WASHINGTON Add this to the growing pile of research that seems designed to scare baby boomers out of their Birkenstocks. A new study from Bankrate.com and Research Affiliates, a Newport Beach, California, money management firm, posits that the postwar generation could be retiring at a most unfortunate moment.
"The baby boom may end with a whimper," wrote Chris Kahn, the Bankrate analyst who worked on the study. "Baby boomers may be leaving ... (the work force) at the worst time in a generation or more."
The study finds that today's low yields on "safe" investments like bank deposits, bonds and insurance products may not provide enough income for the boomers, who are expected to bust longevity records. The shift from pensions to employee-funded 401(k)-type accounts further leaves them less protected than their parents and grandparents.
Let's try for a little perspective, shall we? In the first place, there have been scarier times for Americans to retire. Before 1940 there was no Social Security. In 1960 the life expectancy for women was 73; for men it was 66. So while retirement may have been sweet, it was short. Until landmark retirement legislation passed in 1974, the companies that offered pensions often required decades of loyalty before benefits were guaranteed, and then frequently laid off employees just before they were eligible to collect. In 1980, retirees may have had nice yields, but they were facing a 13.6 percent inflation rate.
So it's not really the worst time in history to retire - or even the worst economy in which to retire. (Depression, anyone?) What it may be is the worst time to depend on bank deposits, bonds and insurance products to see you through a long retirement. Here are other strategies to consider.
- Have patience. "Low returns don't persist forever," says Michael Kitces, research director of the Pinnacle Advisory Group in Columbia, Maryland, and publisher of the financial planning Nerd's Eye View blog (kitces.com/blog).
Those multidecade retirements that everyone keeps telling us we may enjoy mean that we're likely to live through future periods of higher yields and multiple stock market cycles.
- Retire when you can afford to, says Sheryl Garrett, a Shawnee Mission, Kansas, financial adviser. When is that? She tells clients to do this math: Add 1/25th of your savings to the amount of Social Security and pension benefits you expect to get in the first year or retirement. Is the total enough to support a comfortable lifestyle? Then you're good to go. "If you can afford to retire, then you shouldn't care about what the interest rates are at that moment," she says.
- Be smart about spending during the first year of retirement. Kitces tells retirees that they should aim to "take withdrawals low enough to be able to wait it out until returns revert to something more normal." How low? Historically, advisers have told people to count on the so-called 4 percent rule: In the first year of retirement, you can withdraw 4 percent of your savings. In subsequent years you can increase that withdrawal by the rate of inflation - most experts build that in at about 3 percent a year.
Kahn says some retirement experts are now saying 4 percent is too high, but Kitces has run the numbers, and the average withdrawal rate that has sustained retirees throughout history has been about 6.5 percent. "In other words, the safe withdrawal rate approach (of 4 percent) already cuts your lifetime spending by one-third specifically to defend against situations just like this," he said, referring to the current low-yield environment.
Furthermore, research from fund company T. Rowe Price and others has shown that many retirees don't increase their withdrawals by the rate of inflation every year.
- Invest like a young person. If you're going to live for 30 more years, you can take the kinds of investment risks that a long horizon allows. Consider keeping a higher percentage of your retirement savings in stocks than is traditional for retirees - more, say, than the 40 percent that was the old rule of thumb for a 60-year-old. Look at alternatives to those safe bonds and bank certificates, too. Garrett is suggesting some retirees may invest in items like real estate, where they can collect rents, as well as dividend-paying stocks and preferred stocks.
- Slide into retirement. Working part-time for a few years or developing a new way to make money on the side can ease the financial and psychological adjustment. Delaying the start of your Social Security benefits can give you such a big boost (in the form of higher benefits for life) that it may be worth taking bigger withdrawals from your investments to forestall that first benefit check, says Garrett. You can ask your adviser to run the numbers or use one of the new online Social Security benefit planners like SocialSecurityChoices.com or SocialSecuritySolutions.com.
- Save more. Kahn tells boomers to take advantage of the tax breaks for "catch-up contributions." Those allow anyone 50 or older to tuck extra money into 401(k) plans, individual retirement accounts and other retirement plans. Even if this should turn out to have been a historically great time to have retired, a little extra cash never hurt anybody.
(Refiles to add dropped words "offered pensions" in fourth paragraph)
(Linda Stern is a Reuters columnist. The opinions expressed are her own. The Stern Advice column appears weekly, and at additional times as warranted. Linda Stern can be reached at firstname.lastname@example.org; She tweets at www.twitter.com/lindastern .; Read more of her work at blogs.reuters.com/linda-stern; Editing by Prudence Crowther)