Late Baby Boomers: The Worst-Off 401(k) Generation

Last Updated Apr 1, 2010 9:30 AM EDT

Remind me not to call the good folks at the Center for Retirement Research at Boston College when I need cheering up. A new study from the CRR confirms that I am in fact part of Generation Screwed in terms of retirement security.

Those of us who were in the vicinity of turning 40 in 1999 have lousy timing. We entered the work force too late to fully take advantage of the mega bull run from 1982-2000, and now we're so old we don't have as much time as Gen X to make up for lost 401(k) balances. That makes late baby boomers the worst-off generation in terms of retirement security.

Older Boomers: Be Grateful for What You've Got I know what you're thinking: older boomers who lost their shirts in the crash and now have just five to 10 good work years to make up their losses must be even worse off.

Wrong you are.

The first wave of Baby Boomers (those in the vicinity of turning 50 in 1999) indeed suffered the biggest dollar losses during the crash. Here's the breakdown of who lost what from the October '07 market high to the March 2009 low:

Source: Center for Retirement Research at Boston College

Note: the folks in the 65+ cohort fared better than the 55-64 group because they had less riding on 401(k)s; they are old enough to be part of the last generation to grab old-fashioned pensions.

Where Were You in 1982? Despite the big dollar losses, the older boomers had the good timing to be working (and thus savings, goes the theory) during the big bull market of 1982-2000. So they have the benefit of a whole lot of good years before the body slam of two market crashes in the past decade. Younger boomers and Gen X didn't have the padding of those great bull-market years. The chart below shows hypothetical 401(k) returns for the three age co-horts. (The full explanation of assumptions is in the CRR report.)

If we focus on the performance of a balanced portfolio (the bottom half of the chart) the CRR researchers conclude that older boomers have an internal rate of return that is about 40 percent higher than the IRR for younger boomers; 9.3 percent vs 6.6 percent. And older boomers have a return rate that is more than three times the annualized return for Gen X.

Researchers Alicia Munnell (director of the CRR) and Jean-Pierre Aubry conclude that older boomers have had it pretty good:

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.

Time-Out for Young Baby Boomers

As the chart makes abundantly clear, Gen X has indeed gotten the short end of the retirement stick to date. But they also have more time to keep plugging away at retirement saving, and that gives them a slight edge over younger Boomers. I say slight, because both age cohorts are highly unlikely to be able to match the financial security that the Old Boomers had at age 60 (CRR measures security as assets relative to income.) Gen X would need stocks to deliver an 11 percent annualized gain up through age 60, and young boomers would require a 13.2 percent annualized gain, according to the study's authors. Neither is exactly plausible, as they are about double what the New Normalists keep telling us is likely.

Perhaps it's time I check out Cuenca, Ecuador and Merida, Mexico.