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Can The Baby Boomers Retire
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Can The Baby Boomers Retire

Doug Anderson, SVP, Research & Development, The Nielsen Company

SUMMARY: Nearly 39% of U.S. households—some 44 million—are headed by a Baby Boomer. Nearly 77 million Americans fall into the cohort born between 1946 and 1964. In a couple of years, that generation will begin to reach the traditional retirement age. Given all that has happened in the economy in the last eighteen months, will they be able to afford to retire?

Some of the parents and almost all of the grandparents of the post World War II Baby Boom lived through the Great Depression. Many, if not most, Baby Boomers grew up with their stories of hard times. And while those stories were always in the back of their minds, most Baby Boomers came of age in a world so full of promise that the idea of hard times coming to their front door was simply not conceivable. Sure, the earliest Boomers struggled along with everyone else during the recession of the early 1970s, but they were young enough to recover, and the great wealth creation decades of the 1980s and 1990s gave them a sense of invincibility.

That’s nearly $100,000 in lost assets for every household in the country…

The worst possible time

Today, many Boomers are feeling far from invincible. The drop in the housing market has removed three trillion dollars in home equity from the pockets of Americans. On average, that is nearly $40,000 in lost equity for each U.S. homeowner. Since Boomers have the highest rates of home ownership as well as the highest home values, they have lost much more than the average. Likewise, the current economic downturn has taken $11 trillion dollars in stock market wealth away. That’s nearly $100,000 in lost assets for every household in the country. And since Boomers are much more likely to have their money tied up in stocks, they have suffered a disproportionately large share of the losses—for many, at the worst possible time.

Unemployment, traditionally the bane of younger and more downscale workers and not something that strongly impacts those at the peak of their careers, has over the second half of 2008 and into 2009 begun to hit the Baby Boom hard. The rate of increase of unemployment nearly doubled for those aged 45-54 in the second half of 2008 versus the first, and increased far faster for those over 55. In past years, most older and longer tenured workers who lost jobs from downsizing could rely on early retirement packages and other benefits from their former employers. Today, those packages are going away as companies seek to cut headcount without incurring substantial severance charges.

Time is not on their side

Assuming a retirement age of 66, the oldest Boomers have only three years left to recoup lost money they took decades to save. The collapsing stock and real estate markets of 2008 alone wiped out four years of gains in the net worth of Americans, and 2009 has taken more. The youngest cohorts of the Baby Boom may still have time to recover, assuming a substantial long-term upswing in the economy, which is by no means guaranteed, but for the oldest Boomers, time may have run out.

New economic difficulties

Even without this current economic downturn, the U.S. economy would be on the verge of some serious difficulties caused by the aging and retirement of the Baby Boom. The Baby Boom is still the largest generation of Americans and their removal from the labor force and the costs of paying for their support—particularly for healthcare—over the next several decades will place enormous stress on the U.S economy.

Starting now, and continuing for more than 25 years, the number of persons who reach the retirement age of 66 each year will substantially outnumber the number of persons who turn 19 and are entering the labor force. In fact, beginning in a couple of years, shrinking generation sizes will mean that the number of persons who reach the age of 19 is smaller each year than the year before. The number of 19 year olds will continue to shrink until at least 2019. During that period, millions of Baby Boomers will retire and leave the labor force, lowering economic productivity.

The real burden will be in paying for pensions and healthcare…

The well is drying up

The real burden of the Baby Boom on the economy will be in paying for pensions and healthcare. Projections from the Office of Management and Budget (OMB) show that Social Security will have a shortfall by 2017—only about six years into the retirement phase of the Boomers—with the majority still to come. The fund remains solvent for much longer though, all the way out to 2041, when the reserve trust fund runs out. At that point, with current standards of funding and payments, money coming into the Social Security system from payroll deductions will cover only about 70% of the cost of benefits.

Medicare and Medicaid, however, are much different stories. Because they are much younger programs, neither has as large a reserve fund as Social Security. And even though the cost of living has been going up steadily, the costs of healthcare have gone up much, much more. Medicare will require incremental sources of funding by 2019 when the Boomers have 12 more years to retire, and much longer to live.

As many as 60% of persons will need some form of long-term care…

The golden years?

As many as 60% of persons living beyond the age of 65 will need some form of long-term care, either at home, in a nursing home, or in an assisted living facility. Costs for a year of care average $57,000 today (much higher in metro areas), and are increasing faster than the rate of inflation, and are expected to be around $100,000 in the middle of the Baby Boom retirement years. Since few Boomers have long-term care insurance—and Medicaid coverage is only for the very poor—paying for long-term care will quickly deplete the savings of many households.

The age of 24 has become the new 18…

Empty nest syndrome delayed

Nearly two-thirds of the very youngest Boomers still have children under the age of 24 living at home. And nearly 20% will still have children under the age of 25 for at least ten more years. And while the children of the Baby Boom will be the best educated generation of Americans ever, getting them out on their own is taking longer—the age of 24 has become the new 18. Expect to see more multi-generational households as the parents of Boomers live longer and need more support. Many Boomers may have full households at the time when earlier generations were living on their own.

On the other hand, nearly one-quarter of all Boomer households today are single adults living alone. This grows to nearly one-third for the oldest Boomers, and will increase rapidly as the generation ages. The share of those singles who are women will also grow rapidly as the longevity advantage that women have over men plays out. Over the next decade, two new types of Boomer households will emerge, elderly Boomers caring for their parents, and single Boomers—predominantly female in the older ages—living alone. New household structures may also emerge with more unrelated individuals living together, as Boomers band together to share costs and company.

Financial assets of the Baby Boom

In terms of income, the Baby Boom is at the top of the chart. Boomers are in their peak earning years with a median income of nearly $64,000—much higher than either the generations who came before (median of $32,000) or those who followed (median of $50,000). The Baby Boom is above average for all income ranges in excess of $65,000 and peaks at the very top.

Click to image to enlarge.

However, the Baby Boomers have not been particularly good savers. The table below shows the average market value of all financial assets excluding real estate based on the 2006 Consumer Expenditure Survey (i.e., before the recent economic downturn).

While older Boomers have certainly saved the most, they also have a higher share of their assets in securities—over 70% for the two groups closest to retirement versus around 60% for those farther away—and would have been hit by the current stock market woes more heavily.  The younger Boomers are saving more, averaging over $7,000 per year going into insurance and pensions versus only $4,200 for those closest to retirement.

Real estate makes up a disproportionate share of the net worth of most households, but years of moving for jobs and trading up in competitive housing markets as well as taking equity out for home improvements or college funds have placed the Boomers in the position of still paying for their homes at ages when their parents were long done. More Boomers rent (24%) than own their home free and clear (17%). Those who own their home outright increase with age, but around 45% of households with a head aged 63 or 64 still owe at least something on the mortgage for their primary residence.

Can the Baby Boom afford to retire?

While some can, the majority will struggle and have to make substantial compromises to the plans they once had. Some smaller, but still significant share, will simply have to continue to work in whatever jobs they can find for as long as they can, or else take very large cuts to their standard of living. Those fortunate enough to have sufficient insurance coverage will be able to weather most of the healthcare issues they may face, while those without coverage will see their nest eggs quickly diminish. Many will end up relying on Medicaid and other government programs.

Over the next several decades, many of the service jobs once held by teens and younger workers will be held by older ones. As the number of younger people continues to fall, there will be many older workers ready to take their places. Marketers will be required to rethink their portfolios to ensure they have products able to meet the needs of an ever growing numbers of older Americans. The key question that only time will answer is this: Even if marketers can restructure portfolios to meet the needs of the changing U.S. population, will there be enough consumers who can afford what there is to sell?

Sources:

Alzheimer’s Association—2009 Alzheimer’s Disease Facts and Figures

Bureau of Labor Statistics—2006 Consumer Expenditure Survey

Census Bureau—2007 American Community Survey

The Nielsen Company

The Washington Post—Stocks soar, but dismal signs remain (March 3, 2009)

MSNBC—Boomers face stark choices in bleak economy (March 11, 2009)