When Baby Boomers Retire in a Downturned Economy
More than 10,000 baby boomers will turn 65 each day during the next two decades, says AARP, the nation's leading organization on elder issues. The generation that grew up with changes in social mores, music, and more now faces a particularly challenging time to leave the workplace.
But what's a person to do with the rest of their lives, if they were born between the years of 1946 and 1964? Especially when current economic trends and measures are more down than up, who can really afford to retire?
Kiss goodbye the days of secure pensions and gold watches for decades of service. According to the Employee Benefit Research Institute, only 15 percent of the workforce today has a traditional pension plan. Instead, 401(k) s in the private sector and 403 (b) s in public and not-for-profit organizations are the likely alternative plans. These benefits are tied to stock market performance. When the market performs well, benefits boom; but conversely, benefits diminish when the market performs poorly.
Also gone are the days when owning a house meant sure-fire wealth building. Eleven million Americans now owe more than their home is worth. Boomers hoping to downsize to smaller spaces may find that while unemployment hovers near 10 percent, prospective homebuyers may be waiting for the job market to improve before making such a large and long-term investment.
When disposable funds are fewer than in workplace years, older consumers can be particularly at-risk to incur debts that tarnish the golden years. Or as the O-Jays sang, it's that 'almighty dollar' that can change you – especially when there's not enough to provide for yourself or your family.
For example, long-time homeowners with title to their homes or nearing the end of mortgage payments might be lured into a reverse mortgage. As a loan against market value, reverse mortgages can be a transaction that enables borrowers to turn that value into ready cash without selling the property.
However, before signing on the dotted line for a reverse mortgage, borrowers should clearly understand that they are signing an end of life loan. Full repayment is required when either the borrower passes away or no longer lives in the residence for more than a year. Any absence due to year-long extended health care, such as rehab or assisted living facilities will make the loan due.
Overdraft, another debt trap, may offer a convenient way to pay for purchases; but if there is no cushion in the account or consumer checkbooks aren't accurately balanced, overdraft fees that average $34 per transaction can quickly siphon off disposable income. Even worse, consumers only learn of the charges after the statement arrives. Rather than incur the risk of overdraft fees that each year strip $23.7 billion from checking account holders, it is better to decline overdraft than to accept it. Unauthorized overdrafts strip fees from Americans 55 and older at the level of $4.5 billion per year. Nearly $1 billion of that comes from people who are heavily dependent on Social Security income.
Even worse than overdraft fees are payday loans that promise quick and easy cash without credit checks. In recent months, many payday lenders began accepting unemployment checks or disability benefits as income. Yet what the marketing and advertising do not share is how only a very small percentage of payday borrowers are actually able to retire their short-term loan in two weeks. The vast majority of payday borrowers – 12 million each year -- become trapped into a turnstile of repeat loans and high-cost fees that result in more money being paid for interest and fees than the amount borrowed. Meanwhile, payday lenders reap $5 billion annually.
The sobering reality for everyone is that there will always be lenders that would like to take away some of your hard-earned income and savings, just as financial advisors have an array of recommended strategies for preparing for retirement in a post-recession era.
But, it is far wiser for people regardless of age to make regular savings a part of your financial plan. With every paycheck, start and keep saving. Emergencies, unexpected expenses, and vacations, can all be managed, if dollars are set aside on a consistent basis. If you're unable to begin saving right now, consider saving a portion of any tax refund received this year to offset the amount of money you expect to need over the year. Ideally, everyone should have a personal financial cushion that enables them to maintain their lifestyles without going into debt.
A keen awareness combined with a sensible and practical personal strategy can together chart a path to sustainable financial growth in spite of any market downturn. To paraphrase the words of the O'Jays, don't let money – or lenders – fool you.
Charlene Crowell is the Center for Responsible Lending's communications manager for state policy and outreach. She can be reached at: