Baby Boomers Lagging on Savings

Indeed, according to a recent survey by TD Ameritrade, “Boomers and Retirement,” the average baby boomer is roughly a half million dollars short on retirement savings. Moreover, 74% of survey participants say they need to rely heavily on Social Security in their retirement years. That’s a sobering thought, especially with talks of Social Security soon becoming insolvent. And, the average Social Security check is $1,230 a month – leaving little, if anything, for emergency expenses.

Because they need more money, more and more people are delaying retirement, continuing to work past 65. Data from the 2010 Census showed the share of workers 65 and older in the labor force rose to 16%, up from 12% two decades earlier.

The National Foundation for Credit Counseling (NFCC), which assists people who are having trouble paying their bills, reports one-third of its 3 million clients nationwide in 2012 were 55 or older, a 7% increase over two years. Plus, nearly 15% of those were over 65. An equally dismal picture comes from American Consumer Credit Counseling, which reports 25% of its clients are 55 and older. Unquestionably, a growing number of seniors are headed into retirement saddled with debt, running the gamut from mortgages to credit card debt to student loan obligations. Just to make ends meet, they have raided retirement accounts and exhausted savings. Blame the boom and bust, the real estate bubble and the extended and elevated unemployment level for these troubling findings:

•    A survey by the Employee Benefit Research Institute found that most workers polled said they have no savings or investments
•    37% of those polled in the 2012 Retirement Confidence Survey said they believe they will have to wait until after age 65 to retire
•    According to an AARP survey, 34% of older Americans use credit cards to pay for basic living expenses. Their average credit card debt is $8,248, and about half have been called by debt collectors.

“Economists have many explanations for what determines savings behavior and what has caused the U.S. savings rate to decline beginning in the 1980s, but none of these explanations receives good support from the actual numbers,” Steven Pressman, Professor of Economics at Monmouth University in Long Branch, NJ, told “The Suit.”

“As for the (money) problems faced by seniors, there are many explanations here too,” Pressman continued. “But the explanations here do considerably better. In short, pensions have changed. They are now defined contributions rather than defined benefit plans. The economy has changed. The largest fraction of middle-class savings in the U.S. has been in the form of home equity, and home prices have declined significantly since 2007. And, Social Security has changed in two important ways. First, the age to collect full Social Security benefits was gradually increased from 65, resulting in lower benefits for those who retire and begin to collect benefits at age 65. Second, people can now collect Social Security benefits at age 62, although they get a lower amount if they collect earlier. Many have elected to do this.”

In sum, Pressman added, “The three pillars supporting people in old age are shaky and less reliable today than they were several decades ago.”
There is no easy fix. Some seniors will take on part-time job, some will alter retirement goals, and many will do without. Without question, there is going to be an increased need for more financial planners and consumer organizations. The big question facing most baby boomers today isn’t at what age they will retire, but at what income.

IRS: Higher Contributions To 401(k) Plans
To be sure, there is a savings shortage in America, despite a bevy of programs aimed at encouraging stashing money away for retirement.
On Oct. 31, 2103, the Internal Revenue Service announced cost-of-living adjustments affecting dollar limit contributions for pension plans and other retirement-related savings vehicles for tax year 2014.

Participants’ 401(k) contribution limit remains at $17,500, and the catch-up contribution stays at $5,500, but the annual defined contribution limit from all sources rises to $52,000 from $51,000. Also increasing is the amount of employee compensation that can be considered in calculating contributions to defined contribution plans. The new amount rises to $260,000 from $255,000.
These increases give participants the potential for getting a little more a “bang” out of the plan – at least if their employers want to give them more money, retirement planning firm Van Iwaarden Associates noted in an online commentary.

The primary benefit of the recent changes is that “individuals who have very large DB benefits (shareholders in a professional firm’s cash balance plan) could see a deduction increase if their benefits were previously constrained by the [Internal Revenue Service Code Section 415] dollar limit,” Van Iwaarden wrote.

Also left unchanged is the limit on annual contributions to an individual retirement account (IRA), which remains at $5,500. The additional catch-up contribution for those over 50 stays at $1,000. For a Roth IRA, the adjusted gross income (AGI) phase-out range for taxpayers making contributions rises to $181,000-$191,000 for married couples filing jointly. That’s up from $178,000-$188,000 in 2013. For singles and heads of household, the income phase-out range jumps to $114,000-$129,000, up from $112,000-$127,000.

Contributing enough to a retirement plan is perhaps the best way to take control of a financial future. Undeniably, the more money that is put in a retirement account, the more there is to help investments grow. For employees of organizations that match retirement plan contributions, not contributing enough to get the full match is akin to refusing extra money for the future. One of the greatest advantages of increasing contributions is that it’s one of the few elements an individual can control when it comes to retirement planning.

There are a number of retirement tax breaks, including contributing to retirement plans. The IRS wants taxpayers to take advantage of them, yet many fail to do so. One solution, according to John Friedman, an assistant professor of public policy at Harvard’s John F. Kennedy School of Government, is to implement an automatic retirement contribution policy or default plan. Friedman believes it would be an effective way to get people to save more. And, the monetary impact of such a policy on the government would be less than it currently spends on a wide variety of tax incentives.

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