crisis, we shared data from the Investment Company Institute (ICI). ICI argued that the current Do-It-Yourself (DIY) retirement system is working better than headlines about inadequate middle-class savings for retirement suggest. Here’s our original article from December 2017. Keep in mind that ICI represents the companies that administer the 401(k) plans, and similar defined contribution plans that have largely replaced defined-benefit pensions, at least in the private sector.
Has Anything Changed by 2020?
At the end, we’ll update you with some newer statistics and observations. But to whet your appetite, we now see two competing narratives about retirement prospects. The Retirement Crisis version has dire warnings about the future for Baby Boomers (the oldest of whom are now in their early seventies). But the contrarian view is much rosier. This is the glass half full retirement 2020 story. In this view, Boomers’ main challenge is living longer. The problem is not less wealth compared to prior generations. Living longer? Not the worst problem to have. The debate is further tinged by follow-on generations that look at the Boomers and conclude they’re either or both comparatively blessed and or to blame.
First, our 2017 take:
Glass Half Full Retirement – Contrarian View
ICI says America’s retirement system works
Glass Half Full Retirement?
Worried about retirement? Many say baby boomers are ill-prepared. A lot of baby boomers expect the Social Security glass to be empty when they retire.
We’ve written on this issue Retire at 62 – how much will you need to make it? But there are always contrarians. The Investment Company Institute (ICI) argues that the American retirement system is stronger than is commonly believed. ICI promises boomers at least a glass half full retirement in 2017. They use several benchmarks to make this argument.
Americans have $26 trillion in savings. This is seven times (7x) more per household than in 1975, adjusted for inflation. Wealth is relative. Compared to their grandparents’ retirement, baby boomers are 7x richer.
But you ask, isn’t a lot of that wealth concentrated in the upper-income brackets, especially with the demise of traditional pensions?
ICI argues that most households have retirement-specific savings.
Most Retirees Have Employer-Sponsored Retirement Plans
Eighty-nine percent (89%) of workers transitioning to retirement hold assets or have income from employer-sponsored retirement plans, including pensions, 401(k)s, 403(b)s, IRAs, or annuities. This isn’t the empty glass portrayed by doomsayers.
This statistic doesn’t speak to asset quantity in, or income from, such plans, just the existence of such plans.
But ICI responds that many Americans have more spendable income in retirement than before. That’s at least a glass half full retirement.
Lower and Middle-Income Spendable Income Increases in Retirement
Lower-income Americans’ median spendable income in retirement after claiming Social Security increases by 123%.
Middle-income Americans’ median spendable income in retirement after claiming Social Security increases by 103%.
The top 1% of earners see their spendable income fall after claiming Social Security.
For more details from ICI.org, see the links below:
The Rosy and the Realist
ICI view is a fairly rosy. Maybe that glass half full retirement is filled with rosé. The realist can read these post-Social Security statistics to say more about pre-retirement income opportunities than post-retirement income.
And remember that median or mean (average) statistics hide a lot of detail about the distribution of income.
Still, ICI has a point. If Social Security is intended as a safety net, the combination of Social Security plus other savings, especially employer-sponsored retirement plans, is working for a lot of Americans. The glass isn’t exactly empty, even if it’s not full to overflowing. Baby boomers’ glass half full retirement requires more effort by individual workers than the traditional pension system, but the pension system had weaknesses too. Most people were never covered by private pensions even at the peak of private-sector unions. And pensions depend upon the continued health of the former employer, whereas a well-managed defined-contribution account is diversified. Comparisons to an ideal that never was are unfair to the current system.
Whose glass is it?
No one cares more about your money than you do. You must pay attention. Save for the future. Be smart and live within your means. You can’t ignore the future and be surprised to find an empty glass when retirement arrives. Do your part and it’s fair to expect at least a glass half full retirement.
ICI points out that more than 100 million Americans save for long-term goals through mutual funds, exchange-traded funds (EFTs), and other funds. That’s about a third of the total US population. Or about two-thirds of all U.S. workers. ICI members manage savings or investment assets of more than $20 trillion.
We’re in this group. And investment funds are a key part of our plan for financial independence, part of our Aging with Freedom™. But we’re not blind. ICI’s vested interest is to protect the current defined-contribution retirement investment model. Their members manage the system and the savings. This self-interest doesn’t make the research wrong. It just might not be the whole story. And, remember it’s a system that still depends upon the stability and sustainability of Social Security. It’s the classic question. How do you look at the glass? Half-full or half-empty? It’s late in the game. Baby boomers should see the value in a glass half full retirement.
Glass Half Full Retirement Lessons
Our lesson? You need both Social Security and your own savings. You can’t count on Social Security alone to maintain your pre-retirement lifestyle. If you’re middle or upper income? Save or adjust your expectations. But Social Security is the essential backstop. Social Security reform is still necessary to survive the baby boomer demographic bubble. (We think the cap on Social Security taxable income should be lifted.)
Three recommendations for Aging with Freedom:
- Wealth is relative. Be sure you’re above the median in retirement savings for your age and income group.
- Deferred gratification is essential. Be sure you spend less of your income pre-retirement on lifestyle than your peers. Put more in savings and investment.
- Spend less than your income. Regardless of savings, adjust your lifestyle to your post-retirement income. Even if that means major changes in location or more.
Happy at Any Income
We respect the tiny house movement. Many retirees choose recreational vehicles (RVs) for both adventure and frugality. Mobile home parks may save us all. Money counts, but money isn’t everything. You can be happy, if you choose, at any level of income. That is Aging with Freedom™.
Our Lifestyle Adjustment Plans
We moved to a low-cost, rural state. Housing, food, insurance, energy, water, and healthcare all cost less here than in Arizona. And Arizona is still far less expensive than several states. Looking at you California. We plan to get down to one car. And eventually none. Technology promises on-demand ride-sharing services or self-driving cars like Lyft or Waymo (Google’s self-driving car). Tesla Autopilot and Cadillac Super Cruise are here today. Getting off-grid for better energy cost control is on our wish list. We also plan to downsize (again) earlier rather than later.
For a quick summary of moving from a high-cost state to a low-cost state, see a recent article by FreedomIsGroovy.com. The Shockingly Simple Math Behind Abandoning a High Cost State in Retirement
Is your retirement glass half full? What steps are you taking now toward Aging With Freedom™?
Fast Forward to 2019 and into 2020
Remember the two narratives? Retirement Crisis vs. the more optimistic Glass Half Full Retirement 2020? If you watch, you’ll see the competing headlines and stories.
- Forbes: “The Retirement Crisis Is Much Worse Than You Think. . . 2 in 5 adults have little or nothing saved for retirement. Both the availability of and participation in 40k(k) plans is lower than you’d hope.” (These statistics blend those in or near retirement together with those just starting their work careers.) https://www.forbes.com/sites/greatspeculations/2019/03/20/the-retirement-crisis-is-much-worse-than-you-think/#5fb425e93949
- “MarketWatch Opinion: Fears of a retirement crisis are overblown — and these numbers prove it. . . While 54% percent of retirees fear America faces a retirement crisis, only 4% of retirees describe their own financial situation that way.” https://www.marketwatch.com/story/fears-of-a-retirement-crisis-are-overblown-and-these-numbers-prove-it-2019-07-17 Citing among other facts, retiree poverty rates are falling, not rising.
- Forbes: “The Coming Pension Crisis Is So Big That It’s A Problem For Everyone. . .” Wherein pension sponsors contribute too little, assume unrealistic returns, and lack the means to make up the difference to fully fund all the promises made. https://www.forbes.com/sites/johnmauldin/2019/05/20/the-coming-pension-crisis-is-so-big-that-its-a-problem-for-everyone/#cba549237fc5
- CNBC: “Economist: The system is ‘flawed’ when most Americans have little or no retirement savings. . .” https://www.cnbc.com/2019/12/12/system-is-flawed-when-most-americans-have-tiny-retirement-savings.html
- Morningstar: “Debating the State of American Retirement — Morningstar researchers and financial professionals share their thoughts on key retirement questions. . . [M]ost Americans will likely face a significant shock to their standard of living in retirement.”
And many more.
After reading many sources, from various political and economic viewpoints, we have some observations. One of our favorite YouTubers, Josh Scandlen of Heritage Wealth Planning, repeatedly demonstrates how average Americans can afford to retire. His catchphrase? “You don’t have to stay in that crappy old job.” It may require changes in lifestyle, but it doesn’t require a million dollars to retire. Unless you have million-dollar tastes. That’s the glass half full retirement 2020 view. https://www.youtube.com/channel/UCSEzy4i9xrKPoaU9z0_XbmA
A changing economy is stressing current retirement funding vehicles
A changing economy is threatening both defined benefit pensions and defined contribution 401(k) (and similar plans). There are some Baby Boomers caught up in the change, but even more so later generations with less permanent employment and more gigs. Unfortunately, liars glibly use statistics. Be careful reading statistics. Savings rates for current 18-year-olds don’t fairly predict Baby Boomer retirement prospects, for instance. Yet data sets including all working-age adults are cited in support of inadequate retirement savings. You do the math. Or at least understand the math that is being done to you.
Look at the whole picture, not just 401(k)s, Home Values Underpin Boomer Wealth
Middle-class Boomer wealth is heavily concentrated in residential real estate. So, looking at 401(k) and IRA balances alone isn’t enough. And may, in fact, obscure questions about what happens when Boomers go to sell all those homes? You can’t eat your house. Is there enough follow-on demand from younger generations to sustain current housing market prices? (See our article on My House Is Too Big, Falling Prices Ahead.)
Think of the ice in the glass half full retirement 2020 as Boomers’ housing wealth. The ice is not immediately liquid wealth. And some of it may evaporate.
The Wall Street Journal: “OK Boomer, Who’s Going to Buy Your 21 Million Homes? Baby boomers are getting ready to sell one-quarter of America’s homes over the next two decades. The problem is many of these properties are in places where younger people no longer want to live.” Do follow-on generations have the income or desire to buy what Boomers will be selling? https://www.wsj.com/articles/ok-boomer-whos-going-to-buy-your-21-million-homes-11574485201
Nothing Works if Social Security isn’t Secured
Social Security is still a critical part of retirement security. But increased retiree longevity is a challenge for the Government in funding Social Security. And for beneficiaries who may need to make savings last longer. Fewer workers per retiree mean something has to give. We think that should be the cap on income subject to Social Security taxes. Why should lower-income taxpayers pay a higher share of their income to Social Security than high-income taxpayers? There’s still no political solution for the underfunding of current Social Security promises.
No decision is a decision. It’s a decision to accept the status quo, no matter how bad it is.
The Motley Fool: “Social Security Ran a $3 Billion Surplus in 2018 — So Why Is It Going Broke? Despite yet another surplus and trillions in reserves, experts still say Social Security is heading for insolvency. . . “ https://www.fool.com/retirement/2019/04/24/social-security-ran-a-3-billion-surplus-in-2018-so.aspx
Pensions Are Far from Perfect and Have Troubles of Their Own
Complaints about the inadequacy of 401(k) plans obscure the fundamental problems faced by remaining pension plans, both public and private. Private pension plans of declining industries or companies are failing at a rapid rate. The Pension Benefit Guaranty Corporation’s capacity to catch these falling rocks is in doubt. And state and local government employee pensions are chronically underfunded and overpromised. Such that most experts expect more cities and states to go bankrupt.
So, don’t compare 401(k)s to ideal pensions without looking at the ugly reality of pensions in practice. Both systems may need policy adjustments to survive the combination of economic change and the Boomer demographic bubble.
Means and Medians Don’t Tell the Range or Distribution of Retirement Challenges
Statistical averages conceal as much as they reveal. Same for the median. The distribution and range of problems vary. They vary by income stratum. By geography, race, gender, industry, and more. Understanding the distribution is important. Know where you are on the distribution bell curve. Then consider your own challenges, options, and plans. They may be very different than your neighbors next door or across the country. Wealth and preparation for retirement are relative and not absolute. We can play the probabilities in our personal planning, but only if we know our own numbers and not some abstract average.
Many Middle-Class Boomers Still Have a Hangover from the Great Recession
The Great Recession of 2008 did strand many Baby Boomers whose income never recovered from the crash. But not all Boomers.
In some ways, those most at risk are not the poorest. The poorest Boomers fall back on various safety net programs. Medicaid provides healthcare to the poor. There’s public housing available and more.
Those most at risk are those who dropped out of the middle class into the working poor. Working poor make too much to qualify for Government aid but don’t have the time to make up the lost income to empower retirement savings. Nearly half of middle-income Boomers were still not fully recovered from the 2008 Recession as recently as 2017, almost ten years later.
Higher-income Boomers are the primary beneficiaries of the booming market of the last decade. But those gains are not necessarily permanent. The end of the story is not yet written. Wealth and income distribution are not co-determinant (exactly the same) nor are they static over time. https://www.aarp.org/content/dam/aarp/research/public_policy_institute/econ_sec/2012/boomers-and-the-great-recession-struggling-to-recover-v2-AARP-ppi-econ-sec.pdf https://www.thinkadvisor.com/2017/03/01/financial-crisis-still-haunts-middle-income-baby-b
The Top-down vs. Bottom-Up View
Much of the news is written from the top-down view of policymakers or marketers. We try to translate that into what does it mean for us. For you. We can’t wait for Washington, D.C. to solve all problems. One, that’s unlikely. They can’t seem to agree on the time of day. Two, we must make it work, regardless of imperfections. If no one saves the world, we’re still responsible for saving ourselves.
So glass half empty or half full may depend upon how you’re looking at the glass. We take the individual, bottom-up view.
That bottom-up view of the world requires us to see where we are compared to prior generations in similar circumstances. Truth be known, we have a far more complete social safety net than prior generations, even with the imperfections. We are Midas-like rich compared to generations of ancestors.
Our own “can-do list” requires understanding where we are compared to our generational peers in income, wealth (savings), and expenses.
We know we spend less than our income. We spend less than our wealth peers of the same age.
Spending Too Much Looks Like Having Too Little Income
For many, the problem is not too little wealth, or income, but too much spending. It was for us. Lifestyle adjustments ahead. We can say that because we’ve been there and done that. We’ve moved from a high-cost lifestyle in a high-cost urban area to a more affordable rural location and sustainable lifestyle. It ain’t easy. (sic Yes, Mrs. Smith, I know ain’t, ain’t a word. But it’s used for emphasis.) But downsizing may be necessary to make the numbers work. We downsized our housing. From suburban McMansion to a smaller cabin. We downsized our lifestyle, our cars, and more to fit income and savings. And probably have more adjustments ahead. It can be done. And we’re happier because of it. Adjusting the lifestyle to match income isn’t necessarily bad.
Conclusion — Glass Half Full Retirement 2020 Plan
The Retirement Crisis debate is ongoing in the headlines and Washington, D.C. Don’t hold your breath. We’re planning to save ourselves regardless of the rules of the game. Yes, many of the rules are unfair, stupid, or even random. We won’t let our Aging With Freedom™ turn entirely on politicians’ choices. Time to make positive choices to make our lives and numbers work. You can too.
Society at large may be staring at a Retirement Crisis. We don’t plan to live our lives in crisis. We’ll make a glass half full retirement 2020 plan.