Hugh F. Wynn
The Boomer Retirement Boom: Can They Afford Their Golden Years?
Among its many other impacts on American life, the Covid-19 Pandemic accelerated the retirement of many Baby Boomers - leading to a Boomer Retirement Boom, if you will. Can these relatively young retirees afford 25-35 years (or more) of retirement, or will their Golden Years slowly lose their luster? NOTE: Since I’m not a credentialed financial advisor, the answers (observations) I give are strictly my opinion.
The Baby Boomer generation is large in population size and sphere of influence. Born in the period starting immediately after World War II to right before the U.S. entered the Vietnam War (1946–1964), Baby Boomers are known to be industrious, optimistic, opinionated, self-assured, goal-oriented, and particularly in their youth, free-spirited. They grew up in the “flower-power” era and played pivotal roles in social justice movements in the 1960s and 1970s. Most of the "older" Boomers were probably already retired when the pandemic set in, but almost half were still working.
Furloughs, layoffs and a major economic slowdown at the start of the pandemic pushed many Americans out of the workforce - at least temporarily - and it seemed to nudge many Boomers into retirement. Whether the trend is permanent or temporary is anyone’s guess.
Among the reasons for these earlier than expected retirements are that many Boomers feel more affluent due to the enhanced value of investment portfolios, homes, and other assets - caused by the sustained upward market activity and the hot housing market. And, despite the enticement of higher salaries and wages due to government largess, labor pressures, and inflationary forces, many Boomers who left the workforce for various reasons are not re-entering it.
Of course some of the more financially comfortable folks would have retired anyhow, but some less affluent Boomers might be making early retirement decisions based on common misunderstandings…myths, if you will… about those golden years in general and old age in particular. Studies show that if folks reach age 65 in reasonably good health, odds are that more than half…particularly women…will still be around at age 85.
What's my point? Some Boomers are retiring early thinking they will probably not live that long in retirement. This simple misconception about life expectancy can lead to faulty decision-making about:
How to save;
When to take Social Security; and
Managing healthcare costs (ie. Medicare).
Let's handle these topics one by one.
#1 How to Save
A widely-held belief among folks approaching retirement is that they need to become increasingly conservative with their investments, which is - generally speaking - not a bad idea. But to what degree? Remember - we are always dealing with inflation - that nagging little factor that eats away at our savings year after year. Even a relatively low inflation rate of 2% takes it toll.
A Boomer should expect to spend at least 20-25 years in retirement, so inflation's purchasing power erosion could signficantly impact his or her portfolio during that time. Thus, playing it too safe might be a mistake. Conservative investments, such as fixed income bonds or CDs, could make a Boomer's golden years increasingly more stressful if they earn less than the rate of inflation over 20-25 years. After “enjoying” the so-called stagflation era of the 1970’s and early 1980’s, I've became increasingly concerned about even the low inflation we’ve experienced since that period – even more concerned than having a “too-high” percentage of my investment portfolio in fixed income assets.
For this reason, a Target-Date fund approach to balancing one’s portfolio might be worth considering, but even so, with caution. What is a Target-Date fund you ask? It's an investment fund that automatically changes your investments from high-risk, high-reward to low-risk, low-reward holdings as you near retirement. Initially, riskier assets, such as stocks, make up the majority of the fund's portfolio. As the Target-Date fund "ages," the mix of securities slowly shifts with the portfolio increasingly allocated to more conservative investments. Here's a handy dandy blog on Target-Dates if you're interested.
#2 When to Take Social Security
With inflation buffeting the financial well-being of all age groups these days, and because its durability… transitory or long-term…is currently ill-defined, those approaching retirement should most assuredly factor when to take Social Security into their planning. Why? First, taking it later in life makes for a larger paycheck, and Social Security is inflation-adjusted. Unfortunately, most components of an individual’s personal portfolio typically are not.
The highest earner in a household should seriously consider waiting until age 70 to claim Social Security in case one partner does live past 85 or 90. That larger…and inflation-adjusting…Social Security check might be very comforting to the survivor in those final years.
#3 Managing Healthcare Costs
A surprising number of folks believe that having achieved age 65, Medicare will take care of their healthcare costs. This is simply not the case. Yes, Original Medicare will, in part, cover a lot of healthcare expenses, but Medicare isn’t free. Those enrolled in Original Medicare Parts A & B will most have premiums, deductibles and out-of-pocket costs to pay.
Forgetting for a moment the Medicare portion of those years paying FICA taxes, Part A comes without a premium, but Part B will, at a minimum, cost $148.50 per month with steady annual increases. And enrollees in Medicare Advantage Plans may pay low or no up-front premiums, but they will incur copays and coinsurance payments when care is needed. Medigap Plan enrollees (plans supplemental to Original Medicare) will be covered for most medical expenses, but such plans currently do not include eye, dental, hearing and drug coverage. Budgeting for these incremental medical costs in retirement will not be cheap and will most likely occur.
As for long-term healthcare needs, Medicare only covers a limited amount of time in skilled nursing home care following hospitalization, and there is no coverage for at-home assistance or assisted living costs. In short, it’s a myth that Medicare provides long-term care beyond a specific time period.
So, when planning your "Golden Year Budget," factor in significant Medicare-related costs and be very nice to your potential caretaker offspring.
Kids of all generations - particularly Boomers - should approach your golden years thinking clearly about the challenges they bring regarding financial and healthcare issues. DO NOT view those challenges through rose-colored glasses. Be practical about how long you might live in retirement…about the negative impacts of inflation and longevity on the purchasing power of portfolio income…and about the medical coverage (or lack thereof) offered by the various Medicare and Medicaid providers. Careful decisions can lead to a rosy retirement. Faulty decisions, not so much.
(By the way, if your plan is to stay put, it might make sense to modify that big, two-story home you raised those wonderful kids in – or perhaps consider downsizing to something more practical for an old-timer.)