The 77 million American boomers, now between the ages of 44 and 63, see traditional retirement as a period of personal diminishment, dependency, social isolation and stagnation, and they want none of it. Boomers will work longer, not just because they have to, but also because they want to. While a paycheck remains extremely important, anyone who has been laid off in this recession knows that work also provides a sense of belonging and purpose, interaction with people of all ages and structures our daily living.
Retirement was never meant to last for decades and current longevity is the reason why uncapped defined-benefit pension plans are an unsustainable financial burden on business. The demise of DB plans, as well as the sharp decline in employment tenure, has pushed the headache of retirement planning onto individuals. Most boomers are unprepared to support themselves (and often their ailing parents or adult children) over a multi-decade retirement period.
Household wealth relative to income has fallen sharply in this recession and roughly one-third of boomer homeowners are shackled with mortgages that exceed the value of their homes. While households have tightened their belts in the past 18 months, the rise in savings rates has largely been the result of the government's tax-cut boost to disposable income. Spending as a share of pre-tax personal income has not declined at all. The savings rate needs to climb much further to rebuild nest eggs and to lower household debt ratios to the pre-credit-boom levels of the mid-1990s.
There will not be much help from government, as the social safety net is not sufficient to fully support the living standards of even median-income retirees. According to a 2009 study by the Organization for Economic Cooperation and Development, Social Security and Medicare in the U.S. replaces only 44.8 percent of pre-retirement income for median-income families earning roughly $50,000 a year. The replacement rate rises to 58 percent for poorer households (earning half the median income) and falls to only 33 percent for household income of twice the median. The richer the household, the more dependent it is on its own ability to save and invest. In Europe, for example, the net income replacement rate for the median-income household is generally above 60 percent, as high as 75 percent in Italy, and even higher still in Scandinavia. In Canada, it is roughly 58 percent.
The financial crisis has altered the rules regarding portfolio longevity. No longer is it prudent to assume that an initial withdrawal rate of more than 5 percent will cover a multi-decade retirement period. Those early retirees who were forced to sell portfolio assets at markedly depressed values in 2008 have damaged irreparably the longevity of their nest egg, forcing many to return to the workforce or meaningfully cut back their spending. The labor force participation rate of people 55 and older continues to rise sharply to 50-year highs and it is this group that accounts for most of the rise in small business start-ups and self-employment.
Boomers are still the healthiest, wealthiest generation in history. They can and will work longer, cut their budgets and lower their expectations regarding retirement lifestyle and large bequests. The new frugality will be accompanied by a heavy dose of affordable luxuries and travel-like experiences. Home entertainment and personalized recreation will continue to boom. Insurance-related products, such as annuities and guaranteed-income products, though expensive, will become more popular as boomers reduce risk. People will want their banks to help them simplify their financial lives as the economy recovers.
With the aging of the population, the number of workers between 35 and 44 will continue to decline. Younger workers cannot fully fill the gap in either numbers or experience, so boomers will be welcome participants in the workforce. Employers will offer job flexibility, and technology increasingly enables remote employment. To be sure, many boomers have been forced into temporary retirement by the crisis-induced downsizing, and some will need to switch careers or re-locate for future re-employment. For the vast majority, continued employment well beyond age 65 will be possible.
Cooper is the Global Economic Strategist at BMO Financial Group and Chief Economist at BMO Capital Markets.
