Helping boomers bounce back from the Great Recession
The Great Recession took its toll on all of us, but as we've come to learn, it hit baby boomers particularly hard. The combination of high unemployment, declining home values, and investment losses left many boomers in dire financial straits. But don’t despair, If you’re a boomer who needs to get your financial house in order, there’s still time for you to build a comfortable retirement.
First, the bad news. According to a recent AARP report, approximately half of all boomers had trouble making ends meet during the recession and — as the following figures illustrate — more than a few had to resort to extreme measures just to get by:1
- 57% withdrew money from a savings account
- 37% stopped or cut back on saving for retirement
- 35% used credit cards to meet daily expenses
- 30% received financial help from family and friends
- 28% took a distribution or loan from a 401(k) or other retirement account
- 11% used home equity
Unfortunately for boomers, tapping these reserves couldn't have come at a worse time. With retirement looming on the horizon, many were counting on these assets to fortify their nest egg. Instead, boomers lost between 25-28% of their median net worth2 and are now struggling to bounce back.
Where do we go from here?
There’s no time to wallow in what might have been. Here are a few ways to get started now to help recover:
Be an aggressive saver: The average boomer didn’t start saving for retirement until age 35,3 which means there’s a good chance you may need to make up for lost time—as well as any money you may have lost during the recession. Fortunately, there are a number of tax-advantaged mechanisms in place to help you do just that, such as the catch-up provisions now available on IRAs and 401(k) plans. If you are 50 or older at the end of the calendar year, you are eligible to contribute an extra $5,500 to your 401(k), $1,000 to a traditional or Roth IRA, or 2,500 to a SIMPLE 401(k)/IRA.4
1“Boomers and the Great Recession: Struggling To Recover,” AARP Public Policy Institute, 2012
2“Retirement Security Across Generations,” The PEW Charitable Trusts, May 16, 2013.
3“Great Recession pummeled Baby Boomers,” Daytona Beach News Journal, October 13, 2013
Accept more risk: Under normal circumstances, people generally become more conservative the closer they come to retirement. Given the compressed timeframe mentioned above, however, the slow-and-steady approach may not be sufficient. With interest rates on federally insured CDs and other fixed instruments hovering near historic lows, you may need to take on a bit more risk in order to pursue higher returns.
Find new sources of income: With the decline of defined benefit (traditional) pensions, social security is the only form of income many boomers will be able to count on in retirement. Why is income so important? Ask today’s retirees—many of whom are getting such a low rate of return they are in danger of outliving their money. To keep this from happening to you, now’s the time to secure as many sources of income as possible. One way to go about it is to rent out a room in your house, or perhaps purchase a franchise—anything to help replace the paycheck you will lose in retirement. Another way is to cultivate a skill or hobby—such as carpentry—that will help generate income later in life. A third possibility is to use a portion of your existing assets to purchase a lifetime income annuity that’s guaranteed to provide a steady stream of income for the rest of your life. 5
4“Retirement Topics-Catch-Up Contributions,” www.IRS.gov, 2013 figures.
5Guarantees are subject to the claim-paying ability of the issuing company.
As you might imagine, the burden of paying a mortgage can put a major crimp in your retirement lifestyle. Plus, the more you owe on your home, the less you will receive back should you decide to downsize. To reduce your mortgage faster, try making one extra payment a year or add a bit more to each payment so that you can whittle down the principal. If you are saddled with a high interest mortgage, consider refinancing to a lower rate or use other resources—such as the cash value of a whole life insurance policy—to pay off the balance altogether.
Plan to work longer: While the average American retires at age 61, the reality is you may need more time to rebuild your nest egg.7 In fact, 36% of boomers are already planning to postpone retirement, and another 43% are planning to work part time even after they retire.8 This strategy may be the most effective of all since it gives you more time to put money away for retirement, while at the same time, reduces the number of years that you will need to rely on your nest egg. Plus, you can continue to accumulate social security credits all the way to age 70, so the longer you work, the larger your monthly payments will be.
Did the Great Recession set your retirement plans back? If so, you might want to talk to a local New York Life agent. Together, we can start planning for a better tomorrow.
6“Today’s Retirees Face More Mortgage Debt Than in the Past,”
7“In U.S., Average Retirement Age Up to 61,” Gallup.com, May 15, 2013.
8“Boomers and the Great Recession: Struggling To Recover” AARP Public Policy Institute, 2012