By 2030, the last of the Baby Boomers will reach retirement age. At that time, nearly one in five Americans will be over the age of 65.
Many experts predict a retirement crisis will be arriving shortly thereafter.
The issue here is money…
- Will Baby Boomers have saved enough?
- Will the money they have saved last?
- What will be the status of social safety nets like Social Security and Medicare?
- Will the “do-it-yourself” 401(k) retirement model succeed in generating reliable income for such a sizeable retired population?
- Will the possibility of market crashes, bubbles, and corrections complicate matters even more?
The solution for saving the Boomers
The solution for saving and assuring the future security of Boomers is income.
Especially guaranteed income that is immune to market turbulence, adjusts for inflation, and lasts for a lifetime no matter how long a person lives.
I’m not talking here about income to send people on exotic vacations or take trips around the world.
I’m talking about basic income that affords a person the ability to live with dignity.
- This means income to buy food when you are hungry, to keep you warm when it’s cold, to help pay for medicine, everyday necessities, and keep a roof over your head.
- This means income that will be there regardless of the future – no matter how long you live and no matter what your physical condition.
- This means income to provide a backstop, a safety net, and insurance.
- This means income powerful enough to say to a spouse with certainty, “I love you and even though one day I may be gone, this money will be here for you no matter what the future may bring.”
If a person lacks such basic income, it really can be a crisis.
Heartbreak. Destitution. Poverty. Hunger.
So, how does a person obtain the necessary income to cover his or her basic needs?
There are generally two sources for generating income in retirement, pooled income and investment income.
Pooled Income versus Investment Income
Pooled income should be used as insurance to protect and guarantee income needed for basic living expenses. After that, investment income should take the lead covering additional expenses and legacy planning.
Differences between pooled income and investment income.
- Pooled income – while still expensive – is the cheapest way to create lasting income and it provides the greatest guarantees for future security.
- Money is placed in a shared “pool” and funds are withdrawn to provide income for participants.
- Pools are typically administered by large insurance companies, pension plans, or government entities.
- Income is usually guaranteed for life.
- Depending on the source, cost of living adjustments may or may not be provided.
- Except for survivor benefits, pooled income provides no inheritance for heirs.
- Funds are illiquid – except for the checks a person receives every month.
- For those living the longest, pooled income generates an enhanced yield that is virtually impossible to beat using conventionally traded instruments.
- Examples of pooled income include Social Security (were it funded properly), traditional “defined benefit” pension plans, and annuities.
- Investment income is generated by investment funds.
- Investment funds tend to be more liquid and provide a greater appearance of control.
- Generally, investment income requires a larger starting balance (when compared with pooled income) to generate the same sustainable targeted income amount.
- May fluctuate based on the ups and downs of the markets.
- Generally provides no guarantees.
- Principle can suffer from market turbulence and funds can be depleted.
- Is compatible with leaving inheritances, assuming funds last.
- Allows for greater liquidity to make larger, immediate expenditures.
- Funds may be invested in a wide array of investment alternatives.
- Examples of investment income sources include IRAs, personal investment accounts and 401(k) type savings plans.
My intent is not to argue that either type of income is necessarily better than the other.
Both income types serve a valuable purpose depending on the need.
I am generally as opposed to relying on investment income to cover basic expenses as I am for using pooled income to finance luxuries.
The goal is to align the income types so as to provide the highest possibility for future success.
Covering the basics
We can help save the Baby Boomers by encouraging them where possible to seek guaranteed pooled income to cover their basic income needs in retirement.
The more basic income Boomers obtain from such sources, the safer they will be from running out of income and facing serious financial hardship in their senior years.
So what do you think?
- How well do you believe the stock market will serve to support the income needs of Boomers during their retirement years?
- If you knew you had enough guaranteed income to support your income needs in retirement, would it give you peace of mind?
- What do you think of the idea of forgoing inheritance for kids if it means gaining income security for your retirement?
- What steps could you take to make your living expenses in retirement more affordable?