Older Workers Fare Better Through Crisis
There’s no doubt that the financial crisis of 2008-09 has shaken up retirement planning like no other event in memory. Public defined benefit pensions, a mainstay of government employment, are teetering. Hundreds of companies have pulled the plug on matching contributions to 401k plans and are only now starting to reinstate them. And everywhere, workers – especially the oldest baby boomers – have been forced to rethink and remake retirement plans.
But a just released study from Boston College’s Center for Retirement Research reaches a surprising conclusion: Even taking into account the massive losses brought about by the financial crisis, when viewed from a career-spanning perspective, early baby-boomers (those closest to retirement) have fared quite well in terms of financial market returns. The study looks at 401k investment returns over the careers of three hypothetical retirement savers:
- Early Boomers (age 50 in 1999)
- Late Boomers (age 40 in 1999)
- Gen Xers (age 30 in 1999)
The early boomer turned 60 in 2009 and was preparing for retirement just as markets hit bottom in March of that year. These workers – and their decimated retirement nest eggs – were the subject of countless stories highlighting the shortcomings of the 401k. How was it possible for someone to work and save diligently over an entire career only to have the rug pulled out from beneath them on the doorstep of retirement?
Even at the low point, early baby boomers realized 7.9% career market rates of return. More recently, as markets are recovering, career return rates exceed 9%.
But as devastating as the crisis has been, it is amazing to realize that even at the lowest point (March 2009) the career-long rate of return for an early boomer 401k saver was +7.9%! This is because these workers were old enough to benefit fully from the historic run-up in the stock market that occurred between 1982 and 2000. Late Boomers and Gen Xers, on the other hand, had to deal with precipitous market declines in 2000 and 2008 without the benefit of the 80′s market boom.
None of this is to suggest that early boomers’ retirement plans weren’t tragically impacted by the 2008-09 financial crisis. They certainly were and, unlike younger generations, they do not have time to recoup losses. Moreover, percentages and rates of return mask the more fundamental problem that, by every measure, workers across all age cohorts have not (and are not) adequately saving for retirement. A healthy rate of return on a pint-sized nest-egg is not a formula for retirement success.
“As jarring as the financial collapse may have been for the Early Boomers, the market has actually treated them well over their lifetime. Hypothetical workers investing either all in equities or in half equities and half bonds have enjoyed fairly high returns compared with long-run averages. This agreeable outcome is the result of these workers having substantial assets during the long bull market that began in 1982 and ended in 2000.
Moreover, the market has treated Early Boomers a lot better than the subsequent cohorts. Late Boomers and Gen Xers never benefited fully from the 1982-2000 bull market and were hard hit by two market collapses. The Late Boomers are the most vulnerable, as they would need substantial returns in the future to end up with the same ratio of assets to income at age 60 currently enjoyed by Early Boomers.”1
Notes:
- Returns on 401k Assets by Cohort, Center for Retirement Research at Boston College, March 2010. [↩]
