The Big Squeeze
The pressure is on baby boomers saving for retirement. Many also face college tuition and caring for a parent
And the boomers need to plan for long retirements. Modern medicine and better diets are yielding longer lives. The average American woman today can expect to live until 80, up nearly five years from 1970. Those who make it to 65 can expect to live until nearly 84.
Yet boomers also have to worry about higher expenses in their elongated retirements--and not just because of their propensity to spend. Only 13 percent of private-sector employers offer medical benefits to retired former workers, according to EBRI. And the promise of longer lives through better medicine has come with a price. Healthcare expenses could wind up costing retirees 20 percent of their annual income, according to the employee benefit consulting firm Hewitt Associates. This may explain why three times as many boomers say they fear major illness and healthcare expenses more than dying.
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Here's another pressure point: With recent record low mortgage interest rates and surging home values, Americans have been refinancing their mortgages in droves. This includes young boomers like the Eberts.
Last year, the Eberts refinanced their mortgage and took some of their equity out of the home to pay for additions to their house. They redid their kitchen and added a bedroom and a garage for their growing family. To do so, they took an old 30-year mortgage--of which they already paid down 12 years--and replaced it with a new 30-year loan. This means Paul will be around 77 by the time his home is paid off.
Worse still, because of the renovations, the couple's monthly mortgage payments actually increased even though they refinanced at lower rates. "It bothered me a bit to take that on," says Paul, but "we really didn't have a whole lot of options."
Mortgage bonfire. The fact that so many Americans will be carrying mortgages well into retirement means that the old rule of thumb of needing to replace 70 or 80 percent of your preretirement income is out the window. "That may have been true in the old days, when retirees burned their mortgages before retiring," says Rande Spiegelman, vice president of financial planning for the Schwab Center for Investment Research. But today, he says, young boomers should plan on saving enough to replace 100 percent of their preretirement income--minus whatever they are setting aside to build up their nest eggs.
If only there were a federal Leave No Young Boomer Behind Act. But, says Daniel Houston, senior vice president for retirement and investor services at the Principal Financial Group, "there are no silver bullets. The Lone Ranger left the last one of those on the prairie."
So what should one do? For starters, young boomers simply have to save more money. Period. This may be difficult for workers who are simultaneously paying their children's college bills. But "if you don't cut your spending voluntarily now, you'll be forced to cut your standard of living in retirement," says Houston.
Consider this: Fifty-five percent of young boomers--those ages 45 to 54--have saved less than $50,000 toward their retirement, not including the value of their primary residences. Two thirds have less than $100,000 saved. And nearly 9 in 10 have less than $250,000.
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