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Four things baby boomers can do to make our retirement years more financially secure.

In my last column I wrote about the fact that many baby boomers are facing retirement with less than they hoped for in retirement savings.  We are also facing record-low interest rates so funds allocated to bonds are generating very modest returns.  So what can we do about it?

Saving a bit more or spending a bit less is always a good idea.  Unfortunately we don’t have that much time left in our working careers, so small changes in savings and spending rates now will have a relatively small impact on our life styles during out retirement years.   Are there any things we can do that will have a bigger impact?  I have a few ideas.

The simplest idea is to work a few extra years at your current job.  This has a big impact.  Every extra year that you work, is also a year that you do not take any income from your savings.  So it’s a double win.  If you are between 62 and 70 and your earned income allows you to defer the start of taking social security, it also increases the amount of your future social security checks by about 6% for each year you defer. 

Even if you do not want to stay in your current job you might be able to accomplish this work extension by thinking in terms of an “encore career”. Perhaps it means working 3 or 4 days a week so it will feel like a half-step into retirement.  Making  $20,000 or $30,000 per year for the first five years of your “retirement” is equivalent to having an additional $100,000 to $150,000 in savings.   It’s hard to save that amount in a few years, but you might be able to earn that amount over five years in an encore career.

Current bond yields present a real challenge to folks who are looking to live off the income from their investments.  When bond yields were at more normal levels (6%-8%), it was common to advise people in their 60’s to allocate 50% or more of their portfolio to bonds.  This generated a nice chunk of income and kept half of their principal away from the risks of the stock market.

Unfortunately for the retiring baby boomers interest rates are close to record lows.  The current yield of a ten-year US Treasury bond is a measly 1.8%.   This looks depressingly close to 0% to me.  To make matters worse, when interest rates go back up, as they inevitably will, the market value of that bond will drop.   So if you need to sell your bonds before maturity you will experience a loss of principal. 

Consider buying income-producing real estate as an alternative to bonds.  Yes, it’s more work, but what the heck, you’re going to be retired and you might be looking for something to do.  When it comes to real estate, record low interest rates are your friend.  You can buy a two or three family home in Portland right now and rent it out and achieve a 6-7% current yield after expenses.  Your total return will be even higher if real estate prices climb over the time you own the property.

My third suggestion is to not give up on stocks.  Yes they are volatile over the short term, but over every twenty-year period since 1934 they have out performed risk-free returns like CD’s and money market funds.  And chances are, you are going to be around for the long term.  A 60 year old today has a life expectancy of at least 25 more years.   Your expenses will go up over that time period so you need to see some growth of your principal.   Even if you have only 20% or 30% of your assets in stocks it will lower the risk of your outliving your money.  And with the relatively low exposure you will be able to psychologically handle the occasional down drafts in the stock market.

My last idea?  Travel to a developing country, meet new people, learn a new language, while serving your country and adding to your retirement savings. How? Join the Peace Corps.  You will have the experience of your life.  And as long as you are healthy, they welcome volunteers at any age.  In my next column I will show how joining the Peace Corps could generate a $100,000 plus swing in your financial circumstances.  Stay tuned.

Baby Boomers:  We’re not bad people, but we do have bad timing.

You may have read the spate of recent articles bemoaning the fact that the baby boomers have not saved enough for retirement.  The scary reality is that the average balance in 401k plans for Americans between age 55 and 65 is $120,000.   You don’t have to be a financial planner to know that the income from that amount of principal is not going to add much cushion to social security checks over our twenty to thirty-years of retirement.

So what happened? 

Part of what happened to us was bad timing. 

I was born in 1954 which puts me close to the middle of the post WWII baby boom.  I am now 58 years old.  The very long-term total rate of return on common stocks remains an attractive 8-9% annualized.  But look more closely at the sequence of the rates of return over the 2 or 3 decades since we boomers have had money to invest.

Long-term averages are made up of some periods of above average, and some periods of below average returns.  The years of high returns during the boomers investment time frame were the late 1980’s through the 1990’s.  The return on the S&P 500 from 1988 through 1998 was an eye-popping 15% annualized.  This means that money invested that achieved the market return during that ten year period would have doubled TWICE.  Put another way,  $200,000 in a 401k plan in 1988 invested in a broad market index fund would have grown to $800,000 in 1998 without any new contributions.  Not too shabby!

The problem is most boomers didn’t have much saved in our retirement plans in 1988.  I was 34 years old and was just getting started putting money away.  So while we may have had great investment returns during the following decade, it was on a relatively small beginning balance and we were making relatively small contributions.

The year 2000 brought the peak of the dot-com stock market bubble and my 46th birthday.  By then I had started to build a more substantial balance in my retirement plan.  Returns since then have been disappointing to say the least.  The S&P 500 has had an average totoal rate of return of about 3% since 2000.

Boomers have had a similar experience with real estate.  I bought my first home in 1984 and it doubled in value in seven years.  That was wonderful.  But it was a modest home and it appreciated from $50,000 to $100,000.   That’s a relatively small dollar value compared to the current real estate market.  I moved into my third home in 2001.  It is a nice four bedroom colonial in a Portland suburb.  It had a beginning value that was multiple times higher than my first home, and that larger value has not appreciated one nickel.  Once I had some bigger money in the game, returns have been below the long-term averages and in the case of real estate the returns have been negative for most boomers if we upgraded any time in the last ten or twelve years.  More bad timing.

For an even more dramatic timing difference take a look at bond yields.  When my dad retired in 1980, interest rates were at all time highs and he was able to buy ten-year government bonds that paid him 15% annual interest.   So if he had $1,000,000 in retirement saving he would have received a government guaranteed $150,000 of annual income with zero stock market risk.

The diligent baby boomer who retires this month with $1,000,000 in his IRA is looking at a ten year government bond at a yield of 1.8%.  This will give him or her a rather unexciting $18,000 of annual income vs. the $150,000 my dad received annually on the same amount of principal.  

Yes we should have saved more.  But let’s not be so hard on ourselves.  We have probably achieved close to the average long-term rates of return on our stocks, bonds and our real estate.  But unfortunately when times were good we had less skin in the game.  Since we have had larger amounts of money invested in the stock market and more equity in our homes, the returns have been modest or maybe even negative. 

But chin up.  My next column will have some ideas about what we can do about it from here.