May 21, 2020
Lost Wealth Today vs the Great Recession
For older workers starting to think about retiring, the economic maelstrom the coronavirus set in motion is a reminder of that sinking feeling they experienced just over a decade ago.
In 2008, the stock market plunged nearly 40 percent, accelerating the steep decline that was underway in U.S. house prices. The unfolding 2020 recession is playing out differently. But both downturns have one thing in common: Social Security as a stabilizing influence on older workers’ retirement finances.
A 2011 study of the change in baby boomers’ finances during the Great Recession found that total wealth dipped by 2.8 percent, on average, between 2006 and 2010 for households between ages 51 and 56.
The 2.8 percent decline in wealth at the time was a significant setback for baby boomers. In more normal times, earlier generations had increased their wealth by 3 percent to 8 percent at comparable ages.
Nevertheless, things could have been so much worse for baby boomers were it not for the substantial wealth they had built up over several decades in their future Social Security benefits – an amount that is unaffected by the collapse of financial and housing markets. The average value of these future Social Security benefits was 30 percent of boomers’ wealth.
Wealth in the study also included home equity and retirement plan accounts.
This time around, it’s too early to determine the severity of the downturn’s effects on older workers. Unlike the previous recession, though, this one has had little impact on house prices so far, and the stock market, after sinking in March, has regained about half of its losses thanks to aggressive action by the Federal Reserve.
The major worry is unemployment. The jobless rate approached 15 percent in March – well above the 2009 peak of 10 percent – and economists expect it to keep rising.
But, in any recession, Social Security is a stabilizing force. Today, it represents a large share of older workers’ wealth just as it did a decade ago. And lower- and middle-income workers’ benefits are a much larger share of wealth, because they are far less likely to have substantial assets in 401(k)s. …Learn More
March 31, 2020
Boomers Facing Tough Financial Decisions
For baby boomers who thought they were on the path to retirement, the road is shifting beneath their feet.
Danielle Harrison, a financial planner in Columbia, Missouri, sees a raft of problems stemming from the COVID-19-induced economic slowdown.
Many older workers getting close to retirement age are taking big hits to nest eggs that were already too small. Some boomers who lacked pensions and were behind on saving tried in recent years to make up for lost time with a riskier portfolio in the rising stock market – now they’re experiencing the downside of that risk. Others are scrambling to pay expenses or maintain debt payments as their income drops, altering their financial security now and changing their calculations for the future.
“It’s really going to hurt people,” said Harris, who believes that some baby boomers who had planned to retire in the near-term may be rethinking those plans.
And she’s talking about the boomers who still have jobs. The layoffs have already begun and will continue. Economists estimate GDP will contract in the second quarter at an unprecedented 10 percent to 24 percent annual rate.
Evan Beach, a financial planner in Alexandria, Virginia, predicted that “People are going to get fired, and the people who get fired are not the 25-year-olds making $60,000. They’re going to be the 50- and 60-year-olds making $120,000.”
The economic stimulus package Congress passed last week could help, because it was designed to mitigate some job losses by extending loans to businesses that preserve their payrolls. It will do nothing to repair investment portfolios, however.
Beach and other financial advisers worry that panic decisions in this tumultuous time will only make things worse for boomers who, now more than ever, need to preserve their retirement resources.
Just as they did in the years after the 2008 financial market crash, some unemployed boomers will pound the pavement for a job and will scrape by – through odd jobs, short-term contracts, and unemployment benefits – rather than be forced into a premature retirement.
But Beach anticipates that many of them may have no other option than to claim their Social Security – the program’s earliest claiming age is 62. The problem with starting Social Security now is that it would permanently lock in a smaller monthly check. This goes against a central tenet of retirement planning, which is that many people would be better off delaying the date they sign up to increase a retirement benefit they will need for the rest of their lives.
Beach conceded, however, that claiming the smaller benefit now is not irrational for a couple with one laid-off spouse, only $2,000 in income, and $3,000 in expenses. If the laid-off spouse can start getting $1,000 from Social Security, he said, “that’s not irrational. That’s desperate.” …Learn More