From Boom to Bust: How’s Your Financial Health?

Baby-boomers (full disclosure…I resemble that remark) are confronting a financial bust.
The Feb. 19th Wall Street Journal article, Retiring Boomers Find 401(k) Plans Fall Short, starkly paints the picture:
A 60 year-old boomer has a median income of $87,700, and a median 401(k) account balance of $149,400.
Guess what that $149,400 would generate monthly if invested in a fixed annuity today?
About $757 a month (or $9,073 a year).
Even with the expected social security median annual benefit payment of $35,080 (about 40% of pre-retirement income), that equals $44,153 annually, or about 50.3% of pre-retirement income.
Could you live on half your income tomorrow…comfortably?
If you have a pension or other investments, this helps, but half of all boomers do not have a pension to help fund retirement.
How did we get in this situation?
A simple answer is that we, as boomers, elected to spend rather than save.
And as employers, we moved from defined benefit pension plans to defined contribution 401(k) plans as the primary retirement vehicles for employees.
And our need to save for retirement grew exponentially.
And our minds may not have been able to deal with this new reality.
Decision science, behavioral economics, and raw emotion have shown that we prefer pleasure over pain (we buy versus save) and inertia over action (it takes effort to enroll in the 401(k) and save at the maximum level, and it takes no effort to forget to enroll.)
How is your financial health? And if you are responsible for designing your company’s retirement plan, what is the financial health of your employees?
Many employers now offer auto-enrollment, auto-escalation and auto-rebalance features that “nudge” people to make better long-term savings and investment decisions.
Yet many auto-enrollment provisions have employees contributing just 3% of their salary.
So a 30-year old today earning $50,000 annually, saving 3% of pay, receiving annual pay increases of 2.5%, and earning a 6% average annual rate of return, will accumulate just over $200,000 over the next 35 years. Quite simply, that's wholly inadequate. Inflation will take an even bigger bite out of your retirement income needs by 2045.
Vanguard Group, one of the world’s largest mutual fund companies, is now advising people to contribute 12% to 15%, including employer contributions, to adequately prepare for retirement and uncertainty about Social Security and Medicare.
While the best time to plant a tree was a generation ago, the same rule applies to saving for retirement.
But it’s never too late to save more today.
One final note:
I’ve sent this article to my children who are 23 and 26. And I’ve asked how much they are saving. They are increasing that amount significantly
Here’s to your financial health...and the financial health of your children!