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.
The Bad and the Ugly
The first sign of these bumps came in the early 2000s when the tech bubble burst. But those bumps turned into huge potholes in 2008 with the mortgage crisis and impending financial collapse, sending many boomer retirement plans completely off the road. From 2000 to early 2003, the stock market (as measured by the S&P 500) lost 41 percent of its value. Then, after recovering from that drop and reaching new heights, the market lost 51 percent of its value, this time in a span of only 17 months between October 2007 and February 2009 ("The Callan Periodic Table of Investment Returns," Callan Associates, 2011).
But it was not only stock market performance and the status of their 401(k)s that had boomers in a panic—it was the entire economic landscape and changing retirement picture. It seemed that too many factors were trending negatively and the method for retirement planning used by their parents no longer worked or existed for the boomers.
Many of those who had counted on their home as a retirement asset now found themselves underwater. Defined contributions plans have all but replaced traditional pension plans, so there are no longer many guarantees. Market volatility is increasing, leaving many boomers more uncertain about their retirement portfolios than ever. Finally, the outsourcing of manufacturing jobs has exacerbated unemployment, so many boomers are facing layoffs just when they should be hitting their prime earning years.
As a result, many boomers have been forced to scale back their expectations or even delay retirement in order to rebuild their lost savings. This is a sad reality for these boomers, but it can be even more tragic if their children and grandchildren continue with many of their bad savings habits.
"Some small changes in behavior from boomers today can help to set a solid foundation for building the more secure retirement plans of tomorrow."
A famous Business Week magazine headline from 1979 heralded "The Death of Equities," and was shortly followed by nearly 20 years of continuous stock market growth. The point is, predictions of that nature rarely come true, especially when they need to address a long time period. The same is true for retirement planning; just because something is a certain way today, doesn’t meant it will be that way 30 years from now.
One thing that never changes is the impact of good financial habits. If your boomer clients are experiencing problems with their retirement plan because they never developed a true strategy for building and protecting their savings, there is no time like the present to get started. Starting with a few basic steps can help them build something for the future, but it can also assist in showing their heirs that some level of financial security in retirement is not out of reach.
So what can the boomers of today do to help the workers of tomorrow develop better habits?
2006 whitepaper on financial literacy by the National Bureau of Economic Research indicates that a strong positive correlation exists between planning and wealth accumulation. Even something as simple as setting a household budget can make a big difference. Here are some actions that could contribute toward improving opportunities to accumulate retirement savings:
- Pay yourself first and establish a budget. All people that receive a paycheck need to make savings a routine activity, which means setting aside a specific amount from every paycheck for retirement savings and include that as part of an overall budget. If you don’t know how much money you have to spend every month, you won’t know how much is available to save.
- Maximize your 401(k) contributions. Obviously, it’s important for people that have access to an employer-sponsored 401(k) plan to enroll, but even more crucial is a directive to contribute as much as possible there and maximize any employer match that is available. If not, you are leaving money on the table. Similarly, it’s a good idea to escalate contributions with any salary increases to take full advantage of the match.
- Pay down debt. It’s likely that those without ample retirement savings have significant debt as well, including car loans, housing or credit card debt. It’s critical that people are active in managing that debt by developing a strategy for paying off debt, generally starting with highest interest rates first.
- Understand the role of guaranteed income. How we save for retirement in America has changed drastically in the past 30 years, especially when it comes to guaranteed retirement income. Boomers need to incorporate financial products, like annuities, that can help them address the new reality they face, particularly risks like longevity, inflation and funding retiree health care. Individual responsibility for retirement will only continue to grow, so the next generation will also need to become familiar with the whole retirement savings picture and the different ways they can build a portfolio. They need to get focused on the best way to add guaranteed income into their retirement plan.
If the boomers taught us anything, let it serve as a cautionary tale rather than an example, proving that above all, saving for retirement is a constant activity that begins with your first job. Other lessons can certainly be gleaned from their experience— a home is not a retirement asset, credit card debt is expensive and needs to be managed, aggressive investing is not for the short term. But the key factor to recognize is a simple mantra: A failure to plan is essentially planning to fail.
By helping your boomer client with developing a sound saving strategy, you’re also helping to build a new generation of savers that will have a better understanding of the challenges they’ll face during their retirement years.