They Keep Coming Up with the Same Conclusions

People rely on any number of strategies when they try to figure out what is going to happen in the future.

They might read reports and consult experts. Or analyze quantitative and qualitative data. Or study history and use past trends as a roadmap to future patterns.

No matter which method they choose, however, it seems like those who are trying to discern the financial outlook for the large segment of the population that is nearing its "golden years" keep reaching the same unsettling conclusions.

As Greg Ip at the Wall Street Journal's Real Time Economics blog puts it, "Spendthrift Boomers Face [a] Perilous Retirement: McKinsey."

A pillar of economics is the life-cycle theory of consumption. It holds that an individual saves little as a young adult, a lot in his middle ages, and not at all when he retires.

A new study finds that the baby-boomer generation — the 79 million Americans born between 1945 and 1964 — has broken that rule with a vengeance and are ill prepared for retirement as a result.

The study, by the McKinsey Global Institute, the think-tank arm of the consultants McKinsey & Co., carefully examined the saving behavior of various generations. The “silent” generation, the 52 million Americans born from 1925 to 1944, followed the classic pattern closely, with their household savings rate rising from below 15% in their early 20s to about 30% in their late 40s. But that pattern is almost absent for early boomers, those born 1945 to 1954; their saving rate tops out about 20%; and it’s completely absent for late boomers, those born 1955 to 1964, whose saving rate so far has remained stuck at around 10%.

“Our analysis shows that the Boomers’ missing savings peak accounts for most of the collapse in the U.S. household saving rate from its peak of over 10 percent in themid-1980s to around 2 percent today,” write the report’s authors, Diana Farrell, Eric Beinhocker, Ezra Greenberg, Suruchi Shukla, Jonathan Ablett, and Geoffrey Greene.

There are two reasons for the collapse in their saving: “the ‘wealth effect’ from asset appreciation and increased access to credit.” During boomers’ lifetimes, the proportion of people in their 50s with mutual funds rose from 14% to 64%, while the share of households with mortgages almost doubled.

The net effect, said the report, is that boomers carry far more debt than other generations. Because of inadequate saving, two-thirds of baby boomers are unprepared for retirement, defined by McKinsey as able to sustain 80% of their spending as they age.

The solution, they say, is to work longer. If the median age of retirement were to rise two years, from 62.6 today to 64.1 in 2015, the number of “unprepared” households would be cut in half.

“An increase in the median retirement age of this magnitude may not sound like much, but this is a number that has shifted slowly: Over the three decades from 1970 to 2000, the median retirement age declined by the same amount. So the challenge is to reverse that trend, but at a much more rapid pace.”

Comments

[roger]

The 1925 1944 generation (mine) was also very lucky,we had the very good fortune to buy a home paid it off and see it rise in monetary value this gave us an advantage for our retirement years it's nice to think that we where smart but it was also pure luck.

[cletracsteve]

We are in the 45 - 54 generation. We have four children with the final graduating this June from college. We encouraged all four to go to the best private school they could get into : investment in our children's education (not training) was our first investment choice. With today's tuition and room/board costs, how can one save at 30%? We are now spending money to finally get maintenance free vehicles since I am too old to crawl under cars anymore. The point is : children can be very expensive today and with the loss of real wage parity since Reagan, we may not have had as much flexibility in saving while our depression-era parents taught us to deplore frivilous spending.

[dearieme]

I retired early (61.5) to secure the Tax Free Lump Sum that we get to draw from our pension plans in Britain, and to get my monthly pension into payment - because our pension funds are much less protected if the pension is not yet in payment. I suppose that I responded to a perverse incentive.

[Deborah]

Being in the latter part of the 1955 to 1964 cohort I get really tired of being considered to have anything in common with earlier baby boomers due to the vast change in the economy as I have known it. There is an enormous difference in economic opportunity just between the beginning and end of this last 10 year group.

In my case I have two university degrees and this past year is the first year that my wages have exceeded my high school educated grandfather's retirement wages from the mid 80s and what his pensions were when he passed away about 10 years ago. It is also the first year they have exceeded my high school educated father's 1980s wages.

The difference in wealth that I see in my immediate peer age group and those just 5-10 years older is enormous. Take an example of a friend with a sibling 7 years older. She has a 3 year advanced education program whereas he did a university degree. She has a home twice the value paid off whereas he has a mortgage that at the rate the payments are going it will be another 10-15 years to pay it off.

Those of us at the tail end of the boomers were left with sfa in terms of job opportunity. The job I have right now there were 3 people that competed for it. All my life there have typically been 50-100 people competing for a job.

And while I'm on my soap box, I feel completely part of an economically thrown away generation, and now that people are retiring we are being side stepped for younger workers, or they are just saying they can't find qualified people. So, there weren't the jobs to enable a strong work history to be developed and so now opportunity passes for different reasons.

I went back to school for my second degree in my 30s and there were more highly motivated 30 something people continuing their education simply due to the lack of opportunity they'd found with their first degrees.