How baby boomers can close the retirement savings gap

Many baby boomers have no hope of retiring with sufficient funds. The researchers say they have several options for adjusting the trajectory, but these come with tradeoffs.

Only 40% of workers between the ages of 61 and 65, the youngest members of the boomer generation, are financially on track for retirement, according to a recent study by Vanguard, an asset manager and retirement plan administrator. Researchers estimate that this group has enough income to fund their retirement with their current lifestyle.

The remainder is expected to be in short supply. Vanguard estimates that a typical 61- to 65-year-old will retire in the red by $9,000 a year, which is a 24% shortfall in their financial needs.

The analysis assumes people retire at age 65 and claim Social Security.

The findings come as the United States is undergoing a historic demographic shift known as “Peak 65,” with record numbers expected to turn 65 from 2024 to 2027, more than 4 million people a year, or about 11,000 people a day.

Of course, it’s impossible to know the “right” amount of money you need to retire. No one knows how long they will live or how much money they will need for future retirement expenses such as medical care and nursing care.

However, baby boomers who doubt that they cannot maintain their current standard of living are in a tougher position than younger generations.

For example, Gen Z and Millennials will likely take decades to change direction, such as increasing their savings for retirement and earning compound interest on their balances. Not so for those nearing retirement.

Also, compared to younger investors, baby boomers typically own fewer stocks, a typical growth driver for retirement portfolios, to protect their savings from market risk as they prepare to begin withdrawing their retirement funds.

If many baby boomers are unprepared for retirement and are forced to cut spending to preserve their nest eggs, it could have a negative impact on the U.S. economy.

“Some economists are sounding the alarm, saying, ‘We’re facing this (retirement) crisis, and it’s devastating and depressing,'” said David Blanchett, a certified financial planner and director of retirement research at Prudential. “It’s not as bad as it looks.”

Baby boomers have several options to close the retirement preparedness gap. But these options may not be accessible or desirable to all families, he said.

Here we will introduce three of them.

Blanchett said delaying retirement is a “silver bullet” when it comes to eliminating or narrowing retirement disparities.

“Delaying retirement for just a few years can have a surprising effect on retirement outcomes,” he said.

According to the Vanguard report, working longer can increase career savings, delaying claims and increasing your lifetime Social Security income, reducing the number of years you can fund your retirement.

For example, if you worked two years longer, such as retiring at age 67 and claiming Social Security benefits, the percentage of 61- to 65-year-olds who are ready to retire would increase from 40% to 47%, Vanguard found.

However, not everyone can work long hours even if they want to.

“It’s not an option for everyone,” said Kelly Hahn, director of retirement research in Vanguard’s investment strategy group.

According to the Employee Benefit Research Institute’s Retirement Confidence Survey, 40% of retirees said they will retire earlier than planned in 2025. This percentage has remained roughly the same for the past 20 years, hovering around 40% to 50%.

Reasons for unexpected early retirement include health issues and layoffs.

Possible reasons for the somewhat precarious financial position of boomers compared to younger generations include: Workplace retirement plans transitioned from pension-focused plans to 401(k)-type plans just as younger boomers were at their peak earning years, Hahn said.

“They weren’t benefiting as much from the pensions or new 401(k)-type savings systems that their parents or grandparents might have had,” she says.

However, Hahn said most of the money is sitting in his home, a huge illiquid asset.

A majority of baby boomers (86%) own a home, a much larger share than younger generations, according to Vanguard calculations based on the Federal Reserve’s latest consumer finance survey.

According to a Vanguard report, the average baby boomer’s home equity is $113,000.

Researchers estimate that leveraging this wealth would increase the percentage of young boomers who are financially ready for retirement from a baseline of 40% to 60%.

Experts say there are many ways to access these funds.

“From a quantitative standpoint, the biggest benefit is to sell your home and become a renter instead of a homeowner,” Hahn said.

Homeowners may consider selling their current home and downsizing, moving to a less expensive area, or considering borrowing against their home equity through a reverse mortgage or home equity line of credit.

But leveraging housing equity is often a “tough topic,” Hahn said.

Blanchett said most people are reluctant to use their home as a piggy bank, instead viewing it as an asset of last resort.

“For most Americans, their home is their largest tangible asset,” he said. “While theoretically a viable option, it has been relatively unpopular so far.”

Houses typically come with strong emotional attachments to one’s identity, which can make them difficult to sell, Hahn said.

Homeowners who secured mortgages during the low-interest era may also feel trapped given the current rise in interest rates, he said.

Additionally, accessing home equity through a reverse mortgage or HELOC can also be expensive and time-consuming, Blanchett said. Homeowners must get approved for a loan, which often comes with implicit or explicit costs, he said.

Social connections are also “a really important aspect of a happy retirement,” Blanchett said. Retirees will have to weigh the loss of community and social networks against the financial needs of moving, he said.

Of course, people may consider cutting back on spending before and during retirement, Blanchett says.

Saving more money towards the end of working life, forcing households to live on reduced cash flow, could help achieve that goal, he said.

Blanchett’s research shows that the typical retiree spends 20% less after retirement, likely because they spend less because they don’t save enough.

But data shows about 90% are moderately or very satisfied with their retirement, he said.

“These responses strongly suggest that retirees are relatively satisfied despite the perceived retirement crisis,” he wrote.

Correction: David Blanchett is head of retirement research at Prudential. A previous version of this article misstated the company name.