Is Retirement at Risk for Late Baby Boomers?
On July 23, the Dow Jones Industrial Average hit an all-time intraday high of 15,604.22. That same day, the S&P 500 also hit a new high of 1,698.78. With the markets doing so well, you could be forgiven for thinking today’s baby boomers are laughing all the way to the bank.
But that’s not so! Most baby boomers haven’t really benefited from the bull market. While it runs with reckless abandon, it’s leaving behind most Americans who are in retirement. Over the last five years, stocks and bonds have rallied, but the housing market has remained relatively flat. That means affluent Americans who park their assets in stocks and other financial products have done quite well. Those Americans with their wealth tied up in the value of their homes, however, have not.
Since the beginning of the current bull market in 2009, the S&P 500 has climbed more than 160%. U.S. housing prices, on the other hand, are still more than 25% below their 2006 highs.
Retiring baby boomers are also facing another challenge. Early boomers—those between 61 and 65—are more financially stable (for the most part) than their younger peers (those between 50 and 55). The early boomers worked during a period of economic stability in an era when defined benefit plans were the norm. In 1965, the inflation rate was 1.59%; by 1970, it had risen to 5.84%.
The late boomers, in contrast, started working in a more unsettled economic time. In the 1980s, many companies rolled their retirement plans over to 401(k) accounts, tying their self-directed retirement savings to the ups and downs of the stock market. And lest we forget, the inflation rate in 1980 was 13.58%.
At the same time, whether you’re an early or late baby boomer, the Federal Reserve, thanks to artificially low interest rates, has sucked income out of fixed-income retirement investment products. That means retirees relying on safer investments like bank deposits, bonds, annuities, and other insurance products have seen some of their retirement savings tank. To make up for lost ground, late baby boomers may be considering whether or not they should take on riskier investments.
The tried and true retirement strategies of the past may not work in today’s economic environment. In an effort to make their retirement savings last, retirees were once advised to remove four percent from their portfolio in the first year, and raise it annually based on inflation; today, that number is close to 2.5%, and going forward, you may not be able to adjust for inflation.
Whereas at one time a retirement portfolio with 60% allocated to stocks might have been more than sufficient to carry you through your golden years, today, that may not be the case. Retirement savings depleted from low interest rates will be hit even harder if inflation and rising interest rates kick in, like they did in the late 1970s and 1980s.
Those baby boomers wanting to bulk up their retirement portfolio in this low-interest environment may need to consider readjusting their portfolio and weigh it even more heavily toward stocks than bonds.
To decrease your exposure to risk, consider looking at dividend-paying stocks from companies with a long history (15, 20, 25-plus years) of not just paying quarterly dividends, but also of continuously increasing dividends.
While some may argue that there have been worse periods in history to retire, that offers little to no consolation for those already in retirement or nearing retirement. Sure, retirement may have been tough during the Great Depression, but that statistic doesn’t help anyone looking at their depleted retirement savings today feel any better about their current situation.
We can’t control the Federal Reserve, but we can control how much we spend, our withdrawal rate, and how much risk we’re willing to take on.