Key Points
- More than half of peak boomers have less than $250,000 in assets and will have to rely primarily on Social Security as a source of income.
- The 2008 financial crisis caused many older adults to exit the stock market prematurely, missing the rebound and shrinking their retirement accounts.
- Older adults can boost financial stability by setting clear retirement goals, using tax breaks, and leveraging financial planning tools for better decision-making.
Fact Box
- • Baby Boomers:
Individuals born between 1946-1964. This generation is named for the significant increase in birth rates following World War II, commonly referred to as the "baby boom".
- • The Great Recession:
Beginning in late 2007 and lasting until mid-2009, it was the longest and deepest economic downturn in many countries, including the United States, since the Great Depression.
- • Social Security Benefits:
The average monthly benefit for those taking Social Security benefits is $1,900 per month. For those in retirement and taking Social Security, on average this source of income covers 55% of their expenses.
The largest group of baby boomers is now reaching retirement age, but nearly 65% are likely to face financial shortfalls once they get there, according to new research on the so-called “peak 65” surge.
A Lack of Adequate Savings
In the coming years, a record number of Americans, around 4.1 million annually, are expected to turn 65, based on data from the Alliance for Lifetime Income (ALI). The majority of these Americans are not financially ready to retire, and a significant number face the possibility of falling into poverty.
More than half of “peak boomers”, meaning those who will turn 65 between 2024 and 2030, have less than $250,000 in assets and will have to rely primarily on Social Security as a source of income. Financial experts typically suggest that retirees need to replace 70% to 80% of their pre-retirement income to sustain their standard of living, but Social Security is intended to cover only around 40% of that amount.
The 2008 Recession
One major factor behind Boomers’ financial shortfall is the stock market downturn during the Great Recession. The sharp decline led many older adults to pull out of the market, causing them to miss the recovery that followed. While the urge to sell was understandable, it significantly reduced the value of many retirement savings.
In the years that followed, persistently low interest rates reduced the returns on bond funds that many savers and retirees were encouraged to invest in. These limited yields were then reinvested into assets that generated minimal interest. At the same time, stagnant wages made it challenging for most workers to increase their savings during their peak earning years.
Using financial planning tools such as WealthTrace to simulate bear market scenarios can help assess whether your portfolio is resilient enough to endure a downturn similar to the 2008 recession.
Steps to Build Long-Term Retirement Stability
If you are approaching retirement and worried that your savings may fall short of what you will need for your years without work, you are not alone. Here are five practical steps that older adults can take to strengthen their financial security for the long term.
1. Calculate Your Retirement Savings and Income Goals
Many baby boomers haven’t taken the time to fully calculate how much they’ll need in retirement. In fact, nearly half admit they simply guessed their savings target rather than basing it on actual calculations.
With WealthTrace, you can build a personalized, detailed budget to estimate your anticipated retirement expenses. You can create up to three different budgets and switch between them effortlessly to understand how each scenario impacts your financial outlook.
2. Consider A Part-Time Job in Retirement
Working part-time during retirement offers several advantages. It provides supplemental income that can help cover expenses or boost savings without the demands of a full-time job. Earning additional income can also delay the need to draw from retirement funds or Social Security benefits, helping to preserve financial resources.
You can model various income streams in WealthTrace, such as a part-time job during retirement.
3. Boost Your Retirement Savings with Tax Breaks
Depending on your financial situation, you may qualify for tax benefits that help you build your retirement savings more effectively.
- Saver’s Credit: This federal tax credit is designed to encourage low- to moderate-income earners to contribute to retirement accounts. Eligibility depends on income level and filing status, and the credit can be worth up to 50% of qualifying contributions.
- Catch-Up Contributions: Individuals aged 50 and older are permitted to contribute additional funds beyond the standard limit to retirement accounts.
- IRA catch up limit: $1,000
- 401(k) catch up limit: $7,500 for those aged 50 and over, $11,250 for those aged 60-63.
You can enter your annual contribution amounts in WealthTrace and specify if this amount will change in the future.
4. Consider Downsizing in Retirement
For many older adults, downsizing in retirement can offer significant financial and lifestyle benefits. Moving to a smaller, more affordable home can reduce monthly expenses such as mortgage payments, utilities, property taxes, and maintenance costs, freeing up income for other needs or leisure. Downsizing can also unlock home equity, which can be used to bolster retirement savings or cover healthcare costs.
You can model a home sale in WealthTrace to see how downsizing and freeing up equity could affect your financial plan.
Benefits of Using Financial Planning Software
Financial Planning software, like WealthTrace, can provide a clear and organized view of your income, expenses, assets and liabilities, making it easier to set realistic financial goals and track progress over time. WealthTrace also allows you to run what-if scenarios on Roth IRA conversions, recessions, future inflation, delaying Social Security, asset allocation, taxes, and many more important retirement variables.
The Bottom Line
A record number of Americans, about 30.4 million, are reaching retirement age, but many are financially unprepared, with the majority lacking adequate savings and heavily reliant on Social Security. Factors like the 2008 recession, low investment returns, and stagnant wages have left many boomers vulnerable. However, older adults can take proactive steps to improve their retirement outlook, such as working part-time, maximizing tax benefits, downsizing, and using financial planning tools to better manage their future.