What is the biggest difference between baby boomers' retirement and that of their parents? Many people would say disappearing pensions. But even in the heyday of traditional pensions in 1979, fewer than 40% of U.S. workers were covered by a defined benefit plan, according to the Employee Benefit Research Institute. And many of those workers never stayed long enough at a single employer to collect a pension.
I contend that the biggest difference between retiring boomers and previous generations is the increasing levels of debt, both before and after retirement. For many of our parents, the only thing they bought on time was a major appliance or a car. Meanwhile, boomers were already racking up credit card bills in college. Some of them may still be paying for those Friday night pizza parties decades ago.
Ongoing debts make it harder for people to save for retirement and increases their income needs once they retire. A new study about boomers' retirement prospects commissioned by Bankers Life Center for a Secure Retirement backs me up. A majority of pre-retirees in the study — 53% — think they will pay off their debts before retirement, but only 23% of current retirees report being debt free.
Six in 10 boomers who are still working said they are spending as much or more than their household income, according to the study “Paying for the New Retirement: Responsibilities and Challenges for Middle-Income Boomers.” That makes it difficult to build their retirement nest egg.
(Related read: New, simple retirement spending strategy takes on the 4% rule)
Carrying debt into retirement is even harder. Nearly 40% of retired boomers said they have had to adjust their spending to compensate for a financial shortfall in retirement, according to the study that was based on an online survey of 1,000 middle-income boomers between the ages of 52 and 70. Participants included both workers and retirees with annual household incomes between $25,000 and $100,000 and investable assets of less than $1 million.
Five years after the oldest boomers reached the traditional retirement age of 65, nearly 40% identify themselves as retired. This generation of 75 million Americans is on the leading edge of what the study calls the “new retirement” — the transition from institutional responsibility for retirement financial security to an increasing amount of individual responsibility.
For some, that transition is anything but smooth. Between the debt burdens and continued spending, 69% of boomers say they don't believe — or don't know — if they have enough money to live comfortably to 85, the average life expectancy, according to the Social Security Administration. For many, poor retirement planning, lack of savings and limited knowledge of financial tools and investment vehicles have compounded the problem.
Some boomers are even tapping home equity to pay for their children's college education while deferring saving for their own retirement. Time value of money is not working in their favor. “That dollar you save when you are younger is so much more valuable than the dollar you save when you are older,” said Scott Goldberg, president of Bankers Life.
“There is a huge segment of the population that is in desperate need of financial advice,” Mr. Goldberg said. “It is an underserved market that is underinsured and underprepared for retirement.”
What does this mean for financial advisers? “Although the middle-income market may not offer the same financial returns as working with more affluent clients, they are clearly in need of the products and advice we offer,” Mr. Goldberg said. “I think that advisers can figure this out by aligning themselves with insurance carriers, broker-dealers and registered investment advisers that are prepared to service this segment.”
That means you may be meeting with some first-time clients who are older — and less prepared — than you would hope. But Mr. Goldberg said it is never too late to improve a client's outlook for financial security.
“Beginning to pay down debt and developing an action plan are critical first steps toward a secure retirement,” he said. In addition, he recommends that boomers and advisers familiarize themselves with their Social Security claiming options, noting that delaying benefits until full retirement age or later can result in a bigger paycheck for the rest of their lives. Unfortunately, many survey participants didn't even realize that the full retirement for Social Security benefits has increased to 66 for those born from 1946 through 1954 and will gradually increase to 67 for those born in 1960 or later.
There is clearly a need for financial triage to help the deluge of newly retired boomers figure out how to bridge their income gaps and insure their needs. “There is no higher calling in our industry than to reach out to this segment of consumers,” Mr. Goldberg said.
(Questions about new Social Security rules? Find the answers in my new ebook.)
Mary Beth Franklin is a contributing editor to InvestmentNews and a certified financial planner.