Saturday, May 25, 2013

Are boomers spending too much?

Are boomers spending too much and hurting their chances at a comfortable retirement?
Yes according to a survey and an article published in Forbes magazine by Halah Touryalai, Forbes Staff
A study by the National Center for Policy Analysis investigates the spending habits of baby boomers who many say are nowhere near ready to retire
The NCPA compared the pre-retirement spending habits of today’s middle-aged workers (45 to 54 years old) and today’s older workers (55 to 64 years old) with the spending habits of those age groups 20 years ago.
The group notes that real incomes for these age groups have not changed much but the portion of disposable income households spent on certain categories of goods and services has increased.
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The results are not all surprising considering the state of economic affairs for many in the country.
For starters, baby boomers are spending a lot more on education. That’s no surprise considering the cost of a college education has grown faster than income for decades. From 1990 to 2010, education expenditures increased the most — by 80% for 45 to 54 year olds and 22 percent for 55 to 64 year olds.
“Today, outstanding student loans amount to more than one trillion dollars.11  A recent analysis by the New York Federal Reserve Bank found that one-third of the nation’s student loan debt is held by individuals over the age of 40,” the report says.
Another rising cost hurting pre-retirees today: Health care. Health care expenditures–including all out-of-pocket expenses and insurance premium expenses–rose 30% for 45 to 54 year olds and 21% for 55 to 64 year olds. Insurance premiums nearly doubled as a share of health care expenditures for both age groups, the study notes, adding that the growing cost of health care has essentially wiped out the gains in median family income over the last 10 years.
Adult children are taking a toll on their boomer parents. Nearly 50% of parents with children between age 18 to 39 were supporting them in various ways including living expenses, transportation costs, spending money, medical bills and help with paying loans like student debt.
Perhaps less surprising rising cost: Mortgage debt.
From 1990 to 2010 the share of expenditures on housing including principal, mortgage interest, taxes, maintenance and insurance for both age groups increased 25%. Interestingly, the 55 to 64 year olds saw half of the increase in the interest portion of housing expenditureseven though mortgage interest rates have dropped over time. From the report:
Are baby boomers buying more home than they can afford or are prices for a basic home simply outpacing income growth?  The median house size has increased from 2,080 square feet in 1990 to 2,392 square feet in 2010. Since the mid-1990s, the Federal Housing Authority allowed more borrowers to qualify for loans with lower down payments. This action began a proliferation of loans that required little or no down payment. Furthermore, after 2000, home price growth outpaced income growth, peaking in 2004 and 2005. Home prices began falling dramatically by the end of 2008, but many households were underwater, owing more on their mortgages than their homes were worth.
Making mortgage debt even further complicated is that the age of first-time homebuyers is up from 28 in 1985 to 35 in 2011.
As the age of the first time homebuyer increases, the probability that a household will carry a mortgage into its pre-retirement years also increases. In addition, due to the availability of home equity loans, many boomers who were previously close to paying off their homes could be refinancing or tapping into home equity. In fact, it is estimated that 15 percent of all baby boomers will not get out of debt in their lifetimes,” the report notes.
What aren’t boomers spending more on? Entertainment. Boomers have not increased their spending on entertainment or dining out and have in fact cut back on some categories from 1990 to 2010:
  • Food purchases (including restaurant spending) fell 18 percent for 45 to 54 year olds and 20 percent for 55 to 64 year olds.
  • Household furnishings fell nearly one-third for 45 to 54 year olds and one-fourth for 55 to 64 year olds.
  • Clothing expenses showed the steepest decline, falling 42 percent for 45 to 54 year olds and 70 percent for 55 to 64 year olds.
“Contrary to the belief that the savings rate has been stagnant, or even declined, retirement accounts appear to be playing a larger role for baby boomers. However, retirement savings is nowhere near the 10 percent that is often recommended as the share of income that should be dedicated to savings,” Pamela Villarreal of NCPA says in the summary of the report

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