Rest assured, baby boomers – StarTribune.com
It’s a tough time to retire. The market is down 7% from last year and the inflation rate is down to 8.5%. Both are brutal to your bottom line when you’re on a fixed income. But rest assured! Even if things look bad, chances are you’re in better shape than your parents or grandparents. And if they made it through retirement comfortably, so will you.
If there was a golden age of retirement, it would be now. For most of human history, people worked until they were physically unable to, then spent the rest of their lives either poor or dependent on their families. This changed in the 20th century when many economically developed countries adopted various pension programs that paid income until retirement. The United States pays social security benefits and also offers tax incentives for employers to offer retirement plans.
Better access to retirement accounts such as a 401(k) means people are retiring with more money than before. Of course, many people still don’t have access to retirement accounts through their jobs or don’t have extra income to save. But most retirees have a lot more money than before.
More money means more retirement income. A study looked at the IRS records of 5% of American retirees and estimated that income increased by 10-12% for those age 70 in 2011 compared to 2000. Overall, the data shows that people have more or nearly the same income as previous cohorts. retirements.
Our government benefits are also worth much more now. When interest rates fall, as they have for the past 30 years, the value of low-risk incomes like Social Security rises. Yes, medical costs have increased, but this also reflects the fact that health care has become much more efficient in keeping us alive and improving our quality of life. Medicare has also become more generous: think, for example, of the creation of prescription drug insurance in 2003.
It’s also true that you can expect to live longer in retirement, which means your money should last longer. But isn’t that a good problem to have? You’re probably also healthier than former retirees your age, which means you can work part-time for years until retirement if you need to.
Before you get too confident, though, I have to add this caveat: retirement these days isn’t easy. When you live longer and don’t want to run out of money before you dance your last dance, figuring out how much you can safely spend each year is a very difficult problem, especially when markets are volatile and inflation is high and unpredictable. .
To make matters worse, current conventional wisdom, such as the 4% rule or spending your required minimum drawdown (RMD), would suggest that you should cut back on your spending in an economy like the one we are experiencing today. But that’s easier said than done when your money will buy less with inflation at 8.5%, and many retirees feeling ready to travel and socialize after years of pandemic isolation.
In finance, any strategy that forces you to cut spending at the worst possible time is considered a failure. Yet, for whatever reason, millions of retirees are advised to follow a strategy that does just that. So if you want to do better and don’t want to buy an annuity with your savings, you need to be more strategic.
Divide your spending into wants and needs. Fund your needs (housing costs, food) with stable, inflation-protected income like social security or inflation-indexed bonds. Then fund your needs based on the performance of your risky assets (a good investment choice would be cheap, well-diversified equity funds) and balance those decisions with your personal circumstances. If this is the year you feel you really need to take a vacation with your grandkids, so be it. You can at least rest assured that while you’re splurging, your needs are being funded with low-risk assets, so you know you’ll be fine in the future.
Plans like your 401(k) have come under a lot of criticism over the years, but they’re the main reason many retirees will be better off than previous generations. This means baby boomers are entering retirement wealthier than previous generations, but burdened with a very complex risk problem: how to spend that money. So if you want to worry about your retirement, worry about it – at times like these the problem is harder to solve than ever.
Allison Schrager is a senior fellow at the Manhattan Institute and author of “An Economist Walks into a Brothel: And Other Unexpected Places to Understand Risk.”