Cheer Up, Baby Boomers ... It's Not All That Bad

A newly released government study reveals that baby boomers are in better financial shape than widely believed. That's good.

Both pension and Social Security benefits have largely offset the fall in home values over the past several years. And with respect to home values, they still may recover in the next several years, so we can't count that as a loss yet either, assuming the baby boomers stay put.

Also, those earning in the lowest quartile saw their wealth decrease the least because home ownership isn't so prevalent in that group, and Social Security benefits represent a much larger percentage of total individual wealth than is the situation for higher earners with homes. While that's not great, it's important to get an accurate understanding of the entire baby boomer financial security situation.

Boomer financial health: Better than you'd think has the survey results in summary form:

"You might not feel as if you’re in great financial shape as you approach retirement. But a new study shows that the impact of the 2007-2009 recession on some of the oldest baby boomers might not be as bad as first thought.

The report, in the current issue of the Social Security Bulletin, is titled, appropriately enough: “How Did the Recession of 2007-2009 Affect the Wealth and Retirement of the Near Retirement Age Population?” Using data from the University of Michigan Health and Retirement Study, the new report finds that retirement wealth held by individuals age 53 to 58 in 2006 declined by a “relatively modest” 2.8% by 2010.

By comparison, when members of age cohorts six and 12 years older were the same ages (53 to 58 in 2000, and 53 to 58 in 1994, respectively), their wealth increased about 5%, the report notes. These groups, of course, benefited from a boom in housing prices and the stock market.

The study calculates that the mean value of total wealth among so-called early-boomer households was $871,000 in 2006. That figure includes projected pensions and Social Security benefits, retirement savings plans, housing values and other financial assets. By 2010, that figure had fallen to $847,000.

Why the relatively small decrease? Most important, the lifetime value of Social Security and pension benefits – which account for 55% of the total wealth of this group – retained their value. As such, those two pieces, the study says, “played a major role in cushioning total wealth from the effects of the recession.”

So…are you feeling better? If not, one reason could be the fact that the value of your house is likely still lower than it was when the recession started. But here, too, there’s cause for optimism, the report notes: “Housing is the one asset [older boomers are] not likely to cash in for another decade or two; therefore, early boomers have time to potentially recover their lost housing wealth.”"

SUMMING UP 

Social Security and pension benefits are a crucial factor influencing baby boomers' financial security in old age.

As more employers, including governments, transition from pensions to 401(k) plans, it will be critical that individuals know much more about how to save and invest for their own retirement needs.

And it will also be a great idea for future home owners to learn 'vicariously' the lessons of borrowing too much to buy homes and then having far too much of their financial well being concentrated in the asset value of those homes.

Of course, it's also essential that we place Social Security on a firm financial footing for future generations of retirees as well.

There's lots to do but assuring our individual financial security in old age won't be all that hard once we've learned, internalized and are willing to apply the basics of saving and investing.

Thanks. Bob.