3 Majors Reasons Boomers Aren’t Prepared For Retirement

Baby boomers, typically defined as being born between 1946 and 1964, are either right at the edge of retirement or already in the heart of it, as they are now between the ages of 59 and 77. Unfortunately, many of them head into retirement relatively unprepared.

According to data from the Bureau of Labor Statistics, the average annual expenditure for Americans aged 65 to 74 is $56,435. However, with estimates of baby boomer retirement savings running between $134,000 and $162,000 on average, that doesn’t leave a lot of room in the budget to cover these costs.

Social Security adds an average of $1,785.94 per month, but that’s only another $21,431.28 per year, leaving a deficit of about $35,000 per year to make up with savings. That means that a boomer with a typical-sized nest egg only has enough to last about four to five years. How did boomers get into the predicament? Here are a few of the most common reasons.

Lack of Preparation

Baby boomers aren’t the only generation that comes up short when it comes to preparing for retirement. Although younger generations still have time to catch up, their savings on average are still well below the levels that experts suggest.

For example, Gen Xers have $87,000 tucked away on average, while millennials have about $50,000 and Gen Zers tap out at about $33,000. Each generation has its own financial issues to deal with, but they are all plagued by a number of the same hurdles, from rising living costs and stagnant wages to the general difficulty human beings have in deferring current consumption for long-term savings. This combination of factors makes saving for retirement hard for everyone.

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Starting Too Late

According to the 22nd Annual Transamerica Retirement Survey of Workers, in Oct. 2022, the average boomer didn’t start saving for their retirement until they were age 35. This is completely understandable for a number of reasons.

First, younger workers typically don’t earn as much, making it seem harder to save for retirement. Workers in their late 20s and early 30s are also often using their income to pay for other obligations, from a new home to student loan debt to the cost of starting a family. Unfortunately, waiting this long to save for retirement can be devastating, since compound interest takes time to work its magic.

A simple mathematical exercise will demonstrate the severe penalty that boomers who waited to save will pay when it comes to the size of their nest egg. Imagine a boomer who started socking away $500 per month at a 10% average annual interest rate starting at age 35. By the time that boomer turns 65, they would have about $226,000 in their retirement account. However, the boomer who started at age 21 instead would have nearly $1 million instead.

Low Interest Rates

With the exception of the past two years or so, interest rates for savers and investors were quite low for decades. In fact, after the yield on the 10-year U.S. Treasury note peaked at 15.84% in 1981, it was on a relentless decline all the way until 2022, when it finally started rising again.

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During that time, investors who were looking to buy fixed-income investments like bonds to help fund their retirement faced an increasingly shrinking revenue stream. Meanwhile, inflation, even though mild for much of that time, continued to increase costs. 

But in a one-two punch that helped cripple those looking to save for their retirements, even the stock market had a “lost decade” from 2000 to 2010, when the S&P 500 actually posted a negative 2.72% annualized return. Since most investment calculators anticipate a consistently positive average annual return, actually losing money over a 10-year period is devastating to a long-term portfolio. As this is one factor that boomers — indeed, all investors — have no control over, some of the shortfall in their retirement savings is understandable.

The Bottom Line

The average baby boomer is unfortunately behind the curve when it comes to saving for retirement, meaning many of them may have to live primarily off Social Security. Common reasons why many boomers have smaller nest eggs include starting too late and a general lack of preparation, although low interest rates and poor market performance may have been contributing factors.

Future generations have time to avoid this financial predicament, but only if they take heed of the lessons provided by the boomers.

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