Like lemmings to the sea, 78 million baby boomers are on an unstoppable march toward retirement. But most of them are heading there blindly because they have no idea whether they’ve got the savings that they’ll need to support themselves.
In a sense, this is a huge experiment. Not because mean old corporate America has taken away our pension plans, leaving us with 401(k)s that we have to manage and which have give us no guarantees about the income they’ll provide. The fact is, at their peak, pensions only covered about 30 percent of the workforce.
The real culprit is something I doubt any of us would care to give up: our health.
The fact is, thanks to advances in medicine, we’re living much longer than ever before.
According to the Society of Actuaries, on average, a man who was 65 years old in 2000 will live to age 85. For a 65-year old woman, it’s age 88.
However, focusing on your average potential life expectancy is misleading. By definition, “average” means 50 percent will die before reaching that age and the other half will live longer — possibly a lot longer. So if you only aim for an “average” life expectancy, you run the risk of seriously underestimating how big your retirement nest egg should be.
In fact, these individuals have a one-in-four probability of reaching age 92 and 94, respectively. That translates into needing 7-9 additional years of income.
If you’re a couple where both members were age 65 back in 2000, there’s a 25 percent chance that one of you will see age 97!
And looking forward, and again thanks to medical advances and improving health, baby boomers can expect that these life expectancies will be even higher for their generation.
That's not necessarily reason to panic about retirement savings. Contrary to “common knowledge” baby boomers have done a much better job at saving for retirement than previous generations, due to two major factors: 1) Boomers’ parents were raising so many children they couldn’t afford to save like their children can. 2) The huge number of boomer women in the workforce, whereas prior generations didn't have women as earners.
Another “common knowledge” myth: American are lousy savers. In fact, a recent global survey by insurance giant AXA found that “the U.S. leads the world in saving for retirement.” On average, American workers save almost $700/month — more than twice the amount saved by workers in Germany, Italy, and France.
Nonetheless, increased longevity means that for many, “retirement” will last nearly as long as their careers. The obvious problem is that you’ll have to finance it without being able to count on a paycheck coming every two weeks.
As a financial planner and boomer, myself, I’ve devoted a significant amount of research and thought to this. By 2017 roughly 40 million of us will have crossed the big 6-0 divide. None of us knows for sure how long we’re going to live and, therefore, how much we need to save.
So what’s tomorrow’s retiree to do?
First, consider working longer. According to AARP, 40 percent of boomers age 50 and older say they’d like to “phase out” of work and into retirement gradually, rather than making a wholesale change overnight.
It makes sense for more than just financial reasons. First, there’s the social aspect of working. Most of us spend more time with our co-workers than with our spouses 5 days a week. In many cases, these folks are a kind of “family” (albeit with just as many dysfunctions as our real families). If you talk to retirees, many will admit they miss their friends from work and feel lonely.
In addition, there’s the mental challenge that many enjoy at work, or the satisfaction of helping others. Add to this the fact that, for many individuals, their work contributes to their identity. In other words, “what” they do is a big part of “who” they are.
In short, our jobs are more than just a paycheck. A lot can be said in favor of making the transition to retirement gradually as opposed to all at once.
If you enjoy your current job and your employer doesn’t have a required retirement age, why not? Maybe you can negotiate a reduced number of hours. Boomers with specialized skills- teachers, nurses, engineers, etc. — are in a better bargaining position because many firms are concerned about the “brain drain” they’re facing, and will appreciate having your expertise, even if it’s fewer hours per week.
If your current job is a drudge and you’re counting the days until you can leave, start thinking about a job you might actually enjoy. What’s your passion? Gardening? Model airplanes? Fixing up old motorcycles? Start looking into a full or part-time position at Lowe's, a local hobby shop, or the Harley dealership downtown.
Working even two or three more years can significantly improve your financial situation. First, there’s the obvious one: If you’ve got income coming in from a job, you can leave more of your retirement savings untouched, giving your account more time to grow.
This is especially important if the inevitable bear market happens to coincide with the start of your retirement. As anyone who retired in early 2000 can attest, taking withdrawals from a portfolio that has lost significant value virtually guarantees you will exhaust your savings prematurely.
Equally important as the income it provides is the health insurance a job offers. It's worth its weight in gold, especially if your former employer doesn’t offer health benefits for retirees. Remember: Medicare doesn’t kick in until age 65.
Finally, if you work, you’ll continue to pay into Social Security. The real pay-off here is not that your additional contributions will translate into a higher monthly benefit. It’s that every additional month that you postpone starting Social Security means your monthly check will be bigger when you do pull the trigger.
Next week: What’s your Social Security benefit really worth in dollars and cents?
Hope this helps,
If you have a question for Gail Buckner and the Your $ Matters column, send them to: email@example.com, along with your name and phone number.