July 1 is an unusually interesting date this year, and not just because it's the beginning of a long weekend.
This July 1 is the date when the very oldest members of the baby-boom generation turn 591/2, the age at which they are allowed to begin making penalty-free withdrawals from their IRAs and other retirement savings accounts.
They don't have to. Mandatory withdrawals don't begin for another 11 years, when these folks reach 701/2. But they can, and that fact is being viewed with increasing apprehension by economists and investment houses alike.
And in 21/2 years, at age 62, they will be able to start drawing Social Security. Again, they don't have to, but they can. And with Social Security there is enough history to suggest that many if not most of them will.
The baby boom, which added an estimated 76 million Americans to our population, began in 1946 and ran until 1964. Boomers have been yanking the nation around almost from the beginning, starting when they swamped elementary schools in the 1950s, and their impending retirement is viewed by many experts as a plunge into the unknown.
To a greater extent than their parents, boomers will be depending on their own resources to see them through their final years. The decline of traditional pensions, the problems of Social Security and Medicare, and the unprecedented levels of debt that many boomers have taken on -- not to mention the wide disparity in income among members of the generation -- make it far from clear what kinds of lives this giant population cohort will have in retirement.
In one sense, of course, the social safety net underneath the boomers is perhaps the best in history. Social Security benefits, though hardly a ticket to Easy Street, continue to provide a solid, inflation-indexed income base that for current retirees on average replaces about 40 percent of their pre-retirement income. Medicare, which did not even exist when most boomers were born, ensures that a retiree can see a doctor. Improved health care and better knowledge about staying healthy continue to extend life expectancy.
But the net is already under enormous strain. Medicare outlays already exceed Medicare taxes, and the same will be true of Social Security beginning, current projections show, in 2018.
In addition, the reliability of the traditional pension system -- even with government insurance -- is in question. The federal Pension Benefit Guaranty Corp. is deeply underwater, and fixing that without killing healthy pensions isn't going to be easy. Most pension plans are in fact pretty well funded, but if Congress makes the rules too tough on well-funded plans, the companies that run them may simply terminate them.
The law does not require employers to offer pensions at all, remember.
As Rep. John A. Boehner (R-Ohio), chairman of the House Education and Workforce Committee, put it last week: "How do we preserve defined-benefit pension plans for workers and ensure these plans are adequately and consistently funded without making the rules so onerous it becomes more attractive for employers to simply stop offering these benefits altogether?"
All of these forces converge to form the background against which boomers decide how much to take out of their IRAs and similar plans, and when.
Boomers have been a generation for whom things generally worked out despite what their critics see as an unprecedented level of self-indulgence, and maybe that scenario will repeat itself in retirement. But it would be unwise to count on it.
The dawning of penalty-free withdrawals should not be a signal to start taking them. Absent special circumstances, such as very poor health, boomers who are getting by now without tapping their retirement accounts should pat themselves on the back -- and leave the money there to keep growing tax-deferred.
At the same time, the message shouldn't be to set it and forget it. There are analysts who worry that boomers' cashing in will depress the stock market, but as we have seen since 2000 there are plenty of other things that can depress the market anyway.
Thus, the entry of the leading edge of the baby-boom generation into what tax law deems retirement age should be a message to them and to all of us to guard our nest eggs carefully.
This means, in addition to not spending our assets, rebalancing from time to time so that they don't become too heavily weighted in one kind of investment, such as stocks, or in one sector of the economy. It also means making periodic adjustments to take time horizons into account -- shifting a bit more toward fixed-income assets both to generate more cash and to have it available for cashing in with less concern about whether stocks are high or low.
The oldest baby boomers can expect to live on average an additional 20 to 25 years, and how well they handle their retirement accounts can mean the difference between final years that are truly golden and years of financial decline and dependency.
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