Retirement: From theory to reality

For decades, demographers, marketers and pollsters have been carefully tracking baby boomer trends, from the increasing demand for classroom space during their early school years to the rise of the McMansion as they began to raise families of their own.

One of the most closely watched areas focused on retirement readiness as boomers navigated a changing labor market that saw the demise of traditional pensions and the rise of the 401(k). Now many of the oldest boomers — those born in 1946 — have moved into retirement. Despite the dire predictions of their dismal retirement prospects, many of them are doing just fine.

A recent report from the MetLife Mature Market Institute, “The Oldest Boomers: Healthy, Retiring Rapidly and Collecting Social Security,” found that the leading edge of this groundbreaking generation continues to bust myths.

ALREADY RETIRED

Despite the perception that most boomers would retire at older ages because they wanted to keep working or needed to keep saving, a little more than half — 52% — of those surveyed had already retired. A telephone survey of more than 1,000 individuals born in 1946 and representative of boomer demographics was conducted in late 2012 when they were all 66.

More than half of those currently retired — 54% — said they did so earlier than planned, with many citing health challenges or job losses as the cause. That matches similar experiences of older retirees documented by the Employee Benefit Research Institute year after year in its annual Retirement Confidence Survey.

Although a majority of these early boomer retirees said their retirement income is less than when they were working, many reported an improved standard of living, thanks to lower expenses and guaranteed income from Social Security. Only 20% of the respondents said their lifestyle has suffered in retirement.

I guess there's something to be said for the increased quality of life that comes from trading in a soul-sucking daily commute for the leisure of shopping for midweek bargains at the grocery store or taking advantage of early-bird dinner specials while the wage slaves are still stuck in traffic. (Think of it as pre-theater chic rather than greedy geezer gauche!)

The vast majority of the oldest boomers — 86% — are collecting Social Security benefits, according to the MetLife report. Although 66 is the current age for full retirement benefits for anyone born from 1943 through 1954, half of the respondents said they collected Social Security benefits earlier than they had planned. The oldest boomers who started benefits before age 66 forfeited the opportunity to maximize their lifetime income. I guess they didn't have a good financial adviser to guide them in making those crucial benefit decisions.

REPENT IN HASTE

Remember, if you have clients who jumped the gun on claiming reduced Social Security benefits early and now regret it, they may be able to undo their hasty decision. If they are within the first 12 months of claiming, they can withdraw their application for benefits and repay everything they have received (including any spousal or minor dependent benefits collected on that earnings record) and restart benefits at a higher level later.

Or if they miss that initial 12-month window, they can wait until their full retirement age of 66 and voluntarily suspend their benefits, allowing them to accrue delayed retirement credits worth 8% per year between 66 and 70. As a result, they restore their retirement benefits to nearly the same benefit level as if they had waited until their full retirement age to begin collecting them.

The math works like this. Say you are entitled to benefits of $2,000 per month at your full retirement age of 66, but you decide to collect them early at 62. In that case, you collect $1,500 per month but later regret your decision.

At 66, you could voluntarily suspend your benefits and they would earn delayed retirement credits of 8% per year between 66 and 70. At 70, you would resume collecting your Social Security benefits, which would now be worth 99% of your full benefit at your normal retirement age, or about $1,980 per month (75% x 1.32% = 99%). The actual amount would be larger, as interim cost-of-living adjustments also would be applied.

A separate study by The Pew Charitable Trusts confirmed that early boomers born from 1946 through 1955 are on track to enjoy a secure retirement. But the report, “Retirement Security Across Generations,” cautions that early boomers may be the last generation to exceed the wealth of cohorts that came before them.

YOUNGER ARE WORSE OFF

“Replacement rates have steadily declined across the cohorts studied, putting the youngest on shaky financial footing,” the report concluded. It cited disappearance of traditional pension plans, loss of home equity following the housing bust, increase in debt loads and reduction in Social Security benefits due to increasing retirement age for full benefits.

A new report from the Insured Retirement Institute, “The Great Divide,” confirms the disparate retirement prospects of early and late boomers. The report found that late boomers, now in their early 50s, are significantly less confident in their ability to retire securely due to their lower savings rate and heavier reliance on 401(k) plans, compared with earlier cohorts. Part of it could be fear of the unknown, as most late boomers are still working compared with the more than half of early boomers who are already retired.

That means financial advisers have their work cut out for them. While their early boomer clients may enjoy a more secure retirement than many of them have imagined, younger clients will need all the help they can get.

Mary Beth Franklin is a contributing editor at InvestmentNews. [email protected] Twitter: @mbfretirepro