Math for boomers: Have you saved $1 million yet?

In this morning's New York Times, columnist Bob Herbert confesses to "An Uneasy Feeling," apparently his understated way of saying "panic." Herbert lists his concerns: unemployment, worthless mortgages, a decade with no job creation (previous decades since 1940 have all had at least 20% job growth), declining earnings, food insecurity, a health-care plan that is "a bloated, Rube Goldberg legislative mess," not enough money for libraries and teachers, two wars ...

"We're not smart as a nation," Herbert writes. "We don't learn from the past, and we don't plan for the future." I agree, and I am slightly more panicked than Mr Herbert.

Back in 2001, when President George W. Bush was launching a series of tax cuts, I had an uneasy feeling. This president is going to undo our nation's tenuous economic prosperity, I thought. The rising tide that was supposed to float all boats in the 80s had mainly floated the yachts. More of the same could be the ruination of whatever rafts and canoes were still above water.

In 2003, when Mr Bush led us into war on Iraq, my unease moved toward panic. This president has just helped us onto the back of a tiger, I thought. There is no way we will get off unscathed. If we weaken Iraq, Iran will cheerfully fill the gap. War will only increase terrorists' hatred of the West.  We are in deep doo-doo now.

It didn't take any particular prophetic gift, political understanding, or dislike of Republicans to feel that panic: I have never had the first, am limited in the second, and developed the third only recently (my parents were thoughtful, reasonable Republicans and tried to raise me to be the same; and anyway, I don't see the Democrats doing much better). It just seems obvious that if we spend far more than we actually have, we are going to have unpleasant debts. It seems equally obvious that if we start bombing a part of the world that has hated the West since Rome split from Constantinople, we might end up with a serious public relations problem.

I am mentioning this for one reason only: right now something else seems equally obvious, and people aren't saying enough about it. A whole generation of Americans is plunging into poverty, and most of us don't see it coming.

Baby boomers are retiring. There are somewhere between 70 and 80 million of us in the United States--say, 25% of the population. Many of the oldest boomers have already retired; in 20 years, almost all of us will be getting Social Security checks. If Social Security still exists.

I am concerned about Social Security--thank God Mr Bush did not succeed in privatizing it--but that is only part of the oncoming disaster. I am concerned about Medicare, but that too is only one factor. I am concerned about the effect on the financial markets when a large percentage of people who formerly purchased stocks and bonds start making regular withdrawals from their 401(k)s.

Most of all, I'm concerned about those 401(k)s.

Here is how things used to be:

My parents retired in 1975 when they were both 65. Their household income had been modestly sufficient, right around the national average or perhaps a little less. Their former employers gave each of them a monthly pension--roughly equal to the amount of their Social Security checks--and reimbursed all medical expenses that Medicare didn't cover. In addition, they had saved a little money for retirement, and they had taken out a nursing-home insurance policy.

For 16 years, my parents continued to live modestly but comfortably on their Social Security, pensions, and savings. Then both of them fell ill and required nursing-home care for four years. They died in 1995, after 20 years of retirement. There were still a few thousand dollars in their bank account.

Their story is like the story of most people of their generation, the boomers' parents. We boomers, engaging our powers of magical thinking, seem to believe that's how it's going to be for us too. But, as Mr Herbert writes, "We're not smart ... we don't plan."

Here is how things are now:
Pensions are extinct. Most of us have 401(k)s or 403(b)s, and most of these are seriously underfunded. Some of this is our own fault, for not putting away enough each month. Some of this is due to the market meltdown. Some is due to the flaws inherent in the whole concept.  (Stephen Gandel wrote a fine article in the October 9, 2009, Time called "Why It's Time to Retire the 401[k]"--read it and weep.)

Do the math. In 2008, the median income of a male worker--we'll call him Bob Cratchit--was $46,367. If he gets the current average retiree's Social Security benefit, his check will be $1164 a month, which works out to being about 30% of his pre-retirement income. For a reasonably comfortable retirement, let's say he needs 75% of his pre-retirement income, or $2898 a month. If he follows the prudent recommendation to withdraw no more than 4% of his 401(k) in any year, he will need to start with a total of at least $520,200. And he'll need more if the market tanks again early in his retirement years.

Have your eyes glazed over? Then don't do the math. Just realize that if you hope to withdraw $40,000 a year from your 401(k) when you retire, then you'd better have saved 1 million dollars by then. Alas, as Mr Gandel points out in his Time article, few people have saved anywhere near that amount. "In fact, at the end of 2007, the average 401(k) of a near retiree held just $78,000 — and that was before the market meltdown." That means the average retiree can expect a monthly pension-substitute of $260.

Is there a way out of this mess?

Not if we're going to keep on lowering taxes and raising expenses, demanding state-of-the-art medical care without increasing costs, fighting wars that we are unwilling to fund, believing that we are entitled to have more than our parents' generation did. Not if we continue to believe in magic, not math.

There is probably only one good way out, and it isn't pretty. As Mr Herbert writes, "Shared sacrifice is not part of anyone's program." No doubt for a few years our easily-bought Congress will attempt to keep seniors out of homeless shelters, especially if well-funded lobbies encourage them to do so. But if we Americans, old and young, continue to live beyond our means--both as individuals and as a nation--our financial system will collapse, and shared sacrifice will finally become inevitable.

Hint: study Chinese.