NOTE: AFL thanks Forbes, and author Janet Novack, Washington DC Bureau Chief and Assisting Managing Editor of Forbes, for this enlightening piece.
Eventually, the economy and the stock market will recover and COVID-19, the disease caused by the novel coronavirus, will be contained. Yet the current pandemic and its economic consequences could devastate the retirement prospects of some Baby Boomers, while permanently changing the attitudes of many more.
“This is going to leave a real imprint on the minds of people who are near or in retirement,’’ says Joseph Coughlin, director of the Massachusetts Institute of Technology AgeLab. “It’s a personal health 9/11 for much of the country.”
Consider this: After years of hearing how 60 is the new 40, boomers are now being told that those as “young” as 60 have weaker immune systems and face greater risk from the novel coronavirus, particular if they have certain other health problems that increase with age. In China, those 80 and older with COVID-19 suffered a 14.8% death rate, while those 70 to 79 had an 8% death rate, compared to a 2.3% mortality rate for all age groups.
Of course the Baby Boomers—the 72 million still living Americans born between 1946 and 1964—are a diverse group. The majority are still working and plan to stay in the labor force longer, assuming the tanking economy permits it. About a fifth of boomers provide eldercare, either in person or remotely, to a parent or other family member. That means that even if they themselves are relatively healthy, they’re on the front lines worrying about the high vulnerability of the very old and frail. Some have no choice but to worry helplessly from afar. With the largest cluster of COVID-19 deaths in the U.S. so far occurring at a nursing home in Kirkland, Washington, the Trump Administration has directed nursing homes to keep all non-medical visitors out, except in “end of life” situations, and even in those cases clergy and relatives (after passing a respiratory infection screening) must wear face masks. Some assisted living facilities are barring visitors too. (Read more on how coronavirus is changing care for the frail elderly here.)
Much will depend, of course, on how severe and prolonged the pandemic is; how long the bear market that began March 11th lasts; and how deep a recession is caused by the shutdowns and social isolation steps needed to slow the virus’ spread. Here are eight likely longer term effects on Boomers’ retirements.
- Younger Boomers Will Fall Farther Behind
A new study from the Center for Retirement Research (CRR) at Boston College shows that as of 2016, even after seven years of a bull market, late boomers (those born in 1960 or later) had accumulated a lot less in 401(k) and IRA wealth than older boomers had at the same age. That’s despite the fact that fewer late boomers are covered by traditional defined benefit pensions, meaning they need to accumulate more, not less, to achieve the same level of retirement security. Late Boomers were on track to save more, the study found, but got slammed by the Great Recession and layoffs in their 40s. Some dropped out of the labor force. Others settled for lower paying jobs without 401(k)s. Alarmingly, for late Boomers in the middle wealth quartile, 401(k) participation was actually lower in 2016 than before the Great Recession.
The CRR researchers noted they were waiting for results from the Federal Reserve’s 2019 Survey of Consumer Finances to see how lasting the damage to late Boomers, and members of Gen X behind them, had been. Now, even if the news from that triennial survey is good, it might be just a bittersweet historical footnote—-particularly for any late Boomers who lose their jobs in a coronavirus recession.
- Working Longer Will Get Harder
You’ve probably heard this factoid: an average of 10,000 boomers turn 65—the traditional retirement age—each day. But the Pew Research Center calculated last July that the Baby Boomer labor force has been shrinking by an average of only 5,900 per day since 2010. That’s because while some chose to retire early or were forced out of the labor force early, on average, the Boomers are working longer than the previous two generations did. In 2018, 29% of folks aged 65 to 72 (that is, the oldest Boomers) were working or looking for work. When the Silent Generation and the Greatest Generation were that age, Pew figures, only 21% and 19%, respectively, were in the labor force.
Even more dramatic has been the growth in older workers who say they expect to work past 65—even though they don’t all end up doing so. In a 2016 Employee Benefit Research Institute survey, 54% of workers aged 55 and older said they expected to retire at 66 or older or never. Twenty years earlier, only 19% of older workers answered that way.
Yet while lots of Boomers want (or need) to keep working, this harsh fact hasn’t changed in recent decades: when those 50 and older do lose their jobs (say, in the Great Recession or the coronavirus recession), it takes them longer to find new jobs than it does younger workers. Moreover, just one in 10 match their old pay. Some give up and retire earlier than they planned. Those who claim Social Security early to make ends meet end up with lower monthly benefits and less overall from Social Security than those who claim later.
- Panic Will Doom Some Boomers’ Wealth
The current market is scary, for sure. The stomach churning volatility that’s typical of this market has been so severe this time that the drops have triggered multiple automatic trading halts. Eventually, the bear market will end, but not all Boomers will be there to ride the recovery. During the 2008 market crash, about 5% of those 55 or older dumped all the stock in their 401(k)s and then missed the 2009 rebound, a 2011 study of 425,000 workers’ 401(ks) showed.
The problem with “going to cash” in a crash is that you lock in your losses. Maybe your plan is to jump right back in after the market bottoms? Good luck with that. When markets do turn back up, they do so quickly. As financial planner Kristin McKenna explains here, six of the 10 best daily gains in the S&P 500 between January 2000 and December 2019 occurred within two weeks of the worst 10 days. Had you missed all of those 10 best days, your average annualized total return on the S&P 500 for those two decades would have been 2.44% compared to 6.06% had you stayed fully invested and ridden the roller coaster down and back up.
- The Cash Bucket Strategy Will Gain New Fans
The current market should give a permanent boost to a strategy that was already gaining favor—one designed to allow retirees to live well while the market tanks and to conquer the “sequence of return” risk in retirement. The problem is this: even if the stock market averages a healthy return over the 30 or so years you spend in retirement, you’re more likely to run out of money if it has its bad years early in your retirement. (That’s assuming you’re planning to draw 4% out of your portfolio each year, a common rule of thumb.)
There are multiple ways to deal with sequence of return risk, but arguably the simplest way is with a cash bucket. For example, someone nearing or in retirement could keep three to five years’ worth of money for necessary expenses (over and above what Social Security and any pensions provide) in cash or cash equivalents—say, laddered CDs, or Treasury Bonds. The idea is to have enough cash that you won’t panic and can wait for the market to recover before you sell stocks to refill you cash bucket.
- Cruises Will Fall Off Boomers’ Bucket Lists
In January, AARP released a survey of Boomers’ 2020 travel plans showing they expected to spend an average of $7,800 on four to five trips this year, with 51% planning at least one international adventure, and 23% calling their planned foreign travel a “bucket list” trip. Moreover, a full third of Boomers’ planned international trips involved staying on a cruise ship; 61% of those who chose a cruise said they did so because it was “hassle-free”.
Assuming their portfolios recover while they’re still in the travelling mood (travel declines past 75 or 80) it’s hard to believe that retirees will permanently forsake bucket list trips. But it’s easy to imagine that the image of passengers trapped on a ship for weeks as the coronavirus spreads among them, might permanently reduce the number planning to hit the high seas. Yes, the cruise industry, which has suspended operation from U.S. ports until at least mid-April— has recovered from previous health scares. (The World Health Organization notes there have been more than 100 reported disease outbreaks on cruises over the past 30 years, including recent norovirus and influenza outbreaks.) This time could be different.
- Time With Family Will Be Even More Important
One item that pops up at the top of many retirement wish lists is spending more time with family and friends; it’s the leading reason people say they were “pulled” into retirement rather than being pushed there by ill health, layoffs or age discrimination. In the AARP travel survey, multi-generational family trips and family reunions, combined, were the top reason Boomers were planning either domestic or international travel.
Being closer to family also turns up in surveys as the leading reason people move in retirement. It’s not hard to imagine the pandemic and related air travel fears will motivate even more Boomers to move nearer to adult children.
- Aging At Home Will Be Even More Compelling
Even more than cruise ship horrors, the spread of coronavirus through that Washington nursing home and the nursing home visitor ban is likely to be imprinted on Boomers’ minds—and the minds’ of their own now adult children. The vast majority of Boomers already say they want to age in place “where their marriage and mortgage and memories are,’’ notes the AgeLab’s Coughlin. But, he observes, that determination hasn’t been tested yet, since the oldest of them turn 74 this year, while the average age for entering assisted living facilities is 83 or 84.
The desire to age in place—and the reality that not everyone can—predates the Boomers. A new CRR study, using data from the University of Michigan Health & Retirement Study which has tracked about 20,000 Americans 50 and older since 1992, finds 53% of homeowners stay in the house they owned at 50 for the rest of their lives. Another 17% move once, around the time of their retirement, and then stay put. The other 30%? According to the CCR analysis, 14% move frequently after 50 because of job problems and 16% move in their 80s when health problems force them into a rental, assisted living or a nursing home.
A new generation of connected health technology could help even more people stay in their own homes—or at least delay the age at which they move, Coughlin figures. He sees everything from internet-linked pill reminder systems that dispense medication to sensors that allow remote caregivers to check whether an elder is up and moving about. As Coughlin, a Forbes contributor, writes, the internet-of-things will be not only around us, but in us, as Mom has a smart glucose sensor under her skin transmitting and adjusting her insulin levels.
- Care Facilities And Senior Housing Will Change
Over the past four years more than 550 nursing homes have closed, bowing to rising costs, reimbursement pressures—and crucially, shrinking demand from older folks, who as noted above, want to age at home. Nursing homes aren’t likely to disappear as a last resort. But they will need to change, Coughlin predicts—for example, employing contagious disease experts and using antimicrobial surfaces.
Meanwhile, senior housing and assisted living developments, now designed to encourage congregation and socialization, might be built in the future with more spread out units and an eye towards limiting contagions.
“Until two weeks ago, every article was about the perils of social isolation (for the elderly). Now we’re changing it to (promoting) self-isolation,’’ Coughlin observes. “This is an inflection point in our medical model of how to age well.”