Boomer Savings Won’t Make Retirement Visions Real

Is your vision of retirement reality or fantasy?

Take this quick test:

Are you among the two-thirds of people who expect to live just as well or better in retirement than they do now? In other words, no plans to cut back after you quit working?

Are you among the one in two people who counts on having enough money to retire before age 65?

Don’t kid yourself.

You may dream of luxury cruises and wintering in Florida. Reality is more likely to mean grim downsizing - a no-frills existence or working into your 70s, your golden-years fantasy shattered because you didn’t save.

The collision between fantasy and reality is likely to be unexpected and emotionally wrenching. Here’s why:

An influential study concludes for the third straight year that baby boomers aren’t saving nearly enough, and worse, don’t seem to realize they’re in trouble.

On average, 76 million Americans between ages 30 and 48 are saving only about onethird of what they will need to retire, according to the study by Stanford University economics professor B. Douglas Bernheim. The study to be released today, based on a survey of 2,055 people, was paid for by Merrill Lynch & Co., a Wall Street brokerage that stands to gain if Americans invest more for retirement.

“The typical baby-boom household ought to nearly triple its rate of saving,” Bernheim said.

“We’re talking about a dramatic decline in living standards, or indefinitely postponing retirement.”

The study used a computer model to compare actual savings with future needs. Conclusion: Boomers were saving 38 percent of what they should have put away at their ages to avoid a drop in living standards whey they retire.

The study emphasized the large sums needed to beat inflation. A married couple earning $75,000 a year and covered by a traditional pension would need to save $65,000 by age 45, and $325,000 by age 65. (The figures are $117,000 and $450,000 if they lack guaranteed pensions.)

Groups facing the biggest shortfalls were the 30-40 percent of baby boomers earning between $60,000 and $100,000 a year, those without pensions and single people. Boomers earning $60,000 to $100,000 without pensions were saving only a quarter of their needs if married, and only a fifth if single.

Better off were married couples earning between $20,000 and $60,000, with pensions. They were saving more than two-thirds of their needs because Social Security will replace a larger share of their smaller incomes.

This year’s study found the savings gap could be getting worse.

There’s no evidence that older baby boomers in their mid-to-late 40s are socking away more money.

“This is extremely troubling because a household’s rate of saving should increase significantly with age,” Bernheim said.

If the trend continues, baby boomers may fall hopelessly behind as they get closer to retiring.

Bernheim was at a loss to explain this selfdestructive trend.

“People are in a state of denial about retirement” because it means cutting back consumption today, he said.

Some are counting on big inheritances, but most won’t get more than $20,000 or $30,000 - much less than their needs.

The study probably understates the problem because it doesn’t take into account expected cutbacks in Social Security and Medicare. If Social Security were cut 35 percent, baby boomers would have to save five times as much, Bernheim said.

Predictions about retirement in 20 or 30 years are fraught with uncertainty. The outcome depends on assumptions about the economy, Social Security and behavior that may not hold up.

There’s a consensus that baby boomers need to save more, but some experts question Bernheim’s apocalyptic scenario.

Critics worry that alarmist reports could push Congress into adopting costly incentives, such as “Super IRAs,” that haven’t been shown to increase savings, but could increase the deficit.

The most effective way to boost national savings is to reduce the deficit, which would boost economic growth and living standards, said Gary Burtless, a senior fellow at the Brookings Institution, a research organization.

Burtless and others contend Bernheim’s study exaggerates the problem by failing to count a big chunk of household savings, particularly home equity.

Paul Yakoboski, research associate at Employee Benefit Research Institute, said it makes little sense to exclude the largest source of wealth for most families. “Boomers are already tapping into home equity to pay for college, indicating they may be willing to downsize the home to pay for retirement.”

If you count housing wealth, baby boomers on average are saving about 80 percent of what they will need, cutting the predicted shortfall by two-thirds, he said.

The study also excludes half of any savings remaining after counting what’s earmarked for retirement, assuming that some will be spent on college and other expenses. If you count this money, boomers are saving 62 percent of what they will need.

Retirement age has a big impact on financial need. The study assumes retirement at age 65, but some experts predict baby boomers will work longer and, therefore, won’t need to save as much.

Burtless said retirement ages will increase because baby boomers will live longer, have better health, and need the money.

“There is a need to increase savings,” Burtless said. “But we don’t have to triple the rate because people can tap their housing wealth and retire later.”

Critics also point to a 1993 Congressional Budget Office study showing that baby boomers have higher incomes and more wealth than their parents had as young adults.

Bernheim said his critics are wrong.

He didn’t count housing wealth because more than 80 percent of those surveyed plan to keep their homes, either for emergencies or their children. People need to live somewhere and downsizing typically frees up only half the value - a view shared by many retirement planners who don’t count housing equity.

Baby boomers are likely to end up worse off because they won’t get the big economic windfalls their parents enjoyed, he said.

Instead, they’ll have to settle for smaller increases in wages, stock prices and housing values, along with Social Security cuts.

Even with everything going for them, the parents’ generation suffered a decline in living standards when they retired, Bernheim said.

“With everything going against them, baby boomers certainly can’t maintain their incomes.”