Is the Baby Boomer Generation prepared for retirement?

The common perception is that they are not. Although recent academic research contradicts this, a recently published study from Barclays Global Investors says common perceptions reflect reality.

Furthermore, once the effects of reduced government benefits and decreased home values are considered, some segments of the population – particularly the middle class – are in real trouble.

The end of the housing bubble has deflated the retirement plans of many baby boomers.  Barclays’ study, The Future Shock of Retirement, shows that housing plays a relatively consistent role across the spectrum of retirement portfolios and that current and future retirees are likely to be exaggerating the amount of home equity available for consumption in retirement.  Over the long term, those who planned on living off their homes are likely to face increased home price volatility.

Barclays’ study was authored by Jonathan Cohen, Matthew Scanlan, and Matthew O’Hara.  We spoke with Cohen on May 15 about their findings.

Background and Methodology

Cohen and his co-authors used data from the Health and Retirement Study (HRS), which is a national panel data set of individuals over the age of 50.  The authors focused their attention on individuals that were aged 51-61 at the time of the last survey.  This panel has been tracked since 1992, and represents the key database for current retirement studies.  The data is as of 2004, at which time there were 3,424 households surveyed in the data set.

Barclays ranked the comprehensive wealth of all 3,424 respondents in their study, dividing them into wealth deciles for summary purposes.  They then took averages across comprehensive wealth, and all its subcomponents, to assess the relative contribution of each component of a retirement portfolio.  Finally, the authors converted comprehensive wealth into annuitized wealth, to better illustrate the real, long-term purchasing power. Decile 1 represents the poorest and decile 10 represents the wealthiest segments of the population.  The data is summarized in the table below:

The study notes several key observations from this data.  First, Social Security benefits make up a sizeable portion of retirement portfolios, especially among the lower deciles.  But, even among the higher deciles, Barclay’s notes Social Security is a “surprisingly large fraction of total wealth.”  Of greater concern is that, among the higher deciles (especially deciles 6-8, which would generally be considered upper middle class), Social Security constitutes a greater portion of retirement assets than does other financial assets combined (defined contribution plans, IRAs, defined benefit plans, and annuities).

“Housing, government benefits, and current wages form the linchpin of retirement security for the middle class in our society, rather than saving, investments, and employer-sponsored retirement plans,” claims the study.

Home equity is relatively constant across deciles, ranging from 9% to 14% of total wealth.  (Home equity is included in non-financial assets, which also include vehicles, businesses, and investment real estate, less any outstanding debt secured by these assets.)  Cohen notes the data pre-dates the collapse of the housing market, and today’s values would lower these percentages somewhat.  However, the data show that housing values are generally proportionate to income and overall wealth, and do not constitute an unusually high proportion of retirement assets.

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