Alicia Munnell, director of the Center for Retirement Research at Boston College, addressed attendees at the midday keynote of FSI’s OneVoice 2011 conference in Phoenix Tuesday. Her message—the preparedness (or lack thereof) of baby boomers for retirement—was not new to her audience, but the statistics she provided and the tone of her presentation provided clarity for the challenges faced by the boomer generation.
“My mission today is two-fold,” Munnell (left) said. “I’m here to discuss the outlook for boomers in retirement and to advertise and advocate for the use of the financial planning tools we’ve made available.”
Retirement needs are increasing, she explained. The reasons are many; people are living longer and life expectancy is rising. At the same time, they continue to retire earlier. The retirement age in 2010 is still far lower than in 1970, even with all that boomers have recently gone through. Health care costs also continue their stratospheric rise, she said, and two-thirds of the population will need some sort of long term care.
“So as these needs are increasing, the retirement system is contracting, specifically when it comes to the traditional three-legged stool, which includes Social Security, investing and personal savings,” Munnell noted.
She argued that the first leg, Social Security, will replace less and less income moving forward, regardless of current laws. Also, the Social Security tax threshold is not indexed to inflation or wage increases, which will negatively affect more people as they reach said threshold.
The second leg, investments, contains a surprising fact, she says; less than half of employees work for companies that offer a defined benefit or a defined contribution plan. Of those that work for companies that offer plans, fully 20% of employees do not participate, and fully 90% do not contribute the maximum amount.
“People are traditionally bad at allocation, with far too much invested in company stock,” she stressed. “And young people, especially, tend to cash out rather than rollover their contributions when the change jobs. So even before the recession, 401(k) balances were far too small.”
The third leg, the personal savings rate, was actually negative for an extended period of time, especially after the year 2000. Christmas clubs and other tools that encouraged saving in a “we’re in this together” manner fell by the wayside.