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Baby Boomers are in "state of paralysis"
about saving for retirement

New Study Demonstrates That Financial Inaction Follows A Significant Need For Financial Education

Many Baby Boomers are apparently planning to play catch-up with their retirement savings later in life instead of making regular deposits now, putting their retirement plans at risk, according to "Beyond Behavior: Why Boomers Underfund Retirement," a new survey released by The Guardian Life Insurance Company of America (Guardian) today.

A number of recent studies have shown that many Boomers have great expectations for their imminent retirements, but have not set aside money to pay for it. Very few studies, however, have tapped into the field of behavioural finance to understand why Boomers find themselves in this predicament.

"We found that Baby Boomers are in a state of financial paralysis. They don't know how much to save and they don't understand some basic financial principles such as compound interest and adequate returns, so they are doing nothing," said Dr. Frank Murtha, a behavioral finance expert and business professor at New York University and managing member of Frank Murtha Associates LLC. "That is a big mistake and a clear indication that Boomers need more education about sound financial planning if they are going to meet their retirement needs."

While 80 percent of Baby Boomers are concerned about having adequate income during retirement, exactly half said they aren't sure how much money they will need. Less than one in four (24 percent) said they were on track to have sufficient retirement savings.

The survey also makes clear that Boomers have not adopted any savings discipline. Significantly, 55 percent of all Boomers said they could comfortably live on 80 percent of their current income. Yet in another question, only 27 percent said they could save more than 20 percent of their income today. 17 percent said they could save nothing.

When asked about their actual savings habits, only 16 percent of Boomers saved more than 20 percent of their 2003 income while 23 percent said they saved nothing.

The survey also found that most Baby Boomers fail to understand the impact of compound interest: 76 percent of all Boomers mistakenly believe that saving $100 a month from age 30 to 65 would yield greater returns than saving $100 a month from age 21 to 30. In fact, the investor who saves from age 21 to 30 will have a larger nest egg when they turn 65 years old.

In a question about adequate returns, 13 percent of Boomers said they would be satisfied with an investment that grew from $10,000 to $15,000 over the course of 20 years.

When respondents were divided into subgroups — Old Poor¹ , Old Rich² , Young Poor³ and Young Rich⁴ — the survey found that affluence, and not age, is a better indicator for understanding the principles of money and the financial demands of retirement.

"This is clearly a case where age and financial wisdom do not necessarily go hand in hand," Murtha said. "No matter their age, the Boomers with more than $100,000 in investable assets had a better understanding — though not always great — of principles like portfolio diversification and the difference between risk and volatility."

Boomers also tend to think they will be able to make a few big deposits to their retirement savings later in life, rather than many small deposits over the course of a working career. This is especially true of the Young Poor Boomers.

Given a $25,000 windfall, all respondents said they would allocate the most money to saving for retirement ($7974), with paying down debt a close second ($6460). Given only a $1,000 windfall, Boomers made paying down debt their largest priority ($425) by a wide margin.

Young Poor Boomers were less likely to use the small windfall to save for retirement, setting aside only $91 of the money (9 percent) for their retirement. But they would save $7194 (29 percent) of the big windfall for retirement. Old Rich Boomers would save 13,600 of the big windfall, almost 55 percent, for their retirement.

Finally, denial is a strong motivator for not saving, particularly among the less affluent. 39 percent of Young Poor Baby Boomers said they expected to die early into their retirement, while 20 percent of the Young Rich believe they will die early.

The study, conducted by Harris Interactive, was administered online from February 20-25, 2004 to 1,115 Baby Boomers born between 1946 and 1964 who are not yet retired but who play an active role in retirement decisions. Approximately 300 respondents had $100,000 in investable assets or more. Data were weighted to reflect this U.S. population on the basis of region, age, education, household income, race/ethnicity, and propensity to be online. In theory, with a probability sample of this size, one can say with 90 percent certainty that the results have a statistical precision of plus or minus 4 percentage points for the overall sample. This online sample was not a probability sample.

¹ Those aged 55-59 with less than $100,000 in investable assets.

² Those aged 55-59 with more than $100,000 in investable assets.

³ Those aged 45-49 with less than $100,000 in investable assets.