Boomers Behaving Badly: A Better Solution To The ‘Money Death’ Problem
Brandes Investment Partners
January 2012
Abstract:
In the United States and in several other wealthy countries, the demographic and financial problems facing retirees are (finally) getting attention as the costs grow so large that they clearly will impact every member of society through tax hikes, cuts in services or both. Long-term solutions at the aggregate level are not going to be easy, although the basic concepts point only in one direction: less money available, more people share it!
This research focuses on a narrower issue, but one that is critically important to many affluent baby boomers approaching or in the early phase of retirement. What can today’s retirees do to provide enough financial security to avoid “money death,” the risk that assets run out during their lifetime?
Boomers Behaving Badly: A Better Solution To The ‘Money Death’ Problem – Introduction
PART 1: Boomers Bust?
Scope of the Problem and a Possible Solution
Many investors approaching retirement age are worried about their prospects – and with good cause. Financial markets have dealt a series of blows to their investment portfolios in the past few years and they are somewhere in the range of worry to panic that at some point in their retirement years, they will run out of assets and hence their ability to generate the desired level of income to supplement what are increasingly inadequate pensions.
- Previous generations relied more heavily on defined benefit pensions – income for life.
- Previous generations were used to seeing higher yields and total returns from their investment portfolios.
- Previous “retiring” generations were a smaller proportion of the population, requiring less strain on society’s resources to support them in old age.
In the United States and in several other wealthy countries, the demographic and financial problems facing retirees are (finally) getting attention as the costs grow so large that they clearly will impact every member of society through tax hikes, cuts in services or both. Long-term solutions at the aggregate level are not going to be easy, although the basic concepts point only in one direction: less money available, more people share it!
This research focuses on a narrower issue, but one that is critically important to many affluent baby boomers approaching or in the early phase of retirement. What can today’s retirees do to provide enough financial security to avoid “money death,” the risk that assets run out during their lifetime?
This is a large and fast-growing segment of the population, and not just in the United States. Looking only at individuals within 10 years of the normal retirement age in each country (above or below), there are seven developed countries whose growth in that population segment over this decade is expected to exceed either or both of 20% or one million people.
The United States stands out. Projections give it by far the biggest growth in actual population in this segment (Exhibit 1), and its growth rate in this segment is projected to be the fastest as well (Exhibit 2). However, the pace of growth in the other six countries (Canada, Australia, the United Kingdom, France, Italy, and Germany) suggests the issue is not confined just to these borders. For example, in those six nations there are now 77 million people in a range of 10 years before or after retirement age. That number is projected to grow to over 88 million by 2020.
As well as the sheer size and growth of this segment, this is the group that has accumulated the most wealth. A breakdown of wealth by age of head of household shows that the 55-plus age bracket dominates the wealth charts across all major countries. The good news for these over-55s is that their median household wealth is typically between 2 and 4 times the size of the younger generations’ wealth (the 35 to 54s). The bad news is that the absolute numbers are way too low to sustain a comfortable retirement without help from public or private pensions. Organisation for Economic Co-operation and Development (“OECD”) data for the United States puts the median household net worth for over-55s not much above $100,000 (2008 data in 2002 dollars). The same source puts the Canadian equivalent number under $100,000.
Importantly, that data is based on the median household, not the mean. In a population like the United States where wealth is unequally distributed, the median is skewed downwards. By definition, half the population is below the median income, but the mean (average) is typically much higher. This research focuses on those nearer the upper end of the wealth distribution where the money death problem may actually be soluble for the healthy and wealthy in the baby-boomer generation.
That baby-boomer generation is now moving into its retirement years and, within that group, our focus is largely on what could loosely be called the “upper middle class” in financial terms. These are households who may not be in the “high net worth” segment of $10mm plus assets (a segment not typically in danger of money death). But they do have enough assets to expect to generate a material retirement income to supplement their Social Security and any defined benefit (“DB”) plan income.
The approach outlined in this research is aimed primarily at those households with assets in the range of $1-$10mm and whose expected income from Social Security and DB pensions may be only a modest proportion of their desired income level in retirement. However, our proposals and simulations may be helpful to a much broader range of the population in retirement planning.
Note that defined contribution (“DC”) plans are treated as part of the asset portfolio in this study. Some DC plans offer an annuity option to provide lifetime income, but it’s not an option much used. In effect, DC plans are savings vehicles, not pension plans. In addition to individual investors and their financial advisors, this research is targeted toward sponsors and administrators of DC plans, in shaping the investment options they provide, and the advice provided to participants.
Asking the Right Question
As the baby-boomers approach retirement and evaluate their income-generation potential, it’s not that they are getting the wrong answer, but that they may be asking the wrong question – focusing only on the income yield their investment portfolio can generate. In today’s low-yield investment world, income-oriented investing has become the Holy Grail, especially for individual investors.
This search for income has been accelerated by the long-term bull market in bonds, which has driven yields to the lowest levels most individuals have seen in their investing lifetimes (see Exhibit 3). In the United States, the lack of meaningful current income has been exacerbated by concerns about the municipal bond market, traditionally an investment haven for the affluent individual.
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