As the retirement landscape in America continues to evolve, baby boomers are finding themselves facing a future where many are unsure if their savings will last. Yet, not too long ago a stable, secure retirement was well within reach for many working Americans. Thus, it’s logical to ask the question, how did we get here?
The world has changed tremendously over the past 70 years‑starting around the time Social Security was created‑including the way we save for retirement. Unfortunately, more recent history has created some bad savings habits that could very well define the retirement future of the next generation of workers. Not only do boomers have to worry about their own financial future, they need to be concerned about how their children and grandchildren view saving for retirement based on their example.
But history doesn’t have to repeat itself. Some small changes in behavior from boomers today can help to set a solid foundation for building the more secure retirement plans of tomorrow. In that way, we can follow the “good” savings examples and bury the “bad” and “ugly” habits we should avoid.
Shaped by events such as the Great Depression and World War II, the so-called “Greatest Generation” took a cautious approach to financial planning, investing and preparing for retirement. The creation of the Federal Deposit Insurance Corporation in 1935 to help protect bank savings, as well as the inception of Social Security to provide a base level of financial support in retirement‑along with general insecurity about the markets‑led many of that generation to want rock-solid guarantees and safety in their financial planning. It also led many to be attracted to companies that offered a defined benefit (DB) plan in the form of an employer-sponsored pension to provide their retirement security.
Their cautious attitude and the relative guarantees underlying two-thirds of their retirement income (Social Security and defined benefit plans) led many members of that generation to stay away from equity markets. They appeared less interested in having control of their retirement assets and instead were more comfortable allowing the government and their employer to provide the guarantees and security they sought.
In addition, they had the benefit of a growing economy, defined by good employment in the manufacturing sector as well as opportunities from programs like the GI Bill. They also benefitted from rising housing prices and a stock market that performed fairly well, helping the personal savings portion of their retirement plan to grow. As a result, they entered retirement on solid financial footing, which allowed them to indulge their kids, the baby boomers of today.
Coupled with their parents’ financial security, boomers entered the job market with the wind at their backs. The growth of the technology and service sectors in the 1980s led to an abundance of white-collar jobs that offered lucrative incentive compensation. The economy and markets were strong and although DB plans were starting to go away, the birth of the 401(k) allowed for an easy way to save for retirement. As we moved into the ‘90s, the growth of the Internet created opportunities for online trading and individuals learned more about investing on their own. The housing market continued to rise, making home equity loans attractive and boomer consumption habits increased due to enabling from the credit card industry.
As a result, baby boomers approached the management of their assets in a decidedly different way from their parents. Growing up in primarily favorable economic times, and energized by solid economic growth for most of their early working years, baby boomers were often fearless and emboldened as investors. For the better part of the 1980s, 1990s and 2000s, many boomers focused on maximizing their rate of return in order to accumulate more wealth. Guarantees, however, were not necessarily a focus. Guarantees, or the lack of them, seemed to fall from our collective memories as did the stories told in history class of the Great Depression and bank failures. This lack of focus on guarantees meant any bumps in the road could cause significant problems to the retirement security of boomers.
Next week, the author discusses the Bad and the Ugly.