In her post “How old is old? Is 80 the new 65?”, Susan discussed how increases in longevity have dramatically increased the typical years lived post-retirement. The average 65-year-old retiree is now expected to survive until age 84. These changes mean that retirees need increasing amounts of money to afford a comfortable retirement and provide a cushion for emergencies over such a long period without employment.
How much do retirees need? Being able to retire at 65 is expensive even under the most conservative of estimates. Using the CNN Money retirement calculator, a 64-year-old earning $50,000 a year needs nearly $450,000 in savings to supplement Social Security and pay for their current standard of living for 19 years. While these needs may go down if they receive an employer pension, the costs will skyrocket if they face a medical crisis, require long-term care, or live longer than expected. In fact, some report that 65-year-old retirees need a minimum nest egg of more than $1 million.
Are Baby Boomers prepared for retirement? Not at all. Data from a number of sources indicate that Baby Boomers are wholly unprepared for retirement at 65. Recent data from the Employment Benefits Research Institute shows that just over three quarters of workers age 55 and older report having saved for retirement and only two-thirds are currently saving for retirement. Among families headed by 55 to 64 year olds, the median value of all financial holdings—stocks, bonds, retirement accounts, etc.—was $73,000 in 2009, meaning that half of these households have less than that in savings.
Why are they so unprepared? Some point to the change from defined benefit (pension) retirement plans to defined contribution (401k) plans that shifted responsibility for saving for retirement away from employers and onto employees. These accounts, and other financial savings, were further hit hard by the recession, and Baby Boomers have less time to regain the money lost over the past few years than younger workers. Some may have banked on rising home values to supplement meager savings and are now living in their “nest eggs.” Additionally, many may have put retirement last while paying for other needs, such as putting kids through college. Others may have never earned enough to build substantial retirement savings, while others may have never thought retirement savings mattered until it was too late.
What does this mean? For many Baby Boomers, retirement is beginning to look like a luxury, rather than a taken-for-granted step in the life course. For those without sufficient savings, it may mean living off of Social Security, which may cause a sharp drop in standard of living. For those unable to get by on Social Security alone, it means working longer. With many individuals planning to work well past 65, will these decisions pose new challenges in a slowly recovering economy? In the face of diminished job prospects immediately following the recession, many new labor market entrants held on to the hope that jobs would begin to open up once the Baby Boomers shifted to retirement. If retirement is unaffordable for a large proportion of the retirement-eligible population, it may have both short-term and long-term effects felt by individuals 30 and 40 years younger. New high school and college graduates face high levels of unemployment and underemployment; failure to find long-term, full-time positions will impact both their immediate ability to pay for day-to-day expenses, as well as reduce contributions to their own retirement funds.
Rebecca Tippett is a Research Associate at the University of Virginia’s Weldon Cooper Center for Public Service where she studies household economic well-being and produces population estimates and projections.