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Boomer
Bummer: Retirement May Get Ugly for Generation
By
Jonathan Clements Wall
Street Journal, July 9, 2003
The boomers' retirement dreams are about to go bust. I don't have much tolerance for doom-and-gloom pundits. Still, as I think about the rapidly approaching retirement of the baby boomers, those born between 1946 and 1964, one thought comes to mind: It's going to get ugly. Don't worry, I am not about to bore you with some wild-eyed financial forecast. Rather, my pessimism is rooted in three entirely predictable developments. Losing Steam: Bulls and bears argue fiercely over whether stocks, bonds and real estate are over or undervalued. But whichever side you favor, it is pretty clear returns in the decade ahead won't match the heady gains of the 1980s and 1990s. That means boomers will find it tougher to retire in comfort. This forecast isn't based on any fancy economic analysis. Rather, it comes down to one simple fact: The fuel of falling interest rates is almost spent. Since 1981, the yield on the benchmark 10-year Treasury note has declined from almost 16% to under 4%. That has not only pushed up bond prices, which move in the opposite direction from yields, but also it has driven investors into stocks. During the past 22 years, the stock market's share-price-to-earnings multiple has quadrupled, as falling bond yields have encouraged investors to take their chances in the stock market. But at this point, interest rates don't have much more room to drop. That means we won't see additional big gains in bond prices and we are unlikely to see a further big climb in the stock market's price-earnings multiple. The real-estate market is also likely to struggle. In recent years, property prices have climbed smartly, as falling mortgage rates have allowed homebuyers to pay more. But with interest rates nearing the ground floor, mortgage rates can't decline much further. Result? Going forward, investors are almost certain to garner far more modest gains from their three biggest assets, stocks, bonds and real estate. My advice: Don't bank on earning double-digit gains. Instead, to make your wealth grow, hold down investment costs, avoid foolish investment mistakes and save like a demon. Feeling the Squeeze: For the moment, Uncle Sam seems wonderfully generous. But this largess won't last, and my hunch is retirees will bear the brunt of future government cutbacks. Why this gloom? There are three reasons. First, many of the tax cuts introduced in the past few years are already scheduled to disappear, thanks to the sunset provisions included in recent tax laws. Unless Congress acts, the dividend, capital gains, income and estate-tax cuts will all be reversed within the next decade. Second, Congress still hasn't sorted out the mess with the alternative minimum tax. Third, and most critically, there is the looming problem of how to pay for retirees' Social Security and Medicare benefits. Currently, the two Social Security trust funds -- one for disability, the other for retirement benefits -- generate a surplus, partially offsetting the regular government budget deficit. By 2018, however, the trust funds will be paying out more than they collect through payroll and other taxes. The Medicare hospital-insurance trust fund will be in a similar bind, starting in 2013. It's anybody's guess how the politicians will fix this fiscal mess. Maybe Congress will boost the eligibility age for Social Security retirement benefits. Maybe income-tax rates will rise. Maybe there will be a tax surcharge slapped on retirement-account withdrawals. What to do? If you want to retire at age 65, you will likely need a bigger nest egg. I would assume tax rates are headed higher, which means the post-tax value of your retirement savings will be less than you imagine. I would also assume that the Social Security retirement age will rise, with younger boomers having to wait until age 70 to get full benefits. Coming Up Short: If all the boomers quit the work force at 65, it would create major economic problems, because there would be too many retirees and too few workers. But this is one problem that's likely to solve itself. Many boomers are already on track for a later retirement, because they simply aren't saving enough. Older boomers -- those born between 1946 and 1955 -- have a median net worth of just $146,000, including home equity, according to an analysis of Federal Reserve data by AARP, the Washington group for seniors. To be sure, many of these folks will receive company pensions, so they are in better shape for retirement than their net worth suggests. Still, the typical boomer's retirement nest egg looks awfully skimpy, especially when you consider that today's retirees not only will live longer, but also they face rising medical costs and possibly devastating nursing-home expenses. For many baby boomers, the solution will be to delay retirement. That will give them more time to save and to earn investment returns. It will also shorten their time in retirement. That means they can delay claiming Social Security, resulting in a larger monthly benefit, and they can be more aggressive in spending down their portfolio once they do quit the work force. "I think there's been a change in psyche," says John Gist, associate director of AARP's public policy institute. "The collapse in the stock market has opened people's eyes. They're saying, 'I don't have a lot of options and maybe I'll have to work longer.' " Copyright
© 2002 Global Action on Aging |
