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March 13, 2013 at 07:00 AM
For months we’ve been reading about the fiscal cliff and its potential impact on different aspects of our finances. Yet, baby boomers may have a much bigger worry on the immediate horizon that should be getting more attention from both the media and financial planning community: the retirement cliff.
What is the retirement cliff? It’s the current state of retirement in America brought about by several factors including the massive numbers of baby boomers retiring in the next 20 years, the shift from traditional pensions to defined contribution plans that began in the 1980s, and the lack of adequate retirement savings and increasing debt that plagues many of these boomers. The retirement cliff is an unsettling reality facing millions and it demands that boomers think about and prepare for retirement differently.
For the past 30 years, the financial services industry has been focused on educating boomers about how to accumulate assets and build portfolios for retirement. Now, the industry must do a better job of preparing this group of Americans for the transition and distribution phases – those critical years leading up to and through retirement.
In addition to the current state of retirement in America, consider the following four financial challenges. These challenges will make falling over the retirement cliff even harder for boomers:
1. Rising health-care costs
- From 1999 to 2011, health insurance premiums increased by 160 percent for consumers, while wages only increased by 50 percent. (“Cumulative Increases in Health Insurance Premiums, Workers’ Contributions to Premiums, Inflation and Workers’ Earnings, 1999-2011,” Kaiser Family Foundation and Health Research and Educational Trust (HRET), September 2011)
- For a healthy couple turning 65 years old in 2012, to be reasonably certain (90 percent) they’ll be able to meet all of their out-of-pocket health-care costs during retirement, they would need at least $283,000. (“Savings Needed for Health Care Expenses for People Eligible for Medicare: Some Rare Good News,” Employee Benefits Research Institute, October 2012)
- The base cost for an assisted living community is $42,600 per person, per year. (MetLife Mature Market Institute, 2012)
2. Lack of pensions coupled with inadequate retirement savings
- Nearly two-thirds of Americans ages 45-60 say they plan to delay retirement due to financial loss, layoffs and income stagnation. (“Americans Rip up Retirement Plans,” Wall Street Journal -“Trapped on the Worked Treadmill?” Conference Board, 2013)
- Seventeen percent of transition boomers — those 55 to 65 years old — have yet to start saving for retirement. (Allianz Life’s 2012 Retirement and Politics Survey)
3. Rising inflation
- A conservative 3 percent annual inflation rate over 20 years would nearly double the costs of goods and services.
- Seniors spend more in categories most affected by inflation – medical care and housing. According to the U.S. Department of Labor, between 1983-2011, medical care and housing inflation outpaced overall inflation. (U.S. Department of Labor, Bureau of Labor Statistics, February 2012, Vol.5, no. 15)
4. New retirement realities
Retirement will last longer. Data show that a couple, both age 65, has an even chance that at least one of them will live to age 89. That could mean potentially up to 24 years in retirement for one of them. (LIMRA, Retirement Income Reference Book)
