Early boomers -- those who were 50 years old during the stock market party of 1999 -- are not in bad shape for retirement, according to a new study released by the Center for Retirement Research at Boston College. These older boomers may have lost more money than younger people during the market mayhem of the last decade (a trillion dollars' worth collectively), but that's because they had more money to lose. They've recovered half these losses since March 2009, and those with balanced portfolios may even have fully recovered, the study says.
Late boomers -- not "late" meaning "dead," but those who were age 40 in 1999 -- aren't faring nearly as well. That's mainly because, unlike older boomers, they didn't participate in the early phase of the bull market.
Assumptions in the study
The study looks at three hypothetical individuals, all of whom began contributing 6 percent of their pay into a retirement account at age 30. They earned median incomes, based on figures from the Federal Reserve's 1998 Survey of Consumer Finances. And they each received a 3 percent matching contribution from their respective employers. In 1999, these individuals were 50 (early boomer), 40 (late boomer) and 30 (Gen Xer).
While early boomers suffered tremendous losses over the past decade, they benefited from a higher rate of return over the course of their investment time horizon when compared to younger boomers and Gen Xers. Those with 100 percent exposure to stocks, as represented by the Standard & Poor's 500, enjoyed a lifetime annualized return of 12.4 percent through the market peak of October 2007, compared to 10.3 percent for younger boomers and 8 percent for Gen Xers. After the stock market dropped a precipitous 57 percent from the market high in late 2007 through March 2009, the early boomer's return fell to 7.9 percent vs. 3.1 percent for younger boomers and a negative 6.4 percent for Gen Xers. But by February 2010, these returns rose to 9.2 percent, 5.5 percent and 0.3 percent, respectively.
That's a lot of numbers to digest, I know. But this is what it boils down to: Older boomers recovered nicely because they enjoyed higher return rates over their investment lifetimes compared to younger people.
As an aside, those with portfolios divided evenly between stocks and bonds did better over the long term, but we already discovered that a balanced portfolio helps you ride out stock market storms in a previous blog post.
How to make up for lost opportunity
Here's the study's conclusion: For the younger cohorts to end up with the same ratio of assets to income at age 60 as the fortunate older boomers, younger boomers would have to "average a nominal compound return of 13.2 percent" going forward. That number would be 11 percent for Gen Xers.
Sound like a realistic expectation to you?
Since it's unlikely that younger boomers will get such a high return over the next 10 years or so, they have a few options, the way I see it:
- They can ask their employer for a much more generous match. (This may be akin to the unrealistic expectation of a return north of 13 percent.)
- They can forgo all fun in the present and increase their contribution rate to the maximum amount permissible ($22,000 for those who are 50 or older in 2010).
- They can write their Congress representative and ask for a great big raise for Social Security. (OK, I know, that's not really an option.)
- They can rev up their equity stake and hope they don't run into another traumatic market event like the two we recently experienced. (OK, this would be reckless.)
- They can adjust their lifestyles now and/or their expectations for the future.
- They can delay retirement for a few years.
Oh, there's one other option. They can skip retirement altogether and work straight through until they drop dead. Many people already expect to do just that, according to a recent Bankrate survey.
Can you think of other options?