Baby boomers were born between 1946 and 1964, which means that they began reaching age 65 in 2011. Well before then, there were concerns that millions of them would not be financially prepared to retire. Those concerns are proving to be correct.
Experts point to a variety of reasons why many older Americans have financial problems in retirement. Stagnant incomes and rising health care costs are among them, but a trend dating back to the 1970s had a major impact.
Many years ago, a 40-year career with a business resulted in a monthly pension check for life. In this respect, retirement planning was simple. In the 1970s, however, the costs and legal liabilities of offering pension plans began to rapidly increase. So businesses began abandoning such plans for a new concept — the 401(k) plan.
Replacing pension plans with 401(k) plans meant that employees were now responsible for not only setting aside part of their paychecks for retirement, but investing the money as well. Unfortunately, it soon became apparent that many employees were not prepared to do either.
It wasn’t that employees were thoughtless or stupid. Many grasped the opportunity and are now living comfortable retirements. Others, however, simply didn’t have the training or backgrounds that were crucial for this new way of saving for retirement. They were at a fatal disadvantage.
So all kinds of mistakes were made. When changing jobs, it was easy to cash and spend a 401(k) plan for current needs. Some plans allowed for “hardship” withdrawals, which were too easy to obtain. Other plans allowed people to borrow from their plans to build a garage or take a family vacation … and there were few cautions that garages and vacations don’t provide monthly retirement checks.
As for investing the money, statistics began to suggest that workers were either taking too much or too little risk. Both resulted in diminished retirement assets, and “buying high and selling low” became a sick joke for many as they attempted to manage their accounts with little or no help.
Modern 401(k) plans address many of yesterday’s problems, but the pressure on government to help with financial deficiencies experienced by older Americans will continue to grow.