It is, by any measure, a fantastic sum: $21.7 trillion. No, that’s not the latest GDP figure. That’s how much money Americans now have set aside for their retirements, according to the Investment Company Institute. As the baby boom begins its long march out of the workforce (1 in 5 boomers, in fact, has already retired), Americans collectively are sitting on a jaw-dropping nest egg, dispersed in IRA accounts, employer-based 401(k) plans and pensions. The only problem: It’s not nearly enough.
For boomers at retirement, it’s both the best and worst of times. The good news is that so many are still here: In 1900 the average life span was 47; a 65-year-old today can expect to live nearly two more decades. “It’s the dream of history,” says the psychologist and gerontologist Ken Dychtwald, whose research firm Age Wave dissects the massive “maturing market” of aging boomers. “For thousands of years we searched for fountains of youth.”
Now we’ve found it – or at least a minor tributary of it. We’ve also found the bad news, which starts with money.
First, a little history. In 1967 a third of those 65 or older lived below the poverty line; in 2012 only about 9 percent did. This historic reversal, due largely to Social Security, Medicare and the widespread reliance on defined-benefit pensions, might not last much longer. “A greater percentage of the elderly will be poor or near poor than in the last 40 years,” warns retirement expert Teresa Ghilarducci of New York’s New School for Social Research.
Why? Simply put, the boomers are not saving nearly enough to offset the disappearance of pensions. A new Fidelity report says that 48 percent of boomers are not on track to be able to afford basic expenses in retirement, a figure echoed by the Employee Benefit Research Institute, which declared in 2010 that 47 percent of the oldest boomers were at risk.
The birth of the 401(k)
What we think of today as the way almost everyone plans for retirement began as a small shift in the tax code in the late 1970s, designed to benefit a few high-earning corporate executives by letting them put aside a percentage of their salary on a tax-deferred basis. But soon the Reagan administration decided that companies could offer the benefit to all employees. The 401(k) was born.
The 401(k) was meant to supplement, not replace, traditional pensions. Instead, companies began dropping their pension programs. Today, they’ve all but disappeared from the private sector: Only 10 percent of boomer-age workers can expect income from defined-benefit programs.
What killed the pension system? It was hope, but hope mixed with desperation and a bit of greed. The rise of the self-funded retirement dovetailed with the great bull market of the 20th century, when the S&P 500 increased by more than 1,000 percent in nearly 20 years. Boomers’ prime working years coincided with the stock market bonanza. Many journalists predicted they’d reap retirement riches.
The reality is more sobering. Fidelity claims that someone 55 or older who has been active in his or her 401(k) for the past 10 years is likely to have saved $269,500, and $220,000 will just cover medical expenses for a 65-year-old couple in retirement. Most Americans don’t have nearly that much: According to the Center for Retirement Research at Boston College, the typical account for a worker nearing retirement is only $42,000. (Oh, and 55 percent of current workers don’t have any employment-based savings.) AARP says that three-quarters of Americans between 55 and 64 have less than $30,000 socked away. It all adds up to a $6.6 trillion gap between what we have and what we need.
The whole idea of retirement is an artifact of postwar prosperity and longer life spans. For most of history, those lucky few who managed to reach an advanced age kept working until they were physically unable; rural life and extended families provided the safety net. But the industrial revolution and the longevity revolution put an end to that. Enter Social Security, which offered older Americans both a bulwark against poverty and an encouragement to leave the workforce.
In one of the great ironies of history, the Me Generation will transform into the We Generation in their later years.
“Boomers will not so much be doing their own thing,” says Age Wave’s Dychtwald. “They’ll be helping out the grandchildren and maybe having a sister move in.”
Many theorists predict employers will eventually adapt and absorb this army of boomers who either desire or need to remain on the job. But there are other needs, too.
“Whatever economic challenges the over-65s are facing these days, they pale by comparison with the money troubles of the young,” writes Paul Taylor of the Pew Research Center in the new book “The Next America: Boomers, Millennials and the Looming Generational Showdown.” Today’s younger people are staggered by a slow economic recovery and their hefty college debts.
Often, they are finding assistance from boomers: A 2013 Merrill Lynch-Age Wave survey found that 62 percent of those 50 or older had helped out family members financially in the past five years. Other boomers are pitching in with unpaid labor: Currently 30 percent of preschoolers are taken care of by grandparents when Mom or Dad is at work or school.
This is a good thing, in many ways.
“Boomers want to be where the action is,” Dychtwald says – and they’ll get their wish. “I don’t think all 78 million boomers are going to have an easy and carefree time of it. I do think we will make it a more robust and interesting period of life than we have to date.”
But there’s also a danger of creating unrealistic expectations for older adults, says Marty Martinson, professor of health education at San Francisco State University.
“We’ve constructed this idea of the 90-year-old surfer-volunteer as the ideal retiree,” she says. Yes, older people want to be active, useful parts of society, Martinson is quick to add. But this should be a choice, not an obligation.
No wonder “retirement” no longer seems like the right word to describe this strange new time. As circumstances change, so will what we think we want from this still-evolving life stage. It’s going to be a work in progress for a long time.
For a generation that has always defied expectations, this last act will be one to watch.