The Boomer Retirement Crisis: Navigating The Investment Maze

The baby boomer generation, born between 1946 and 1964, is retiring in large numbers, and many have not saved enough to maintain their standard of living. This situation has been termed a retirement crisis and has significant implications for the economy, including the job market, consumer spending, and social security. So, how can baby boomers invest during this challenging period?

Social Security

The aging of the baby boomer generation is causing a demographic shift, with a decreasing number of workers supporting each Social Security beneficiary. This has resulted in an imbalance, with benefit payouts growing faster than receipts. As a result, the Social Security fund that pays retiree benefits is projected to be depleted by 2033 if no changes are made. However, it's important to note that Social Security won't go bankrupt due to ongoing payroll tax contributions.

To address the funding shortfall, several solutions have been proposed, including:

• Raising the retirement age to match the increase in life expectancy.
• Increasing the payroll tax rate for employees and employers.
• Raising or eliminating the payroll tax cap to increase revenue.

While these solutions may help shore up the system, they also have implications for both workers and retirees. For example, raising the retirement age may reduce benefits for those who choose to retire early, while increasing the payroll tax rate could impact take-home pay for workers.

In addition to these potential solutions, it's worth noting that baby boomers have benefited from certain advantages that may positively impact their retirement prospects. These include the dramatic rise of the stock market since the early 1980s, smaller household sizes, and higher employment rates for women, which contribute to increased pension coverage.

Overall, while the baby boomer generation poses challenges to the Social Security system, it is important to remember that Social Security won't disappear, and there are steps that can be taken to ensure its sustainability for future generations.

Private pensions

There are two main types of private pension schemes: defined contribution and defined benefit. Defined contribution pension schemes are usually personal or stakeholder pensions, also known as 'money purchase' pension schemes. They can be set up by an individual or arranged by an employer as a workplace pension. The money paid in is put into investments by the pension provider, such as shares, and the value of the pension pot can fluctuate depending on how these investments perform. The final value of the pension fund will depend on how much was paid in and how well the fund's investments performed. The pension provider will usually take a small percentage as a management fee. Defined contribution pensions offer flexibility, allowing individuals to control how much they pay in and balance the level of risk and security.

Defined benefit pension schemes, on the other hand, are usually workplace pensions based on an individual's salary and how long they have worked for their employer. The pension provider promises to give a certain amount each year when the individual retires, and the amount received is based on the pension scheme's rules rather than investments or payments made.

Personal pensions, a type of defined contribution pension, are arranged with a bank, building society, insurance company, or unit trust. Individuals pay regular monthly amounts or a lump sum to a pension provider, who invests it on their behalf. It is also possible for other people and family members to pay into a personal pension. Personal pensions are suitable for those who are self-employed, not working but able to pay into a pension, or those who want to save more for retirement.

Stakeholder pensions, another type of defined contribution pension, are flexible and allow individuals to start with small contributions, making them ideal for low and middle-income earners. They also offer charge-free transfers to other stakeholder pensions and have set management charges.

Self-invested personal pensions (SIPPs) are a highly flexible form of personal pension that allows individuals to invest in a wide range of assets, including overseas properties, car parks, and unregulated products. SIPPs can be started with a few thousand pounds and offer either a low-cost or full-service option, with the latter providing a larger range of investments and a team to help implement them.

Personal saving

• Set reasonable savings goals: Start with small, attainable goals, such as saving 10% of your income or $500 by the end of the year. Gradually increase your goals to avoid becoming overwhelmed.
• Save in specific categories: Identify one or two areas each month to reduce spending. For example, you can lower your utility bills by checking for drafts and turning off appliances, or cut down on entertainment costs by borrowing books and movies from the library instead of buying them.
• Find a financial planner: A professional financial advisor can help you identify areas for improvement in your financial health, create a money management plan, and determine the types of savings you need to achieve your goals.
• Make savings automatic: Utilize online banking tools to automate your savings. Set up recurring transfers from your checking account to your savings account, preferably on payday. Start with a small amount, such as $5 per week, and gradually increase it over time.
• Increase your 401(k) contribution: Boosting your 401(k) contribution is an easy way to save more for retirement. Remember that your 401(k) contribution is pre-tax, so increasing your savings will also lower your tax burden.
• Maximize cash back: Use cash back credit cards that offer rewards and cash back on your everyday spending. Look for cards that offer at least 2% cash back, which you can then deposit into a bank account or brokerage.
• Start a side hustle: Earning more money gives you more financial flexibility. Consider working extra hours, taking on a second job, or participating in the gig economy by driving for ridesharing services or renting out a room in your house.

Real estate

For those looking to invest in real estate, there are a few different options to consider. One option is to purchase rental properties directly. This can provide both appreciation and rental income, making it a valuable asset class in retirement planning. However, it is important to keep in mind that managing rentals can be labour-intensive, involving tasks such as collecting rent, maintaining the property, and dealing with tenants. An alternative to direct property ownership is investing in Real Estate Investment Trusts (REITs). REITs are companies that own and operate income-producing real estate, and they offer a truly passive investment as the REIT manages the properties and distributes income dividends to shareholders.

Another option to consider when investing in real estate is utilising reverse mortgages. These allow older homeowners to convert their home equity into cash, which can supplement retirement income or cover expenses such as medical costs or home repairs.

When it comes to the broader real estate market, baby boomers currently own about 32 million homes in the US, and their choices will continue to shape the market and the economy for years to come. As they age, many baby boomers are expected to follow the pattern of previous generations and downsize to smaller homes or move to retirement communities. This could put a significant number of single-family properties on the market over the next decade, potentially easing the current real estate inventory crunch. However, some data indicates that baby boomers may age in place longer than past generations due to their relatively better health and wealth.

One thing is clear: the decisions of the baby boomer generation will have a significant impact on the availability of real estate inventory in the coming years. As the largest generation to retire, their actions will shape the market and create opportunities for savvy investors.

Stocks and equities

Baby boomers may choose to maintain a portion of their portfolio in stocks and equities, but with a more conservative approach to avoid unnecessary risk. Dividend-paying stocks and blue-chip companies are often favoured for their stability and income potential.

Some baby boomers use dividend reinvestment plans (DRIPs) to gradually grow their wealth. DRIPs allow investors to automatically reinvest dividends into additional shares of the same stock, compounding wealth over time.

Index funds and exchange-traded funds (ETFs) are also used to diversify equity holdings.

Younger investors can generally tolerate more risk and benefit from the effects of compound interest, so an asset allocation of 80% stocks and 20% bonds is recommended for those in their 20s.

However, those closer to retirement may opt for more stable, low-earning funds like bonds and money markets. The traditional retirement portfolio is considered to be 60% stocks and 40% bonds, but this has been questioned in recent years due to low interest rates and a series of bear markets.

The "100-minus-your-age" formula is a popular way to determine the percentage of your portfolio that should be in equities. This formula is designed to reduce equity risk as you age. However, some retirement experts argue that a rising equity glide path, which increases equity exposure during retirement, can improve outcomes for retirees.

Dividend Stocks

Dividend stocks can be a smart option for retirement investors, offering a potential to outperform in multiple economic scenarios. Dividend-paying companies can often raise prices to pass on higher costs, providing some protection against inflation.

Historically, dividend stocks have beaten the S&P 500 with less volatility, and they provide income through capital appreciation and dividend payments.

Foreign Ownership of US Equities

The impact of baby boomer retirements on the stock market may be mitigated by foreign ownership of US equities, which has increased from 7.2% in 1990 to 20.6% in 2012. This could compensate for any potential decline in US retiree holdings of stocks.

Frequently asked questions