Q&A:
Boomers in a Bind

Dallas Salisbury says the next generation of retirees may find its expectations unfulfilled

» Better or Worse
» Who Is To Blame?
» Being Eligible
» Looking For Yourself

Baby Boomers face a paradox, says Dallas Salisbury, president and CEO of the Employee Benefits Research Institute. As a group, the 77 million born between 1946 and 1964 have saved more--both proportionally and in absolute terms--than their predecessors. Yet, they face higher costs in retirement than the previous generation, including pricier medical insurance and bigger bills for home and nursing-home care. On top of that, they have more debt, incurred to finance higher lifestyles.

The result, Salisbury told the recent White House Saver Summit in Washington, is that, when they reach retirement, most boomers will learn to their disappointment that they cannot sustain their standard of living.

Salisbury's conclusions derive partly from EBRI's 2002 Retirement Confidence Survey, released in March. While retirement planners say it takes about 70% of pre-retirement income to live comfortably after one's working years are over, about 16% of workers ages 40 to 59 believe they need less than 50% percent, the survey says. Another 25% believe they can do so on 50% to 59% of pre-retirement income, while another 14% think they can make do on 60% to 69% (another 7% do not know how much they will need).

PLANSPONSOR's Robert Stowe England recently spoke with Salisbury about Baby Boomers' retirement prospects.

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Better or Worse

PS: Will Baby Boomers be better off, worse off, or on a par with their parents in retirement?

Salisbury: All things in life are relative. They're going to have higher income. It will buy them as much lifestyle as those that went before them but, if they are not satisfied with that lifestyle, then, even though they have a higher income, they won't be as well off.

PS: So, is it all a matter of how you feel about it?

Salisbury: Our parents saved less than we're saving, but they also had a much more modest approach to life and they did not believe in debt. They had, as a life objective, paying off their mortgages, so they didn't have housing expenses to speak of when they retired. In today's world, people are more likely to enter retirement with a much higher lifestyle, with lots and lots of mortgage debt and, therefore, with high monthly carrying costs. At the same time, they will have a desire for a higher lifestyle than was demanded by the Depression's children. So, are they going to think they're as well off? Probably not.

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Who Is To Blame?

PS: Is the consumer culture at fault for the Baby Boomers' sometimes-troubling prospects? Or are the Boomers themselves entirely to blame?

Salisbury: The consumer culture, combined with easy access to debt, have created an environment in which spending is a lot easier than saving. The rise of personal bankruptcy "without guilt" has contributed as well.

At the same time, however, Baby Boomers have had far greater opportunities to save. They also have been inun-dated with financial institutions advertising to save for retirement, as well as public service campaigns to save. They also have been given the technology and tools they need to be financial planners or savers. In spite of that, they have chosen to spend, not save. So, yes, it's largely the fault of the Baby Boomers. They may not have saved enough-except for the lowest-income people, who cannot afford to save.

PS: What does "not enough" mean?

Salisbury: The probability of needing nursing-home care goes up with age and, because the Baby Boom generation will live longer than the generations before them, a larger proportion will need either extended home care or nursing-home care. The Baby Boom generation has not saved for that, just like the generation before them had not saved for that.

PS: Will fewer Baby Boomers have retiree medical care?

Salisbury: Yes. The proportion of retirees over 65 that had retiree medical benefits in addition to Medicare has been as high as the low-30 percentiles. For the Baby Boom generation, that is likely to be down in the low 20s. They are going to have to spend more of their money on retiree medical care than the prior generation had to spend.

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Being Eligible

PS: What misconceptions do Baby Boomers have about retirement?

Salisbury: We have learned from our retirement confidence survey that Baby Boomers do not know when they will be eligible for full Social Security benefits and are unaware that the retirement age for full benefits slowly is being raised to age 67. Most boomers plan to retire before they are eligible for full Social Security benefits, but falsely believe that they will be eligible.

PS: What other assumptions are likely to lead to financial disappointments for Baby Boomers.

Salisbury: Baby Boomers continue to anticipate higher rates of return from their retirement savings than the Warren Buffets of the world say are realistic to achieve. The research from most any academic or the investment retirement planning firms is that the only way of having a near-total probability of not outspending your money in retirement is to spend only about 4% per year of what you have accumulated. Most surveys indicate that individuals believe they will be able to spend 8% to 12% per year. If you spend more than 4%, there's a high probability of outliving your money.

So, you get into this further dilemma for the Boomers. Because they have tended to always approach life as high spenders and high borrowers, one can anticipate that that will follow them into retirement. Again, while they may have saved more than their parents, they also may spend it down much faster than their parents do. So, by the time the Boomers hit 80, they are likely to be feeling far more stressed than their parents felt at 80-even though their parents had far less.

PS: What can plan sponsors do between now and when Baby Boomers retire to affect their retirement situation in a positive way?

Salisbury: Plan sponsors are doing a great deal, but people are not taking advantage of it. Plan sponsors offer pre-retirement planning services, but attendance is low. They offer on-line investment advice, but usage is low. They offer 401(k) matching contributions-essentially free money-but 20% to 25% of workers leave that money on the table by failing to make their own contributions. This response is across the spectrum and, for some Baby Boomers, the response is: "I'm a denier. I'm going to live for today. Carpe diem."

PS: What can they do now to avoid this future?

Salisbury: The ending would be a happier one if, suddenly, Baby Boomers found fiscal discipline and were reborn into the image of the Depression's children. They would, for example, immediately cut up their credit cards on retirement and keep only a debit card. Then, they would calculate a realistic income from Social Security and assume they could take only 4% of their pool of assets to spend every year. Based on that knowledge, they could say then, "I can't afford that second home" or "Gee, I can't afford the home I'm in because I can't afford the mortgage payment plus my lifestyle. So, I'm going to sell this house and downsize-either to a lower mortgage payment or something I own outright."

Even with this adjustment, more Baby Boomers will face a greater challenge on long-term care and extended nursing-home care than their parents. Medical technology has taken away the luxury of just dropping dead with regularity. The magic of medicine keeps us ticking-but, sometimes, it doesn't keep us ticking in robust shape.

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Looking For Yourself

PS: What about the generations after the Boomers? What can they do to be sure they are better prepared for retirement?

Salisbury: The under-30 crowd seems to have internalized that, if they don't look out for themselves, no one else will. While it's too early to have the data to indicate how they will prepare for retirement, there are some positive signs with their early participation in (k) plans and credit management. A key effort that can help is to take financial literature and education into the schools at the earliest possible ages. If that can be done throughout the education system, then, over time, it can have a fairly substantial effect on retirement prospects for future generations.

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This article first appeared in the July 2002 issue of PLANSPONSOR Magazine