Did Boomers Enjoy the Boom a Little Too Much?
By 2010, households headed by people over the age of 50 will have control of more than half of U.S. spending.
So wouldn't it be nice to know that this generation, the Baby Boomers, has its financial act together?
A new study released today by McKinsey Global Institute, an economics research firm, has found that that is not necessarily the case.
In fact, more than two-thirds of early Baby Boomer households, meaning those between the ages of 50 and 63, are financially unprepared for retirement. There are a number of factors contributing to that, the study found. Among them: Inadequate saving, income and wealth inequality and a slowing economy.
Most of us have probably painted a rosy financial picture of Boomers. We think of them as the wealthiest generation. But it is only a top tier of Boomers that holds much of the generation's overall wealth. And while it is true that boomers make more money, they also tend to spend more. In 2005, Boomers had 47 percent of national disposable income but contributed only 7 percentage points to national savings, the study pointed out.
The fall in home values and stock prices is not helping matters. For the past few years, especially, Boomers have been relying on the wealth in their homes and on stocks and they haven't thought much about saving, said Diana Farrell, director of McKinsey Global Institute. "There was a sense of I don't need to save. I have assets," she said.
The study predicts that as the Boomers grow older and work less, they will also spend less, slowing down real GDP growth, from the 3.2 percent average annual rate we've seen since 1965 to 2.4 percent over the coming three decades. This could pose even more challenges for an already struggling economy.
So what can be done? According to the study's authors, one solution would be to let Boomers work longer. By increasing the median retirement age by about two years--from 62.6 today to 64.1 by 2015--the share of unprepared Boomer households could go from a whopping 62 percent to a still-not-so-great 31 percent.
But businesses and policymakers have to take some action to allow Boomers to work longer, Farrell said. For one thing, employers should let Boomers work part-time or from home. And the whole issue of health insurance for older workers has to be explored, she said, because insurance costs climb with age, discouraging many employers from keeping people past a certain age.
These conclusions come after a year-long study by McKinsey Global Institute in partnership with McKinsey's Consumer Insight Practice. Among the research techniques used was the creation of a database of U.S. household financial data by age, income, and wealth from 1962 through the third quarter of 2007 and a survey of more than 5,100 households containing Boomers and the Silents, which are the preceding generation.
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