The Retirement Problems — and Solutions — for Younger Boomers
The latest State of the Participant 2020 report from John Hancock brought some unwelcome news, echoed in other recordkeeper reports: the younger half of the Baby Boomer generation — those aged 56 to 65 — are generally unprepared for retirement. In the report, the two age cohorts spanned by this demographic have the lowest percentage of individuals who are retirement-ready: 34.2% for the age 50-59 group and 20.4% for the age 60+ cohort. The difference between these age groups and younger demographics is striking, as all other age groups had at least 53% of participants on track for retirement.
Why is this the case? Well, unlike the generation that preceded them, or even older Boomers, they generally do not have a defined benefit pension plan. And the advent in auto-enrollment, which has fueled excellent income replacement numbers for Gen Z, Millennials, and even Gen X, came too late to save the retirement health of Baby Boomers. Auto-enrollment generally means that younger employees save for retirement at the most critical juncture — in their 20s, and reap the benefits of compounding. While many younger Boomers are saving for retirement now, they were not doing so when it was most beneficial. In addition, many young Boomers are part of the so-called “sandwich” generation, caring for both elderly parents and their own children, which carries a tremendous financial burden.
What can younger Boomers do now to improve their odds of a secure retirement? Here are some suggestions:
- Max out elective deferrals, if they can afford to do so — Boomers can save up to $26,000 in a 401(k) or 403(b) plan, and if they also have a 457(b) plan in conjunction with the latter, they can increase that amount to $45,500 ($52,000 if they are in a governmental 457(b) plan). Boomers will never catch up for those lost years in their 20s when they failed to save, but maxing out will certainly improve the retirement picture.
- Consider a Roth conversion, if they can afford to do so — For a variety of reasons, individuals might find themselves in a historically low tax bracket in 2020. Thus, it may make sense to convert some retirement plan assets from pre-tax to Roth, if permitted by the plan. That way, Boomers would pay taxes now when tax rates are lower and avoid paying taxes when rates are potentially higher; thus, saving taxes that can be used for retirement income. Even if higher tax rates do not entirely pan out in the future, it is a solid strategy in retirement to be tax-diversified, so that individuals can choose whether to draw funds from pre-tax or Roth sources, depending on their tax situation. Of course, they have to be able to afford to pay taxes on the funds at present to take advantage of this opportunity - and those taxes, while historically low, can still be significant based on the amount converted.
- If Boomers can’t afford to do either of the previous suggestions,they can look to reduce expenses, increase income, or both — While this sounds difficult, there are actually hundreds of ways to improve the income versus expense equation without greatly sacrificing one’s current lifestyle. For example, the act of simply tracking spending and establishing a budget generally decreases spending. Decluttering is also a fairly simple activity that has two financial benefits: avoiding duplication of purchases (many people unknowingly purchase duplicates of many household items because they cannot find the originals in the clutter), and creating additional income from selling unused items. And, individuals don’t need to reduce expenses and/or increase income by much for it to have a tremendous impact; a little more than $27 a day adds up to $10,000 per year!
Thus, younger Baby Boomers struggling to accumulate sufficient retirement wealth should know that it is never too late to turn things around!
Note: This feature is to provide general information only, does not constitute legal advice, and cannot be used or substituted for legal or tax advice. Opinions expressed are those of the author, and do not necessarily represent the opinions of Cammack Retirement Group.
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