Where did baby boomers go wrong? This generation isn’t financially prepared for retirement
Retirement is right around the corner for baby boomers — if they haven’t already entered it — yet so many are financially unprepared.
Baby boomers, or those born between 1946 and 1964, expect they’ll need $658,000 in their defined contribution plans by the time they retire, but the average in those employer-sponsored plans is $263,000, according to a survey of 900 investors by financial services firm Legg Mason. Older boomers, who are 65 to 74, have an average of $300,000. Their asset allocation for all of their investments are also conservative, according to QS Investors, an investment management firm Legg Mason acquired in 2014, with 30% in cash, 24% in equities, 22% in fixed income, 4% in non-traditional assets, 8% in investment real estate, 2% in gold and other precious metals and 8% in other investments.
“They have less than half the assets they hope to have in retirement,” said James Norman, president of QS Investors. “That’s a pretty big miss.”
Americans across the country, and all age groups, are drastically under-saved for retirement. Only a third of Americans who have access to a 401(k) plan contribute to it, and previous research suggests the typical middle-aged American couple only has $5,000 saved for the future. Meanwhile, millennials may not be able to picture themselves in retirement at all, though are urged by financial professionals to make a habit of saving, if even only as little as $5.
There are a multitude of reasons people may not have enough for retirement, such as having to leave the workforce in between their prime years to care for loved ones, not working long enough to qualify for certain government benefits. or choosing to pay for their childrens’ college tuition instead of saving for their own retirement. Still, not saving enough was the biggest regret among older Americans, according to a survey of 1,000 participants by personal finance site Bankrate.com.
Generation X, or those born between 1965 and 1981, aren’t doing all that much better, though they have the benefit of more time to reach their financial goals. More of them have a defined contribution plan, according to the Legg Mason survey, with an average of $199,000 stashed away for a goal of $541,000 by retirement. They are also investing conservatively, with 25% in cash, 21% in equities, 17% in fixed income, 11% in non-traditional assets, 16% in investment real estate, 7% in gold and other precious metals and 4% in other investments. Conversely, QS Investors suggest their Gen-X aged clients have 80% in equities, which faces more risks from the stock market but could also realize higher returns.
Retirement isn’t the picture-perfect image of lounging on a beach with the idea of a 9-to-5 job long gone. Benefits aren’t the same, either — for example, in 1985, retirees could expect Social Security to cover most of their income and employers typically covered most health-care costs. Retirees 30 years ago also probably didn’t expect to live for decades after resigning at 65, whereas now people are being told to plan to live well into their 80s.
Americans know they’re not saving enough though, and some may think they’re even less prepared than they actually are — a study by the National Retirement Risk Index found 52% of all-income levels were at risk of falling short in retirement, while 57% of survey participants said they were at risk.
Aside from having a plan in place to save for retirement, and perhaps testing out that budget and lifestyle before jumping into it fully in retirement, Norman suggested reconsidering portfolio allocations. Though the standard theory is to reduce exposure to stocks as a person gets older, some say it’s best to keep most (or for some, all) of their portfolio highly exposed to equities, especially since they’ll likely live longer and need that income down the road. Still, everyone should understand their risk tolerance and what amount of exposure to risk they are comfortable with.