Retirement Post RecessionWill your retirement mantra be, “save, save, save,” or “work, work, work?” That depends on how close to retirement you are—at least, according to a recent study published by The Pew Charitable Trusts. (Source: “Are Americans Prepared for their Golden Years?,” The Pew Charitable Trusts web site, May 16, 2013, last accessed June 13, 2013.)

When the Great Recession hit in 2007, the oldest baby boomers were just a few short years away from retirement. And, after a lifetime of economic expansion and planning for retirement, they faced the real possibility of losing a significant portion of their savings. The economic downturn also heightened retirement planning concerns facing virtually everyone else.

Many Americans who had held off saving for retirement saw their situations exacerbated by unemployment and a bleak job market. Many more also found themselves saddled to homes that were worth a lot less than they were just a few years before—though that’s a better predicament than those who discovered their houses were worth less than the mortgages they were carrying.

According to the report, early baby boomers (those born between 1946 and 1955) were heading toward retirement with enough savings to maintain their financial security. And thanks to both the “Dot-Com” boom and housing bubble, early baby boomers had higher overall wealth, net worth, and home equity than the Great Depression babies (those born between 1926 and 1935) or war babies (born between 1936 and 1945) had at the same ages.

But that doesn’t mean their retirement plans didn’t take a hit. Between 2007 and 2010, every age group experienced a significant loss of wealth. Early boomers lost 28% of their median net worth. The rest of Americans fared a lot worse.

Late boomers (those born between 1956 and 1965) lost 25% of their wealth. Those who made up Generation X, also known as Gen-Xers (born between 1966 and 1975), were hit the hardest, losing nearly half (46%) of their wealth, or roughly $33,000 on average. Unlike the baby boomers, the Gen-Xers didn’t have that much savings to begin with, so their $33,000 loss was an even greater setback. As a result, Gen-Xers will need to either postpone retirement or enjoy retirement living on a lot less.

Asset Level by Cohort Chart

Chart copyright Lombardi Publishing Corporation, 2013;
Data source: The Pew Charitable Trusts web site, last
accessed June 13, 2013.

As a general rule, many financial planners recommend saving enough to replace 70% to 100% of your pre-retirement income when you leave the workforce. After the recession, early boomers had enough savings and wealth to replace 70% to 80% of their pre-retirement income.

Late boomers are on track to replace just 60% of their pre-retirement income. The typical Gen-Xer, saddled with $80,000 in debt and the lowest rate of home ownership, will only be able to replace half of that income.

Replacement Rates by Cohort Chart

Chart copyright Lombardi Publishing Corporation, 2013;
Data source: The Pew Charitable Trusts web site, last
accessed June 13, 2013.

In the past, the goal of saving for retirement was to generate income, not accumulate wealth. As you got closer to retirement, your investment needs to be rebalanced, moving away from growth to preservation.

Where should late baby boomers and Gen-Xers look to rebuild their retirement savings? Whether it’s a short- or long-term plan, it’s all about wealth creation. Small-cap stocks offer the highest reward potential, but they also offer greater risk. With already depleted savings, this may not be the best strategy.

One of the best places to turn to are defensive stocks that have a long history of paying out regular dividends—not so you can cash in the dividends and enjoy yourself now, but so you can reinvest the dividends and see your wealth grow long-term at an even greater rate.

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