In light of the freight train of 77 million baby boomers that’s rumbling on a collision course with the nation’s entitlement programs and health care infrastructure, a conversation I had just the other day with a young mother of two about her outlook on retirement has a special poignancy to it.
“I’m 36, and all my life my parents, the media, and everybody else has been telling me to forget Social Security and Medicare because by the time I’m ready to retire, there will be nothing left. So we try to save as much as we can, but we never feel like it’s going to be enough.”
My very next question for her: So what’s your plan? As people young and old wonder and worry about their financial life after retirement, I’m reminded of a great quote from Chuck Noll, the fantastic former coach of the Pittsburgh Steelers, who said, “Pressure is something you feel only when you don’t know what you are doing.”
The pressure is on for the millions of Americans who wonder if they will have enough money to sustain them through their retirement. But with a proper plan, a lot of that pressure goes away.
Doing the Math
Some people might say that we are all saving too little and there is no other side to the debate. The evidence: Last year, the nation’s personal savings rate slipped into negative territory. According to the Bureau of Economic Analysis at the U.S. Department of Commerce, Americans since 2005 have been spending more than they’ve been earning for the first time since the Great Depression.
Does this portray a dire situation? In my view, it’s pretty serious, but not desperately so. This has a lot to do with the way the government calculates the nation’s personal savings rate as total disposable after-tax income minus consumption. What’s not in that figure are capital gains on investments, realized or not, and that includes the investments people have in 401(k)s.
Oh, and the government’s calculation doesn’t include the value of your home, which in the case of most baby boomers is greater than money earned on capital gains on investments, again including investments in 401(k)s. The extended period of historically low interest rates from 2001 through 2004 helped fuel a boom in housing purchases, which in turn helped drive home prices higher. The lower rates also led to a surge in mortgage refinancings, which prompted people to pull equity out of their homes. Last year alone, homeowners had an additional $900 billion in home equity money to spend, a big factor in driving the personal savings rate lower.
Even with all of that home equity money around, the state of our retirement savings is far from exemplary. According to a recent study by New York City–based management consulting firm McKinsey & Company, an alarming 50 percent of today’s 55-year-olds have less than $50,000 in their 401(k) plans.
Spending Slowdown
But is it possible to save too much? In a June 2005 report in the Journal of Financial Planning, financial planner Ty Bernicke examined federal statistics and discovered that while, early on, seniors tend to spend money on travel, hobbies, and their extended families, their spending slows down as they themselves slow down. This is a potentially important finding, because some financial advisers figure that retirees will continue to spend at the same rate until they die, and they rely on this assumption in projecting people’s savings needs.
Bernicke also found that this trend has been apparent over several generations of retirees, suggesting that baby boomers won’t be much different. The average net worth of American seniors actually grows as they get older.
So what about you? It’s crucial to realize that everyone’s situation is different, and that everyone needs a plan. Sit down with a financial planner and talk with that person about your life, your health, and your finances—all at once. Then decide how much you need to save. If you follow the plan and review it on a regular basis, your retirement readiness won’t remain a mystery.
