Younger baby boomers face deep shortfall in retirement savings

Not all boomers are OK. When it comes to retirement savings, younger baby boomers have significantly less than their older counterparts.

That's according to a study by the Center for Retirement Research at Boston College, which uncovered a striking difference between "late boomers" — those born in 1960 to 1965 — and "early boomers," born in 1948 to 1953. By the time they reached their 50s, the study found, the late boomers had 19% less retirement wealth than the early ones did at the same age.

What could explain this wealth gap? Several demographic and economic shifts contributed, the study said, but the main reason was the 2007-2009 financial crisis.

"The late boomers were hit really hard by the Great Recession," said Anqi Chen, one of the study's co-authors. "It was the earnings lost during the recession that really set them back."

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Why was the downturn more damaging for late boomers? It's a matter of life stages. Typically, Chen said, Americans reach their peak earning years in their 40s and early 50s. But for those at the younger end of the baby boom, those were exactly the years when the economy was in crisis — in 2007 to 2009, late boomers were somewhere between 42 and 49 years old.

And that's not even including the economy's long, slow recovery. Unemployment in the U.S. didn't return to pre-recession levels until December 2017, according to the U.S. Bureau of Labor Statistics.

In the meantime, late boomers took a huge hit to their nest eggs. Just as their careers were gaining steam, many of them lost their jobs. At age 50, only 77% of late boomers were working, compared with 96% of early boomers at the same age. That meant they lost access to retirement plans, sometimes for years — and in many cases, they never got it back.

"What was interesting was that not only did you see that drop, but it didn't pick back up later," Chen said. "A lot of people lost their jobs, and then they had a hard time reentering the workforce."

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In addition, something else set this age group apart. Unlike their predecessors, late boomers worked and saved at a time when pensions were no longer the dominant retirement plan. Instead, they had defined-contribution plans like 401(k)s and IRAs — and that meant their retirement income was not guaranteed.

This daunting combination is familiar to many financial planners with late boomer clients.

"Late boomers had a double whammy between the Great Recession and the shift to 401(k) plans," said Jay Zigmont, founder of Childfree Wealth in Water Valley, Mississippi. "As the first group to truly embrace 401(k)s as their primary retirement savings, this can be very dangerous. Not working during peak retirement saving years can set people back years on their retirement."

The irony is that at the beginning of their careers, late boomers were actually doing better on their retirement savings than early boomers had done. At age 44, the average early boomer had just $7,011 in their 401(k) or IRA. At the same age, the average late boomer had $29,355.

But in the years that followed, this gap dramatically flipped. By age 56, the average early boomer had $75,378 in their retirement plan, while the average late boomer had only $37,464 — less than half as much.

"When we look at their average 401(k) and IRA balances at younger ages, we see that late boomers were actually ahead of other cohorts," Chen said. "And then you see that drop."

To calculate boomers' total retirement savings, the CRR added the balances of these defined-contribution retirement plans together with those of defined-benefit plans, like pensions, and with Social Security benefits.

All told, the average late boomer ended up with a retirement nest egg of $279,686. The average early boomer, by contrast, had $345,648 — a 19% difference.

The study examined several potential reasons for this. Demographically, late boomers are a more diverse group than early boomers, and Black and Hispanic households tend to have less wealth than white ones. 

But as it turned out, this did not explain the savings gap. In fact, among Black and Hispanic workers, retirement wealth was actually higher for late boomers than it was for early ones — the opposite of the overall trend.

The real reason, Chen said, was crystal clear.

"The Great Recession is the culprit here," she said.

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What can late boomers do about it? In many cases, they'll need to do more than other generations to catch up on their savings — with financial advisers' help.

"Chances are that we are going to have to help our clients plan on working longer or saving more now to make up for the deficit," Zigmont said. "We need to start having those conversations now and helping our clients to make the hard choices."

Another option is to change one's retirement plans to cut costs.

"If they live in a place with a high cost of living — especially housing — then they could consider moving somewhere cheaper," said Ron Strobel, founder of Retire Sensibly in Meridian, Ohio. "That could help shore up their retirement savings quickly."

And in the case of someone who sold their assets during the worst of the Great Recession, it's important to get back on track — no matter how painful it may be.

"Bite the bullet, stick to your long-term plan, and get invested again," said Noah Damsky, co-founder of Marina Wealth Advisors in Los Angeles. "This will ensure you have as successful a future as possible."