Baby Boomers – will they outlive their capital?

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HiResThere is an alarming similarity between our congested highways and baby boomers traveling towards a financially uncomfortable retirement.

Anyone who has commuted from Toronto to Oakville will know what I mean. The QEW highway heading west is congested causing you to slow down. Then the 427 dumps more traffic onto your route further reducing your travel speed.

A few kilometers ahead, thousands more cars increase your commute time as the 403 merges into the QEW. A commute that should take less than one hour can last over two hours.

This congestion is similar to baby boomers travelling towards retirement who are confronted by excessive personal debt and the increasingly high costs of children’s post-secondary education disrupting their plans.

Here we have the baby boomers’ perfect financial storm. There is the convergence of meeting our retirement savings goals with the need to pay off debt and finance our children’s education; all at a time when personal debt is at historic highs.

The back drop to this potentially dangerous time for baby boomers has a few additional elements that are cause for concern. There is the myth that many will just work longer; however, job security is questionable. The younger generations are more energetic, mobile, eager to find work and willing to take a lower salary.

One final reality is that life expectancy is increasing. Many who enjoy living longer will not be able to afford their desired lifestyle in their later years. This will be more problematic for women because most outlive men.

Not all segments of the baby boomer generation will be affected equally by this gloomy picture. Some groups will be more negatively impacted than others. McKinsey & Company’s recent report titled “Are Canadians Ready for Retirement?” suggests the category at most risk in failing to meet retirement goals is the comfortable middle class.

Those less prosperous have lower financial expectations so government retirement programs such as the Canada Pension Plan, Old Age Security and potentially the Guaranteed Income Supplement will cover their living expenses. At the other end of the spectrum are the truly wealthy. They have accumulated enough to maintain their expensive lifestyle.

While both ends of the financial spectrum are financially sound, it is the middle class that is most at risk. There are several reasons why they will be the least comfortable during retirement.

Their standard of living is high so more cash flow is required to support the extras to which they have become accustomed.

The McKinsey Report predicts 23 percent of Canadians will not be adequately prepared for retirement. Households with an annual income of over $90,000 are 10 percent more likely to not be sufficiently prepared to retire than the national average. Thirty-three percent fall into this category.

The highest segments of the Canadian population that will not be prepared for retirement are households with an annual income in excess of $140,000 where 41 percent will fail to meet their retirement goals.

Many baby boomers have enjoyed strong earning power and comfortable lifestyle. Their future is far less appealing than their past. Lifestyle decisions have led many boomers to accumulate significant debt levels.

Effectively they have been living beyond their means. How can they expect to maintain a lifestyle on a reduced retirement income when they couldn’t afford their lifestyle during their working years?

The middle class is less likely to have employer pensions and for many, their investment portfolios, for various reasons, have not grown as expected. When adding the increasing costs of living longer it becomes evident that many baby boomers will be financially challenged.

In my opinion, outliving their capital is the legacy that many of the “prosperous” baby boomer generation will leave behind.