Baby Boomers Slow to Save For Retirement

The first baby boomers are reaching their 60th birthdays, but the real shock may come when they contemplate retirement.
Most didn't start investing in 401(k)s soon enough, and relatively few Arkansas companies offer traditional "defined benefit" pensions. The future of Social Security is unclear.
The salvation for many boomers may lie in their far more frugal parents.
"You will see a massive amount of asset flow," said A. Wyckliff Nisbet Jr., an attorney at Friday Eldredge & Clark of Little Rock, whose area of practice includes employee benefits and estate planning. "In fact, that's going to make up ... some of the pay for boomers who haven't saved enough for themselves."
The wealth that the "Greatest Generation" amassed will be passed down to baby boomers, but it won't necessarily be in stocks and bonds.
"It will be in farms and Mama's house," Nisbet said. "And those assets will ... enhance their retirement security."
Bill Haught, a Little Rock attorney who handles estate planning and estate settlements, said baby boomers' parents estates were getting larger.
"What we're finding is more people are receiving larger inheritances now, and I don't know that's likely to change unless the economy drastically heads south and we see a big drop in the value of investments," he said.
But a lot of the baby boomer parents aren't so quick to leave everything to their children. Some are leaving it to charity, "figuring the kids ought to get something, but they don't need to be put on Easy Street," Haught said.
In the next couple of years, the first wave of more than 75 million baby boomers will start their retirement. People born between 1946 and 1955 had in 2004 an average net worth of $667,000, according to the AARP. But that average is skewed by some heavy hitters at the top end; the median net worth in that group was a far more modest $170,000.
Younger baby boomers, those born between 1956 and 1964, had an average net worth of $390,000 and a median of $115,000, the AARP said.
Justifiable Fear
Baby boomers' have a justifiable fear of running out of money in their retirement years. In that sense, they are in the same position as the previous generation, Olivia Mitchell, a Wharton professor of insurance and risk management, said in a July Knowledge@Wharton report.
"However, they face much greater uncertainty," Mitchell said.
In addition to the possibility that Social Security benefits will have to be reined in, health care costs may be higher.
Nisbet suggests employees invest as much as they can in 401(k) plans as early as they can. Unfortunately for baby boomers, 401(k) plans didn't become popular or widespread until about 15 to 20 years ago. Now baby boomers on the verge of retiring are working against the clock to earn any significant money from the retirement plan.
"The problem with a 401(k) plan, as it applies to baby boomers, is you can't get a whole lot in there in the last few years of your employment," Nisbet said.
A baby boomer who has worked for a large company for more than 30 years is on track to replace 88.4 percent of his income through a defined contribution plan, such as a 401(k), and with Social Security, according to a February report by Hewitt Associates LLC, a global human resources services company in Lincolnshire, Ill. But if the same worker hasn't contributed to the 401(k) plan, the projected income replacement falls to 61.5 percent, the report said.
Social Security Not Secure
Nisbet, 58, said he expected to see some money from Social Security, but he's not banking on it for his twenty-something children.
"Anybody with any actuary skills will tell you that Social Security ... is broke," Nisbet said. "It's a system that is a pay-as-you-go-along plan. It relies on people contributing today to pay out to people who retired yesterday and in prior years."
The system seemed to work smoothly when it was founded in the 1940s. Employees started working in their teens or early 20s and stayed on the job until they were 65. At the time, the average life expectancy after retirement was 13 years.
Now people are entering the work force later, often in their mid-20s, and taking an early retirement at 62. After retirement, people are projected to live another 20 years.
For a married couple today, both 60, the probability that one of them will live past the age of 90 is 62 percent, Christopher "Kip" Condron, president and CEO of AXA Financial of New York, wrote in the July Wharton report.
"What's happening is that you have folks [contributing to] the system for a shorter period of time that are going to live a lot longer than they did when [the Social Security] system was set up," Nisbet said.
But Nisbet doesn't think Social Security is going away anytime soon.
"Politicians are afraid to death to talk about it because a lot of the people who are retirees are voters," he said. "But something big is going to happen to it. I don't think it will disappear."
Haught also said he thought that Social Security was such a "political sacred cow that it's almost unthinkable that they won't have some sort of Social Security as a safety net."
But retirees are learning that they can't live off the Social Security benefits alone, Haught said.
The first warning sign of major changes in Social Security? Its benefits are now being taxed. If a worker earns more than $25,000 and files a single return, or if a married couple earns more than $32,000 and files a joint return, up to 85 percent of the Social Security benefits are subject to federal income tax.
"That is an oddity in retirement tax rules because ... you already paid income taxes on what you put into it," Nisbet said. "Why should you have to pay taxes again when it comes out?"
Nisbet said he thought the next step would be privatizing Social Security because it "is probably the worst investment over a lifetime that anybody can ask for. It is terrible."
The likely solution, he said, is something President Bush has suggested: self-managed investment funds that have the potential to earn better returns than Social Security.
401(k) Pros and Cons
On Labor Day 1974, the Employee Retirement Income Security Act of 1974 was enacted, which allowed for 401(k) plans to take off.
But workers were slow to adopt the new plan.
"It is now the dominate plan feature there is in the United States, and Congress has encouraged it," Nisbet said.
Employees with a 401(k) plan at work need to invest as much as they can in it, Nisbet said, not only for the value of long-term investing but because the contribution isn't taxed when it's taken out of a paycheck.
The 401(k) money is portable, so an employee who changes jobs can take his 401(k) plan with him to the new job.
One drawback to the plan is that some of the fees the professional manager receives are being passed on to the employee.
"Your friendly guy that helped you pick a bunch of funds for your plan could not only be getting a commission for selling it to you, but he could be getting a kickback that you're not even aware of," Nisbet said.
Another problem with the 401(k) is that many people make poor choices resulting in a retirement income that isn't enough to maintain their pre-retirement living standard, according to an April 2006 AARP Policy Institute report by John Turner.
Other workers don't contribute to a 401(k) plan even though their employer offers a matching contribution, Turner said in his report, "Designing 401(k) Plans That Encourage Retirement Savings: Lessons From Behavioral Finance."
Worse, a small number of workers turn over their investments too aggressively, resulting in high trading costs. And other workers take their benefits as lump sums, which might cause them to burn through their money before they die, Turner said.
"Workers as investors may be their own worst enemy," he said. "Many workers are uninformed about financial markets and lack interest in spending their time learning about them."
Pensions Disappearing
In August, President Bush signed the Pension Protection Act. The law's intent was to bolster the defined-benefit pension plan industry by forcing employers to increase the premiums that are paid to the Pension Benefit Guaranty Corp., which is an insurance fund that protects the pensions of 44.1 million American workers and retirees.
Nisbet said most Arkansas companies didn't offer pension plans anyway.
"And they would be foolish in setting one up now," he said. "The legislation that they passed — all it's going to do is accelerate the freezing or termination of existing plans. Employers just can't put up with it anymore."
Still, those baby boomers who do have traditional pensions are old enough that they would be in good shape even if their companies terminated the plans or froze the benefits.
"Pension plans are very age-sensitive. The older you are, the bigger your benefit," Nisbet said.
As boomers face retirement, the difference in outlooks will depend on planning, said Condron at Wharton School of Business at the University of Pennsylvania.
"I think there are people at one end of the spectrum who plan for retirement and worry about running out [of money], but they have done some good planning," he said. "At the other end of the spectrum, you have people who have done very little planning and have accumulated very little and don't know what they are going to do."