Shaky retirement outlook for baby boomers unable to rely on bond income

by Grace

A financially uncertain retirement looms ahead for many baby boomers, even for the few who have managed to put away at least $1 million in savings.

A MILLION dollars isn’t what it used to be.

That’s the message of a New York Times piece detailing how millionaires may not be living the high life as retirees.

… $61,000 or $71,000 a year — the combined Social Security and cash flow from the $1 million portfolio — isn’t likely to be enough for most people who have grown accustomed to living on $150,000 or more a year….

Without another source of income, perhaps from traditional pensions from either or both spouses, he adds, a household like this won’t come close to replacing 80 percent of its pre-retirement income — often considered an acceptable target level.

Of course, retirees from the lower end of the wealth spectrum will be the ones dealing with more serious struggles to make ends meet.

Some reasons for the pending retirement ‘crisis’:

  • Low savings rate
  • Slump in home prices
  • “Ultralow interest rates” have drastically cut  investment income from bond portfolios

This last reason has been particularly painful for investors who have long considered bonds a low-risk vehicle that would consistently offer a minimum level of income.

For people close to retirement, the problem is acute. The conventional financial advice is that the older you get, the more you should put into bonds, which are widely considered safer than stocks. But consider this bleak picture: A typical 65-year-old couple with $1 million in tax-free municipal bonds want to retire. They plan to withdraw 4 percent of their savings a year — a common, rule-of-thumb drawdown. But under current conditions, if they spend that $40,000 a year, adjusted for inflation, there is a 72 percent probability that they will run through their bond portfolio before they die.

Suddenly, that risk-free bond portfolio is looking risky….

Interest rates are expected to rise, and the outlook suggests ongoing volatility.

bond investing is likely to remain challenging for years to come. Investors may face a double-whammy — low yields now and the prospect of significant losses as yields rise. On Friday, after the Labor Department reported that the unemployment rate edged up to 7.6 percent from 7.5 percent, yields rose further, amid uncertainty about the Fed’s intentions.

Not too many good options for baby boomers facing an underfunded retirement.

  • Spend less and save more.
  • Continue working beyond typical retirement age.
  • Consider tapping into home equity.
  • Add more stocks to an investment portfolio.

Of course, this last suggestion is not without risk.

.. adding stocks to a portfolio reduces the risk of outliving your savings. But it also increases the risk of big losses.

Some traditional advice for younger people, with a new suggestion about rethinking retirement age:

  • Save more
  • Invest in stocks
  • Live below your means
  • Get used to the idea of working longer, until age 70 or beyond.

Read more about A Bond Market Plunge That Baffles the Experts.

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6 Comments to “Shaky retirement outlook for baby boomers unable to rely on bond income”

  1. I saw this article when it ran. I think this is going to be the biggest threat to the economy going forwards, a much bigger problem than student loans. Besides the problems mentioned in the article, which really only apply to the few who managed to save, the bigger problems are
    a) most people have no savings. Even people who managed to save some money often dipped into it during periods of unemployment
    b) there is a huge rise in the number of people who have no children. Traditionally, when there was no safety net, and no savings, people relied on their kids. But now lots of people have no kids.
    c) most pundits say “just work longer”. But there isn’t a lot of interest in elderly people (those OVER 65) in the kinds of businesses that offer good jobs, such as high tech. If the over 65 set is forced to take lower level jobs, then lots of younger workers will be shut out of the kinds of entry level jobs they need.

    I foresee enormous pressure on the government to expand, not contract, social security in about 10 years. Remember, the vast bulk of baby boomers are still 5 to 10 years from retirement. As we know, they are a demographically huge group, and if they are suffering, they will let the politicians know.

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  2. I agree with all your observations, although I think we’d be doing well simply to maintain Social Security benefits at present levels. I see changes that would include a raised minimum age to collect SS and an increase in the level of wages subject to SS taxes.

    Plus, we will lower our expectations of what constitutes a “comfortable” retirement.

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  3. Maintaining benefits at current levels means spending more because there are so many boomers. That is really the crux of the problem. Raising the age for getting benefits sounds reasonable, but it will have an impact on younger people who won’t be able to find jobs. Also, you will end up with more people on disability because that has become the support for people who are too unhealthy to work but too young for Social Security. As you can imagine, people over 60 are more likely to have such conditions.

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  4. Here is some interesting advice – for those with only paltry 401Ks, spend them early in retirement and defer taking social security
    http://takingnote.blogs.nytimes.com/2013/06/11/but-for-the-grace-of-social-security/?hp

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  5. That advice to spend down 401k assets makes sense. But making the choice to rely solely on SS could be difficult, for those who actually have that choice.

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