In this month's Big Picture column, contributing writer Dr. Somnath Basu takes a look on page 38 at the stark reality of baby boomers' retirement savings and paints a portrait that, by all accounts, is depressing.
The majority of financial advisors work with the top 7% to 10% of this demographic group. Even in this space, the odds of many boomers enjoying a retirement like their parents' are slim.
Advisors often relate tales of friends of clients in their mid-50s with high six-figure portfolios who come in and ask if they can retire in two years withdrawing high five-figure annual amounts. The record low interest rates of recent years may have curtailed the number of these visits as a new reality sets in.
But advisors and these types of potential clients have assets to work with and that gives them some choices and flexibility. The real problem isn't the so-called mass affluent, with $500,000 to $2 million in investable assets, although these folks are learning that-was it Yogi Berra who said?-the future isn't what it used to be.
For a moment, let's take a cold, hard-headed approach to the folks that turn up in surveys who never saved or whose average net worth is $25,000. For these folks, maybe the senior co-housing solution offered by short-lived CFP Board CEO Sarah Teslik is a realistic one.
But the real problem, as Basu recognizes, are the millions of boomers wedged between the mass affluent and those folks for whom saving and investing is a foreign language. Take a 60-year-old couple, each of whom has worked for more than 30 years, with a combined $400,000 in 401(k)s, IRAs and other assets. Ideally they could work to 70 but that would be unlikely.
Even if we assume interest rates return to normal levels and Social Security payouts continue to rise with inflation, the income generated from these various sources just doesn't cut the mustard. As Basu notes, a return to 3% or 4% interest rates results in income of $12,000 to $16,000. Dividend-paying stocks with modest growth potential might ultimately produce a better outcome, though Basu rightly questions this assumption.
After all, can a society in which the number of folks aged 65 or older jumps from 42 million in 2010 to 110 million in 2030 be expected to produce a stock market generating the same 7% to 8% return on equities that it did in the 20th century, when people checked out shortly after their productivity waned? Maybe, but maybe not.
In their later years, most retirees inevitably dip into whatever capital they have, as Nobel laureate Francis Modigliani's life cycle savings hypothesis suggests. Still, Basu correctly contends that the problem is "real and immediate" and could prove to be much larger than the 2008 financial crisis.
About 90 million people controlling most of the nation's assets will retire in the next 18 years and they will have sweeping clout. How it all plays out is anyone's guess.