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Low interest rates mean US Boomers face difficult retirement

Economic growth
By Paul Hodges on 15-May-2015

US over65s Apr14There are 46m people aged over 65 in the USA today, and there will be 56m by 2020, according to recent US Census Bureau data.  By comparison, the number of those aged under 18 will be static over the same period at around 75m.  And by 2035, there will be more people aged over-65 than under-18 (78m versus 77m).

This is the impact of increasing life expectancy and the collapse of fertility rates in action.  As the Census chart above shows, the number of over-65s is set to rise steadily:

  • There will be 74m in 2030, and 82m in 2040, and around 100m by 2060
  • The reason, of course, is the ageing of the BabyBoomers, who began turning 65 in 2011
  • The youngest Boomer, born in 1964, will only reach this milestone in 2029
  • And with current life expectancy, this means most Boomers will still be alive then
  • As a result, Census estimates the 0ver-65s will be around 20% of the total population

US pensions May15This should, of course, be cause for great celebration.  Only a century ago, US life expectancy was still only around 50 years – but the combination of vaccinations, drugs, chlorination of drinking water and healthier lifestyles has completely changed our expectations.

But there is one major problem with this marvelous news, as this second chart shows.  It updates the detail from ‘Boom, Gloom and the New Normal’, to show one view of how a pension fund might look today:

  • It assumes someone joined the workforce in 1979, and earned median wages every year until Q1 this year
  • It then assumes they were able to save 5% of their salary into a pension each year
  • And also assumes they invested this in stocks and achieved the exact gain/loss of the S&P 500 each year
  • Over this period, their pension fund would have grown to $213k by the end of March (blue column)
  • The red line then shows the income from investing this fund in Treasury 30-year bonds (the “risk-free” option)
  • This rises/falls with fund size and interest rates: with 31 March rates of 2.54% it would have been $5410/year

Every pension fund is different, but the above assumptions are very favourable for most people.  Periods of unemployment and illness can make it very difficult to save 5% of your wages each year.  And whilst the assumptions don’t include dividends, they also don’t include charges for buying/selling.

$5410/year is not a lot of money, even if one adds to it by drawing down some of the fund each year.  But in reality, this is far more than most people will have.  Latest data shows that 95% of US households have total financial net worth of just $56k, and the median worth of people aged 55-64 years (ie pre-retirement) was just $61k in 2013.

This, of course, is why spending drops so sharply past the age of 55, as I discussed last week.  It is also why US Social Security is currently scheduled to run out by 2030, and also why Medicare will be bankrupt by then.

2030 is not a long time away.  Anyone aged 70 or under can hope to live to then with current life expectancy.  But if nothing has been done to avoid this looming crisis, they may not feel much like celebrating on New Year’s Eve 2029.