The most recent cohort of Americans who are part of the “baby boomer” generation – typically classified as people born between 1946 and 1964 – are less wealthy when compared to older baby boomers, putting them at greater risk of financial instability in retirement. This is according to a new brief by researchers Anqi Chen, Wenliang Hou and Alicia H. Munnell and published by the Boston College Center for Retirement Research (CRR).
“Over the last 40 years, the retirement system has shifted from defined benefit plans to defined contribution plans, primarily 401Ks and Individual Retirement Accounts (IRAs),” the brief’s introduction reads. “This shift has been accompanied by a decline in Social Security benefits relative to pre-retirement earnings as the program’s Full Retirement Age has moved from 65 to 67. Thus, the expected pattern when examining retirement wealth across cohorts is relatively less wealth from defined benefit plans and Social Security and much more from 401Ks and IRAs.”
However, the most recent cohort of baby boomers illustrate a drop in 401K and IRA benefits when compared to their predecessors within their own generation, according to data from the Health and Retirement Study (HRS) conducted by the University of Michigan.
“This drop is alarming given that Late Boomers, who were ages 51-56 in 2016, would have spent the majority of their careers in a defined contribution world,” the brief reads.
Since the HRS only focuses on households 50 and over, taking a closer look at the data presented in the Federal Reserve’s Survey of Consumer Finances (SCF) may give a more holistic picture of Late Boomers’ finances, and the data indicates that they may have previously been in a better financial position than prior classes of boomers.
“In fact, until their mid-40s, Late Boomers held more 401(k)/IRA assets than earlier cohorts at the same age,” the brief reads. “Thereafter, however, that pattern changed abruptly, and they fell behind.”
By the time the examined Late Boomers entered their 40s, the onset of the 2008 financial crisis was taking place and appears to have significantly affected their collective financial standing, even though the timetable of their retirements coincides with an environment that existed after corporate pensions had started to lose their prominence.
“Their employment rate – that is, the percentage of individuals working – dropped sharply. More importantly, the percentage of the cohort not working did not rebound as the economy recovered,” the brief reads. “Thus, one explanation for the low level of retirement assets is simply that many Late Boomers ended up permanently unemployed, unable to contribute to their 401Ks, and likely having to drain accumulated retirement assets to support themselves.”
Read the brief at the Boston College CRR.