Masters of Universe Torpedo Boomer Retirements

Financial Crash Jeopardizes Retirements of 78.2 Million Americans

Mar 27, 2009 Howard Bryan Bonham

Wall Street stirred up a perfect storm in mid-2007, when they saw dark clouds gathering and began dumping sub-prime credit risks and related equities.

The purge of risky untouchables broadened and gained momentum as the S&P Global 1200 Stock Index lost 18 percent by mid-March 2009, versus a year earlier. During the same period, stocks in Germany, Hong Kong, Japan, the US and the UK lost an average of 17 percent, according to data from EconStats online.

Worldwide Financial Collapse Threatens Baby Boomers

The swiftness and severity of the economic mayhem, in which doubtful financial values have collapsed worldwide, has stunned the Boomer generation like a Taser gun. They were born between 1947 and 1961, and have been the movers and shakers in America’s economic surge, since World War II ended. They have called the shots that have juiced the economy.

Now ironically, Boomers retiring soon must bear the brunt of the excesses of the greatest bull market in history; for they have been hammered by four events:

Collapse of securities markets;
Collapse of real estate markets;
Business recession;
Reduction in purchasing power, caused by inflation.

The charts below, based on data from the Federal Reserve Board, the Department of Labor and the US Census Bureau, are snapshots of the Boomers’ plight. Collapsing securities and real estate markets the world over, in conjunction with ballooning mortgage and consumer debt, have reduced total US household net worth 17.3 percent in just two years, a process evaporating nest eggs from a peak of $62.3 billion in 2006 to $51.5 billion in 2008. (Chart 1).

Inflation Makes Losses Worse

When factored in, inflation has penalized them even more. Although their Social Security benefits will be indexed to compensate for inflation, they are not adequate to support a comfortable retirement for most people. As to help coming from private retirement programs, how long can they afford inflation increases (called COLA's), after the recent meltdown?

After adjusting for inflation costs, US household net worth slid a whopping 37.2 percent in the past two years, from the $62.3 billion in 2006 to an adjusted $39.1 billion in 2008.

Meanwhile, values of real estate and other tangible properties shot up from 33 to 48 percent of net worth. This means Boomer households are set to enter retirement years with diminished liquid assets and increased illiquid ones. That cumbersome mix will stymie efforts to recoup their recent losses, at least in the early stages of the graying of America. (Charts 2 and 3.)

Burgeoning Debt Now Tops Household Income

There is another troubling consequence of the perfect storm. In 2002, as house buying and consumer credit increased dramatically, total household debt began to exceed annual personal income. Consequently, debt coverage fell from 2.3 x debt to under 1 x and is a warning buzzer for households facing cessation of the income stream. (Chart 4.)

The gap between what Boomers thought they had for retirement and what they actually have is substantial. Following the net worth peak of $62.7 billion in 2007, the inflation-adjusted amount of $39.1 billion in 2008, represents a gap of $23.6 billion. For them the burning question is how to recoup the deficit by retirement.

First Wave of Boomers Begin Retiring in Five Years

The first of 78.2 million Boomers will begin retiring in five years. As mentioned above, most distressful to them are the declines in the corporate equities, mutual fund shares and pension fund reserves in household net worth. Those resources are their most liquid assets and ones also most capable of the biggest appreciation, in a recovery. They have slid from 55 to 37 percent of household net worth in ten years. (Chart 5.)

Boomers Have Options To Recoup the Retirement Deficit, which are:

Deciding to work longer, to extend the asset accumulation period;
Living more cheaply, to double-up on asset accumulations;
Counting on financial markets recovering the deficit;
All the above.
(Winning the lottery is most certainly a long-shot).

Whichever they choose, recouping so much in such a short time is a tall order. However, Boomers are an inventive generation. In addition, they have the political clout of large numbers and are vocal. They are the 800-pound gorilla in the chimp cage.

Source of charts: Howard Bonham Research.

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