Retirement Planning: A Generation In Trouble

As a late boomer, I often feel I am watching my generation running en masse for the edge of a cliff like so many lemmings. Amazingly, most of the lemmings do not see the cliff directly ahead of them. A few can see it, and may express fear, most continue running with the pack.

The financial cliff is the dearth of retirement savings in this country, combi9ned with the crumbling of the traditional pillars of retirement security.

Perhaps the failure of this generation to plan for the future has something to do with the sense of entitlement which pervades our generation. We see our parents living well in retirement. Most of us have earned more money than our parents throughout our working lives, and we expect that, somehow, this will remain the case in retirement. Someone will take care of us, we've worked hard our whole life - why worry?

The problem is that the pillars that supported our parents comfortable retirement are rapidly crumbing. Those pillars of retirement security were employer paid pensions, personal savings, home equity, and governement benefits. With each and every source of potential retirement income under attack, it is important for each and every person to stop and ask just where the money for everyday living expenses is going to come from.

Employer Paid Pensions have been relentlessly scaled back over recent years, and are now limited for the most part to government and union employees. This is a natural result of the generational change to a more fluid workplace in which employees, for the most part, do not work for the same employer throughout their working lives. The elimination of the pillar of employer paid pensions places more weight upon the pillars that remain, in particular personal savings and the 401k and other retirement accounts which replace them.

Personal Savings rates have continued a relentless decline. The national savings rate is now LESS THAN 0%, indicating that Americans are actually spending more than they make. (just like the governement, we borrow the difference). The lack of savings and the copious use of easy credit offset what feeble attempts most people make at saving for retirement. According to The Business Journal, the average 401k account balance is $69,000. Stop for a moment to think about how long $69,000 would last if you were to stop receiving a paycheck today. Forget about income, for with CD and bond yields at 4%, you will only earn $2760 per year.

Worse yet, 30% of employees eligible for an employer sponsored plan do not participate at all, and 23% of the remainder had account balances of less than $5000. It is safe to say that a large percentage of people carry credit card balances that exceed their retirement savings. For most Americans, the pillar of personal savings and assets is very weak indeed.

Home Equity. Well, here is a bright spot, right? At least the baby boomers have enjoyed increasing real estate prices, haven't they? We can always count on our homes for retirement, can't we? Well, maybe... Those who have purchased property and paid off their mortgages as prices climbed will have a healthy nest egg to dip into in retirement. Big enough to live off of for 30 years? Probably not all by itself, but at least this pillar is strong. Unfortunately, however, many Americans have sqaundered this opportunity. As fast as the value of their homes has increased, they have borrowed it back out in the form of home equity loans. Many, tempted by temporarily low rates and interest only loans, have bought more house than they can afford, in some cases multiple homes, in the hope that values will continue to rise. In short, many homes and investment properties are so highly leveraged that the owners have no equity at all! If (when?) interest rates go up and property values level off (or fall, as in 1989-90), many homeowners and property flippers will be in deep financial trouble. So for some this pillar is strong, but for many it is shaky indeed.

Government Benefits. The retirement income of last resort. Social Security and Medicare will always be there for us, won't it? OK, I'm kidding. We all know that the program and the future workers who will need to fund it will both be stressed to the limit. Even at today's levels, the program will not support anything close to the lifestyles to which most people have become accustomed. In short, the pillar of government benefits is very weak, and is not intended to support, on its own, the entire burden of retirees health care, housing, tax, food, energy, and leisure expense.

The alternative to retirement of course, is not to stop working at all. Many boomers claim they do not want to retire, would prefer to remain active in the workforce. That is a healthy attitude in many ways, but it does not negate the need for a retirement plan. The reality is that few people, as they pass traditional retirement age, are able to maintain their pre-retirement level of income. Skills become obsolete, people become sick, or they just cannot (or no longer wish to) keep up the fast pace which they maintained while they were younger. Earnings from employment may supplement other retirement income, but cannot be relied upon to replace the traditional pillars.

It is my sincere hope that this generation of mine will wake up to the dangers ahead, and start taking responsibility for their financial futures. Strengthening the pillars of retirement through responsible financial planning is the solution. The alternative scenario is unpleasant to consider.

Frontier Financial Planning and Capital Management is located in Somerville NJ, in the heart of Somerset County. We are centrally located to many NJ communities in Somerset and Hunterdon counties including Hillsborough, Bridgewater, Manville, Basking Ridge, Bedminster, Readington, Flemington, Warren and Green Brook.

HOME | NEWS | PARTNER LINKS | CONTACT US
COMPREHENSIVE FINANCIAL PLANNING | RETIREMENT PLANNING | INVESTMENT ADVICE | SMALL BUSINESS RETIREMENT PLANS | SMALL BUSINESS PLANNING & BENEFITS | ADVICE ONLY SERVICES | FREE CONSULTATION | ABOUT US