Why The Great Recession Has Baby Boomers Fighting Uphill Battle

Since the financial meltdown of 2008, we had a nice rebound in 2009 but then suffered a setback with the European crisis in the spring of 2010. The markets have stabilized once again, but are still at levels that are approximately 30-35% from their peak levels of 2008.

Now most financial experts will tell you that the markets will eventually recover fully and that you should continue to invest for the long haul. However, for baby boomers (those born between 1946 and 1960), this bit of advice is hard to swallow because time is not on their side. To illustrate this point, I have provided the following example.

Let’s take a typical baby boomer couple that both turned 53 in 1999. This was just at the height of the dot com boom. At this point in time, they had $750,000 in retirement savings, and a $250,000 house that was fully paid off. Their annual cost of living as a couple was $50,000. Thus, if they were to retire right now and use their savings, it would last about 20 years, or until they are 73 years old. By all accounts, this appears to be adequate and life is good.

Let’s now fast forward to the year 2006. The dot com boom and bust has come and gone and now we are at the crest of the housing boom. Our couple is now 60 years old. Their retirement savings portfolio has now grown to $1,012,500. In addition, their house value has shot up and is now worth $400,000. With everybody cashing in on their homes like an ATM machine, our couple is no different and decides to refinance their home. With their good credit, they take out a $240,000 loan on their house, leaving $160,000 in equity. They decide to spend half of it on their children’s college education, a house addition, some extravagant vacations, and other stuff they just wanted to buy (perhaps a boat). The other half they added to their investment portfolio. Add the end of this financial shuffling, they now have $1,132,500 in their investment portfolio, and $160,000 equity in their home for a grand total of $1,300,000. Sounds pretty good, given the pain of the dot com bust. Unfortunately, costs have risen as well. The children’s tuition has skyrocketed, energy prices have climbed, and medical costs have begun to climb at alarming rates. Using more true measures of inflation (not the one the government misleads the public with), the same $50,000 in expenses back in 1999 has now risen to $93,000 a year. Even so, the $1,300,000 would last 14 years, meaning that they could continue their lifestyle until 74 years of age. This is one year more than projected in 1999. So it appears that life is still good.

Now comes the painful portion. It is now 2010 and we are in the aftermath of the housing bust and the Great Recession. Our couple is now 64 years old. Even with the rebound of the stock market, our couple’s retirement portfolio now stands at $725,000. In addition, their house value has dropped to $320,000 (note that it is still worth more than it was back in 1999). They have paid down their loan to $200,000, but that still means the equity in their house has dropped to $120,000. All the while, costs have not dropped one bit and the same $50,000 in expenses back in 1999 now costs a staggering $128,000. Their total net worth has been reduced to $875,000 and would only last 7 years at the current rate. This means their money would last until they are 71 years old. All of a sudden, our couple has now fallen 2 years short of the original 1999 projection, but more importantly now has only 7 years left on the clock to get it back again.

Recent reports have indicated that with the economy stagnating, a full economic recovery could take a decade or longer (see the 1970’s). However, our couple has only 7 years of savings left. So while the same financial advice of buy and hold is still being tossed out there, it no longer has any relevance to our couple. They simply cannot afford to wait out the storm. If both are still working, that would help push the limit out. However, what if they were laid off during this time period, took an early retirement a couple of years ago, or were no longer able to work? What if they need to pay for nursing care, senior assisted living facilities and/or increasing medical bills due to failing health in old age? What if they are perfectly healthly and will live until they are 90?Their children are probably unlikely to be able to help, given that fact they have racked huge amounts of debt and are digging themselves out while trying to figure out how to put their own children through college.

The only way out of this mess is a quick economic recovery, which every politician is campaigning on this fall. However, the last two economic booms were built on greed. With the passing of the financial regulation bill signed into law by President Obama, approximately 350 new rules (specifics still to be determined) were put into place to prevent such greediness from occurring again (or so they say). As such, politicians may have killed their own cow because if greed is curbed, then a quick economic recovery with the power of the last two economic booms is highly unlikely. And without a quick economic recovery, a lot of baby boomers will be faced with a financial quandary.

There is a saying, “As the baby boomers go, so goes the rest of the nation.” If that statement is true and a majority of baby boomers are scratching their heads over their financial situation as demonstrated in this post, then this country might be in a lot of trouble in the not-too-distant future.