Friday, June 8, 2012

Reality Three: It Isn’t Going Away.

Social Security Reform: Social Security may die, but retirement won’t

Boomers aren’t unique.  It would be nice to think the retirement planning problem is just an irresponsible generation.  In fact, another article “WhyBoomers Need Bigger Nest Eggs Than Their Parents” starts out looking like it will just rehash that issue.  Certainly the title would lead one to believe the focus is on boomers.

But it broadens the focus: “From 1983 through 2007, the period during which the surveys (Fed’s Survey of Consumer Finance) were conducted, the ratio of wealth to income has remained virtually unchanged at any given age.”  Note the phase “at any given age.”  They aren’t just talking about boomers. 

The broader focus is also explicit in the next statement: “At first glance, this regularity seems comforting, suggesting that the boomers and the cohorts that follow are as well prepared for retirement as their parents. But that conclusion is wrong.”  Again note the phrase “and the cohorts that follow.” 

The article first uses the conventional measure of the extent one is prepared for retirement: “The easiest way to answer that question is to look at the ratio of wealth to income from the Survey of Consumer Finances (SCF), the Federal Reserve’s comprehensive survey of household wealth in the United States. The notion is that the wealth-to-income ratio is a good proxy for the extent to which people can replace their pre-retirement earnings in retirement.”

Then the article goes on to list reasons why current and future retirees need to have more savings than previous generations.  What the article fails to note is that some of the reasons why current retirees need to have saved more (e.g., decline in pensions and increased life expectancies) are going to stress “…the cohorts that follow” more than boomers.  In short, for retirement planning, the wealth-to-income ratio has to be updated.  It has to be supplemented with as follows: “AND the number of years over which it has to be replaced.”

An article entitled “Life Spans, Health Care Costs and Rethinking Retirement” in the April 2012 AAII JOURNAL notes some relevant survey results.  The respondents were asked how they would “change how they approach money management if they knew they would live to be 100.”  The respondents weren’t non-planners.  It was a Merrill Lynch survey of 1,000 individuals with investable assets of $250,000 or more.  “Respondents said they would continue working at least part-time and/or re-evaluate their saving and investment strategies if they knew they would become centenarians.”  Fully three quarters would change how they planned for retirement.  The fact is living to be 100 is going to be more common among the post boomer generations. 

Unfortunately, boomers aren’t the only ones that enjoy the freedom of avoiding responsibility for planning.  Remember The 99%ers: Part 7” cited some articles (e.g., “US wealth gap between young and old is widest ever”) that indicated some encouraging information: boomers have saved more than younger people. Reality three:  It isn’t going away reflects the fact that freedom from the responsibility for planning appeals to many: young and old alike. 

The reforms needed in order to accommodate the size and longevity of the baby boomers are going to be essential in the future.  It is absurd to ignore the fact that medical science is going to continue to find treatments that increase longevity.   The shortcomings will be worse for post boomers because they will live even longer. 

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