By DAVE CARPENTER, AP Personal Finance Writer Dave Carpenter, Ap Personal
Finance Writer Mon Dec 27, 9:33 pm ET
CHICAGO Through a combination of procrastination and bad timing, many baby
boomers are facing a personal finance disaster just as they're hoping to
retire. Starting in January, more than 10,000 baby boomers a day will turn 65,
a pattern that will continue for the next 19 years.
The boomers, who in their youth revolutionized everything from music to race
relations, are set to redefine retirement. But a generation that made its mark
in the tumultuous 1960s now faces a crisis as it hits its own mid-60s.
"The situation is extremely serious because baby boomers have not saved very
effectively for retirement and are still retiring too early," says Olivia
Mitchell, director of the Boettner Center for Pensions and Retirement Research
at the University of Pennsylvania.
There are several reasons to be concerned:
The traditional pension plan is disappearing. In 1980, some 39 percent of
private-sector workers had a pension that guaranteed a steady payout during
retirement. Today that number stands closer to 15 percent, according to the
Employee Benefit Research Institute in Washington, D.C.
Reliance on stocks in retirement plans is greater than ever; 42 percent of
those workers now have 401(k)s. But the past decade has been a lost one for
stocks, with the Standard & Poor's 500 index posting total returns of just 4
percent since the beginning of 2000.
Many retirees banked on their homes as their retirement fund. But the crash
in housing prices has slashed almost a third of a typical home's value. Now 22
percent of homeowners, or nearly 11 million people, owe more on their mortgage
than their home is worth. Many are boomers.
Michael Vanatta, 61, of Vero Beach, Fla., is paying the price for being a
boomer who enjoyed life without saving for the future. He put a daughter
through college, but he also spent plenty of money on indulgences like dining
out and the latest electronic gadgets.
Vanatta was laid off last January from his $100,000-a-year job as a sales
executive for a turf company. And with savings of just $5,000, he's on a budget
for the first time. In April, he will start taking Social Security at age 62.
"If I'd been smarter and planned and had the bucks, I'd wait until 70," says
Vanatta, who is divorced and rents an apartment. "It's my fault. For years I
was making plenty of money and spending plenty of money."
Vanatta is in the majority. Some 51 percent of early boomer households, headed
by those ages 55 to 64, face a retirement with lower living standards,
according to a 2009 study by the Center for Retirement Research at Boston
College.
Too many boomers have ignored or underestimated the worsening outlook for their
finances, says Jean Setzfand, director of financial security for AARP, the
group that represents Americans over age 50. By far the greatest shortcoming
has been a failure to save. The personal savings rate the amount of
disposable income unspent averaged close to 10 percent in the 1970s and `80s.
By late 2007, the rate had sunk to negative 1 percent.
The recession has helped improve the savings rate it's now back above 5
percent. Yet typical boomers are still woefully short on retirement savings.
Even those in their 50s and 60s with a 401(k) for at least six years had an
average balance of less than $150,000 at the end of 2009, according to the
EBRI.
Signs of coming trouble are visible on several other fronts, too:
Mortgage Debt. Nearly two in three people age 55 to 64 had a mortgage in
2007, with a median debt of $85,000.
Social Security. Nearly 3 out of 4 people file to claim Social Security
benefits as soon as they're eligible at age 62. That locks them in at a much
lower amount than they would get if they waited.
The monthly checks are about 25 percent less if you retire at 62 instead of
full retirement age, which is 66 for those born from 1943 to 1954. If you wait
until 70, your check can be 75 to 80 percent more than at 62. So, a boomer who
claimed a $1,200 monthly benefit in 2008 at age 62 could have received about
$2,000 by holding off until 70.
Medical Costs. Health care expenses are soaring, and the availability of
retiree benefits is declining.
"People cannot fathom how much money will be needed to simply cover
out-of-pocket medical care costs," says Mitchell of the University of
Pennsylvania.
A 55-year-old man with typical drug expenses needs to have about $187,000 just
to cover future medical costs. That's if he wants to be 90 percent certain to
have enough money to supplement Medicare coverage in retirement, the EBRI said.
Because of greater longevity, a 65-year-old woman would need even more to cover
her health insurance premiums and out-of-pocket health expenses: an estimated
$213,000.
Employment. Boomers both need and want to work longer than previous
generations. But unemployment is near 10 percent, and many have lost their
jobs.
The average unemployment period for those 55 and older was 45 weeks in
November. That's 12 weeks longer than for younger job-seekers. It's also more
than double the 20-week period this group faced at the beginning of the
recession in December 2007.
If financial neglect turns out to be many boomers' undoing, challenging
circumstances are stymieing others.
Linda Reaves of Silver Spring, Md., never had much opportunity to save as a
single mother raising two sons and a daughter. After holding a variety of
positions over the years hotel office manager, research analyst for a
mortgage company, hospital mental health counselor she was still living
paycheck to paycheck. Then she was laid off in 2007 at the age of 57.
She entered a training program to learn new skills, but all she has found since
is a string of temporary jobs. In her daily quest for clerical or
administrative work, she competes against much younger applicants.
Reaves, who turns 60 this month, plans to work until she's at least 70 and then
wants to travel, even if she doesn't know where the money will come from.
"I just keep going. I don't really worry about it," she says.
Add this all up, and there's a "slow-burning" retirement crisis for boomers,
says Anthony Webb, a research economist at the Center for Retirement Research.
"If you have a crisis where the adverse consequences are immediately clear,
then people understand that they have to do something," Webb says. "When the
consequences will be felt 20 or 30 years in the future, the temptation is that
we kick the can down the road."
As a result, he believes many won't change their behavior.
For less affluent boomers, it won't take that long to feel the pain of poor
planning. Concerns about financial trouble will hang over many of those 65th
birthday celebrations in 2011.
Many seem to view their plight through rose-colored granny glasses. An AARP
survey last month of boomers turning 65 next year found that they worry no more
about money than they did at age 60 before the recession or the collapse of
home prices. But in an acknowledgement of reality, 40 percent said they plan to
work "until I drop."