As Baby Boomers are likely to soon find out, it can be a job to live really long and prosper.
Helped by tremendous progress in health care, the generation born just after World War II can look forward to a protracted old age. “A 70-year-old today is like a 60-year-old 10 years ago,” says Ronald Klatz, president of the American Academy of Anti-Aging Medicine in Chicago. “Within the next 35 years, people are going to be turning 100 and feeling like they are at 55 today.”
While exhilarating, such death defiance has a sobering side: Very few Boomers have saved enough to pay for a regular span of retirement, much less a far longer one. And the result is that the old three-legged stool of retirement-income planning Social Security, pensions and savings–has been replaced by a new, four-legged model.
The fourth leg: work.
“Retirement as we know it today will cease to exist,” predicts Roger Herman, a business futurist and chief executive officer of Herman Group, a management-consulting firm in Greensboro, N.C.
The change arises, of course, not only from the need to work longer. Many Baby Boomers are expected to feel so physically fit and engaged with their work that they will want to keep working. In addition, if the generation–now 35 to 53 years of age and numbering about 76 million–were to retire en masse at 65, employers would be faced with a severe labor shortage. So they are expected to do everything they can to persuade Boomers to stay on the job.
It shouldn’t be hard to persuade many of them, and a look at the math shows why.
A person who retires at 60 expecting to live for 25 years on $30,000 a year, in today’s dollars, of retirement savings will come up $358,000 short if he or she lives five years longer than anticipated, says Mike McCarthy, a financial planner with Hewitt Associates, a consulting firm in Lincolnshire. (The projections assume an annual inflation rate of 4 percent and an annual return on investments of 8 percent.)
Many Boomers, meanwhile, have saved far less than that hypothetical example might suggest. According to a study by Public Agenda, a non-profit research group in New York, 38 percent of Baby Boomers report having less than $10,000 in retirement savings.
Boomers, however, seem to be making up for their improvidence with far-reaching work expectations. According to AARP, the Washington advocacy group for Americans 50 and older, 80 percent of Boomers it surveyed said, in a contradiction of conventional terminology, that they would continue working in some way once they were “retired. Of this group, 23 percent said they expect to work part time because they will need the income. Only 16 percent said they expect to stop working altogether, according to AARP. (In a sign of the times, AARP recently discarded the name American Association of Retired Persons, partly in recognition of the growing number of members who are still working.)
Because Boomers dwarf the baby-bust generation that follows them, demographics could help them secure better employment and negotiate favorable working terms in their older age. According to Census Bureau data, the number of people in the U.S. age 65 and older will nearly double over the next 30 years, from 34.6 million this past July to 69.4 million in July 2030. Meanwhile, the ratio of working-age individuals to the over-65 population will narrow considerably.
All of which is expected to put pressure on employers to devise part-time jobs, flexible scheduling and work-from-home options for older workers if they want to get them to keep working.
“The labor shortage will continue for at least a decade, operating as a vacuum, holding people in the work force,” says Herman. “The future employment environment will attract, and hold, millions of workers who would have simply retired in different times.
A longer, healthier life also has implications for investment strategy. Advisers say aged Boomers should maintain a balanced mix of investments to help fund their bonus years, instead of taking an extremely cautious approach to investing in their old age, as retirees have often done.
“A lot of times, people think `I need to be invested in stocks when I’m working, and the day I retire, that’s when I need to pull out of the market,’ ” McCarthy says. Instead, he advises retirees to maintain a balanced portfolio of stocks, bonds and conservative investments such as money-market funds, certificates of deposit and Treasury securitie.
McCarthy says retiring clients often have notions about cashing out of stocks to limit their exposure to downside risk in the financial markets. “Fear of loss, I think, is the biggest thing,” he says. But retirees, like any long-term investors, should be able to withstand a downturn in the market, says McCarthy. “In my opinion, inflation is the biggest threat to someone’s retirement, not the idea that the market might go down.”
Meanwhile, advisers say that Boomers should take warning from the current cohort of retirees, many of whom are scrimping along on nothing more than their Social Security benefits. According to Cathy Noe, press officer for the Social Security Administration in Baltimore, for the average worker, making $30,000 a year, Social Security payments after age 65 will represent about 42 percent of preretirement income. That’s far short of the 80 percent that planners recommend. According to the government, however, about one-third of today’s retirees are relying entirely on Social Security payments for income.
“The public has essentially dramatically overestimated what Social Security would utimately provide them, and they still are today,” says Dallas Salisbury, president of the Employee Benefit Research Institute, a non-profit research organization in Washington. The Social Security Administration recently began mailing personal benefit statements that show working-age people how much they can expect to accrue, depending on salary levels and various ages of retirtment. “What that should do is panic a lot of people, ” says Salisbury.
For many Boomers, there has been an unspoken fifth leg of retirment planning: inheritance. But as their parents also live longer, that, too, is at risk. Adisers say Boomers shouldn’t bank on inheriting wealth, because many of their parents will fail to properly manage their finances, while others will live longer than expected and spend most, if not all, of their money.
Younger Boomers whose parents didn’t save enough or plan properly for retirement, should also brace for a double whammy: paying their parents’ bills while also meeting their own old-age needs later.
The cost of care for a resident in an assisted-living facility is, conservatively, about $4,000 to $5,000 a month, says Howard Udoff, a disability and long-term-care manager at American Economic Planning Group, a financial-management concern in Watchung, N.J. And, warns Udoff, elder-care costs are rising about 5 percent a year, more than double the overall rate of inflation. “Most people,” he says, “do not understand that Medicare (the government insurance program for the elderly) does not pay for this.”
What’s more, despite living better and longer, Boomers will also have to contend with the inevitable health consequences of their own aging. Steven Kaye, president of the American Economic Planning Group, recommends that Boomers buy long-term care insurance as soon as possible.
“A 45-year-old can buy it for half of the cost of a 65-year-old,” he says, since the price is set according to a sliding scale that goes down with the age of the beneficiary at the time of purchase. A policy bought when a beneficiary is 65, says Kaye, would run an annual cost of between $2,000 and $2,500–depending on the particualars of the plan–and if bought at 70, would rise to between $3,000 and $3,500. By contrast, a policy bought at 45 would cost somewhere between $600 and $1,000 a year.
“That,” says Kaye, “is a manageable premium for shifting so much financial risk.”
