Baby Boomer Bust?: How the Generation of Promise Became the Generation of Panic
212
Baby Boomer Bust?: How the Generation of Promise Became the Generation of Panic
212Paperback
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Product Details
| ISBN-13: | 9781600377518 |
|---|---|
| Publisher: | Morgan James Publishing |
| Publication date: | 04/15/2010 |
| Pages: | 212 |
| Product dimensions: | 5.90(w) x 8.90(h) x 0.70(d) |
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CHAPTER 1
The Expectation Gap
Most of our parents had pensions, Social Security and the value of their homes to fund their retirements, creating a certain expectation in their children that our post-career lives would be somewhat comfortable as well. Unfortunately, our generation generally doesn't have pensions or defined-benefit retirement plans as formally defined (unless perhaps if you're a union worker or public employee), we've seen the value of our homes diminish, and even if Social Security — a sort of transfer payment from the next generation to ours — is still around when we need it, the maximum payment (currently about $3,000 per month) doesn't really excite anyone. Oh, yeah, and one other thing: Our cherished 401Ks and IRAs have tanked.
My colleagues and I conducted a survey of a broad spectrum of Baby Boomers in Spring 2009 — when the effects of the economic downturn of 2008/2009 settled in, after the initial shock and numbing period of late 2008/early 2009. Because the online sample was not random, the results are not projectable to the entire population, but nonetheless, they provide us with a broad-scale qualitative snapshot of the feelings, behavior and the adjustments Baby Boomers made as a result of the downturn. (If anything, our panel was more upscale than the population at large, thereby giving us a good "acid test" of the impact of the recession.)
We asked our online panel many questions, but one of the most important was, "How do you plan to pay for your retirement?"
The sassiest answer? The Lottery
And what about housing? Our parents' generation practically went to the bank on the appreciation in the value of their homes. Could the Baby Boomers ride that escalator as well?
The bad news: Almost half of the people we talked to estimated that the value of their homes declined by 10% to 30% in the last 12 months.
The good news: Almost 60% of the Baby Boomers we talked to own their homes and think they will be fine in terms of being able to make their mortgage payments going forward. Surprisingly, only about 8% fear that their houses are "under water," meaning that the value of their home is less than the balance owed on their mortgage.
So with cautious optimism, it looks as if Baby Boomers will get some return on their housing investment. Of course, that's all dependent on the housing market coming back in future years, what they actually paid for their house and how long they've held it, how many refinancings they have been forced — or will be forced — to do, and, of course, their employment now and in the future.
As one Baby Boomer told us, despite the fact that their loan-to-value ratio is only at about 20%, "it's all dependent upon staying employed." Another added, "the answer is based on the condition of my husband's employment. With difficulty I could maintain my home with my present salary, but any cost increases would force me to sell it or find a second job."
And now for the coup de grace. We invested in a magical panacea called a 401K, which was designed to incent savings that would accumulate tax-free over the years and ride the never-ending rise of the stock market; at a mere 6% or 7% a year, our financial advisors told us, the cumulative value of what we stashed away would double every 10 to 12 years.
Mesmerized, we ogled at the spreadsheets. Jesus Christ, honey! In 2020, our 401K will be worth $3 million. Maybe we should start looking for that little shingle-style bungalow with a water view on Nantucket.
Emboldened by a 14,000 Dow in 2007, we upped the ante. Geez, maybe that little bungalow should become a 5,000square-foot waterfront McMansion.
Then the bottom fell out.
The 14,000 Dow from 2007 became the 6,700 Dow in March 2009. Down more than 50%, which of course means that the Dow will have to increase by more than 100% just to get back to where it was in 2007.
Instead of that waterfront McMansion on Nantucket, we may have to settle for a modest retirement village in Nanuet.
Without doubt, the economic downturn of 2008/2009 has wreaked havoc on the lives, dreams, aspirations, consumption habits and net worths of our cherished Baby Boomer generation. We found a number of interesting and sometimes frightening themes in our survey of this vaunted generation.
Let's start by tackling the veritable 800-pound gorilla in the room — retirement.
A Less Than Idyllic Retirement
More than 30% of the Baby Boomers we talked to told us, "Frankly, I don't think I'll ever be able to retire." About 43% of them thought they were okay before the current economic downturn but now doubt their ability to retire based upon the current value of their assets.
A prevailing thought was expressed by one of our respondents: "The idea of retirement has become further and further away for the average and below-average citizens in this country." And another told us: "I will not be able to retire and maintain my present lifestyle."
According to Dr. Ronald Manheimer, former Executive Director of the NC Center for Creative Retirement at UNC Asheville, "There are several studies and surveys out there done by academic researchers and financial services companies that paint a dire picture of Boomers' ability to retire soon or ever. In the aggregate this is probably true though most will eventually retire either because they want to or have to. They will simply adjust ... not painlessly, but resignedly. People will have to sell their homes and move into apartments or low-cost condos. They will have to find satisfaction and meaning in their later years through other means than greater wealth would have allowed."
Okay? So how bad is it really?
We asked our panel of Baby Boomers how they planned to fund their retirements. The leading sources were 401Ks (63%), Social Security (61%) Personal Wealth (41%, but that number is somewhat redundant with 401K and housing), and Sale of Existing Residence (35%). Only 28% mentioned that they had some sort of pension.
So exactly how adequate — or not — are these resources to fund a decent retirement?
I decided to address the point head-on by performing a simple analysis. Since our Boomers told us that Social Security, their 401Ks and selling their existing residences were their primary retirement funding vehicles, we took the average value of these assets across the U.S. and uncovered some interesting findings.
Let's say a Baby Boomer is 53 today — right smack in the middle of the Baby Boomer Bubble. Here's what they're looking at in terms of a monthly budget if they choose to retire at 62, 65 or 67. I performed the analysis under two different scenarios: a) selling their primary residence and b) keeping their primary residence.
This analysis was based upon a current 53-year-old having an average household 401K or IRA balance of $100K (which is generous; the Center for Retirement Research at Boston College estimates that the average family approaches retirement with only $60K in retirement savings), the national average current home value of $180,100 and a national average mortgage balance of $108,658. I allowed for an initial 15% bump in 2010 in home and 401K values (to allow for an initial recovery) and 6% a year thereafter. I also anticipated each household saving an additional $3K per year through retirement age and collecting the current maximum Social Security benefits (single wage earner household with benefits for non-working spouse) for their retirement age unadjusted for future Cost Of Living Adjustments. The total net worths (assuming both with and without the sale of their primary residence) were annuitized through age 87 at 6% annual growth. Finally, I assumed 25% for taxes and Medicare and/or health insurance. (NOTE: for age 65, the Full Retirement Age of 66 years and 2 months was utilized for the calculation of Social Security benefits).
The monthly budget numbers aren't draconian by any means — particularly in some regions of the country — but they are, by most standards, modest. So for most Baby Boomers the dream of retirement as that frolic on the beach with Dennis Hopper is exactly that — a dream.
No wonder 17% of Baby Boomers told us, "I plan to work until I drop because I have to."
So here's the retirement conundrum. Based on national averages, the monthly retirement budget predictably increases as you defer retirement. However, this implies that you have the ability to defer retirement, in other words, you manage to keep yourself employed, not an easy trick in today's economy.
But, if a large number of Boomers are lucky and manage to remain employed to 67 — or even older — this could create a logjam at the entry level of the employment base, which, of course, would mean fewer people from subsequent generations contributing to the Social Security Trust. On the other hand, if a Boomer is laid off, he/she would be forced to dip into what otherwise would be their retirement savings to fund their living situation today. And, if they have children of college age? WHAM! BAM! ZONK!
Social Insecurity?
When we asked our Boomers about Social Security, one of them answered: "It's the largest Ponzi scheme going."
An interesting, although not completely accurate, analogy.
Ponzi schemes work as long as the base of the pyramid is wider than the peak. Frighteningly, the generation behind ours — the ones who will fund our Social Security payments — is smaller in number than our generation. So if Social Security is, indeed, a Ponzi scheme, we're in a lot of trouble. (In effect, we'd be being Bernie Madoffed by the U.S. government.)
Indeed, Social Security is probably one of the most misunderstood, if not anxiety-inducing, institutions in modern America. Is it a trust fund with our contributions stashed away in some mythical bank for us to collect when our time comes? Is it a transfer payment from one generation to another? Is it some sort of increasingly insolvent bubble that will one day burst just like the Tech Bubble of the 1990s and the Sub-Prime Mortgage Bubble of today? Or is it, indeed, "the world's largest Ponzi scheme?" It seems as if most of us either don't really know, don't want to know or are just writing it off. As one Boomer put it, "I'm not counting on Social Security being around by the time I'm eligible to collect."
So what's the reality? Will Social Security be around for us Boomers to collect?
The news is really not so bleak. Social Security is both a transfer payment and a trust. As currently designed, the payroll tax of 12.4% (shared equally by employees and employers) more than covers the benefits doled out to retirees. The surplus is then put into a trust fund that is invested in government bonds.
So far, so good, right?
But here's the kicker. In the year 2017, projected total benefits paid will be in excess of payroll taxes collected. So Social Security will have to start supplementing the taxes with interest earned on the bonds in the trust fund. This may not be such a terrible fate; we'd live off bond interest, just like those "trust fund babies" most of us envy. (Author's Note: as this book was being written, it was reported that, due to lower payroll tax payments as a result of the recession, the surplus may actually be wiped out in 2010, seven years ahead of schedule; of course, if we have other "boom" years in the future, that can move things in the opposite direction. Accordingly, this analysis may swing a few years in either direction over time)
In 2027, though, projected benefits paid to retirees will be in excess of what can be financed by both the taxes collected plus the interest earned on the trust fund. Now at that point, we are going to be forced to commit the unpardonable sin of cutting into principal. We'll need to sell a portion of the bonds each year to make the benefit payments — not such a good idea.
In 2040, the trust fund is projected to be completely depleted and, if nothing is changed in the interim, the payroll taxes would have to be raised to 16.7%, a 35% increase, to fund the benefits paid to retirees. In 2082, the payroll tax would have to be raised to 17.8%.
So, with a little bit of luck, it looks like Social Security will be around for most of Baby Boomers' lifetimes. Various proposals have been made to either raise more revenues (one idea suggested was to invest the trust fund in equities instead of government bonds, which in hindsight is a not so good idea!) or decrease benefits NOW so as not to have to "fall off the cliff" in 2040. What's really frightening is that Social Security was designed to cover only a portion of a retiree's monthly budget (41% of preretirement earnings up to a designated cut-off), which begs the question: What happens when retirees run through their other sources of income? (Our examples in the previous section assumed that total net worth would be depleted by age 87.)
So, to answer our original question, is Social Security truly a Ponzi scheme? Currently, three workers contribute for each retiree, but, again, right now Social Security is still generating a surplus (at least until 2010). By 2035, it will be two employees contributing per each retiree.
You decide.
Impoverished Millionaires?
At the beginning of Austin Powers: International Man of Mystery, both secret agent Austin Powers and his nemesis, Dr. Evil, cryonically frozen in the 1960s, are thawed in the 1990s. Dr. Evil, up to no good, reveals he stole a nuclear weapon and immediately demands a ransom of "One Million Dollars!"
Cut to widespread bewilderment underscored by deadpan silence. (Later, when Dr. Evil realizes how times have changed, he ups his ante to $100 billion.)
Truth be told, a millionaire isn't a millionaire any more, but it certainly beats the alternative. Interestingly, or perhaps, predictably, many Baby Boomer millionaires don't feel so secure. Surprisingly, 18% of them described themselves as either "Compromised" or "Poor" as a result of the downturn.
And our Baby Boomer millionaires aren't too sanguine about their employment status either: 43% expressed some sort of discomfort with their current employment situation (including 7% who had recently been laid off and 2% who had to hold down several jobs to get by). Predictably, this had a ripple effect on their housing situations with 28% of our Baby Boomer millionaires expressing discomfort over being able to make their mortgage payments in the future.
And their retirement plans? 50% responded positively to, "Before the economy turned I thought I was fine. Now I'm not so sure." 17% went so far to say, "I never believed that my personal assets would be sufficient to pay for my retirement." Remember, these are millionaires saying that their personal assets are NOT SUFFICIENT to pay for retirement!
No wonder that 27% of our Baby Boomer millionaires expressed either a Significant or Overwhelming amount of stress in their lives due to the downturn.
"My job is at risk, so it colors my thinking and comfort level," one of them told us. Another confided, "I was downsized in January. Need to dip into savings until a new job is found." Then, the double-whammy: "Both my husband and I had jobs eliminated late last year." Alternatively, we have our Back-to-Basics Boomer Millionaire who told us, "We are pretty frugal and derive our satisfaction in simple ways, so it hasn't been much of a change for us."
An interesting response that indeed proves the coin has another side: "I work for a university. Our enrollment is up 8%." Perhaps the reason enrollment is up is because overall employment is down, which begs the question, Is higher education a counter-cyclical growth industry?
Employment Angst
Worrying about staying employed is an anxiety not solely restricted to our millionaire Boomers. 47% of our total Boomers group expressed some sort of fear or discomfort about their employment status going forward:
• 12% claimed they worked for a big company and were worried about their jobs
• 2% were public employees who worried about their jobs
• 6% were recently laid off and are looking for new jobs
• 25% were self-employed and mentioned that business "was not so good"
• 2% told us they had to hold down several jobs to get by
Comments akin to, "My husband works for a modest-sized company and I would say his job is tenuous, too, because it's dependent upon the travel industry," or "I work for a small business and feel secure for now but I think I'll be laid off next winter if things don't pick up," and "Had to lay off most of the people who work for me and change assignments," or "I work for my town as an art instructor. ... I assume my job could be cut at any time," set the tenor of the group.
Another boomer told us, "We are towards the end of our earning potential. My husband and I are really feeling some major down-turns financially. We were forced to pay our taxes on credit cards — at 22%. ... If we lose our house it will be the last one we own. My hubby is 56 years old. ... he now repairs metal roofs by himself. He cannot find someone to hire him outright ... again, I emphasize a Baby Boomer is at the end of their earning potential. What now?"
(Continues…)
Excerpted from "Baby Boomer Bust?"
by .
Copyright © 2010 Roger Chiocchi.
Excerpted by permission of Morgan James Publishing.
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Table of Contents
PART I The Perfect Storm,
Introduction: Wipeout,
Chapter 1: The Expectation Gap,
Chapter 2: So How Did We Get Into This Mess? — A Tragicomedy of Greed, Avarice, Deceit, Idealism and Horror,
Chapter 3: Birds of a Feather,
PART II Left in Its Wake ...,
Chapter 4: Empty Bucket,
Chapter 5: What Do the Simple Folk Do?,
Chapter 6: Shattered Dreams,
Chapter 7: Disrupting News,
Chapter 8: New Beginnings,
Chapter 9: Jeep Thrills,
Chapter 10: If You Can't Take the Heat, Step Into the Kitchen,
Chapter 11: No Script,
PART III Lifeboats and Riptides,
Chapter 12: (Actually Chapters 11, 7 & 13),
Chapter 13: Death Is Not an Option,
Chapter 14: The End of the World as We Know It?,
End Notes,
Index,