Study Shows Baby Boomers Need A Stint In Savings 101



Think carefully before you answer these questions:

Which savings or investment goal is most important to your household right now?

You receive a surprise tax refund of $1,000. What would you do with the money?

You are in a store to buy a shirt. The store is selling it for $50. The same shirt is selling for half price at another store just down the road. Would you go to the other store?

You are about to pay $2,865 for a home entertainment center. The same home entertainment center is selling for $2,840 at another store just down the road. Would you go to the other store?

Who is better off? An investor who puts in $100 a month in a mutual fund from age 21 until age 30 and stops, taking the money out at age 65, or an investor who starts at age 30 and puts in $100 a month until retiring at 65?

If you are a typical Baby Boomer, your answers would be riddled with inconsistencies and poor choices. These are the findings of "Beyond Behavior: Why Boomers Underfund Retirement," a study based on a survey of 1,115 Americans born between 1946 and 1964 and not retired.

"Baby Boomers don't know how much to save and they don't understand some basic financial principles such as compound interest and adequate returns," said Frank Murtha, a business professor at New York University who helped develop and interpret the survey conducted by Harris Interactive for the Guardian Life Insurance Company of America.

For example, "providing for retirement," picked from among 15 possible choices by 42 percent of the Boomers, was the most common answer by far to the question about the top financial goal. But if they received a surprise $1,000 tax refund, Boomers would save more of it for other purposes ($127 of the $1,000) than for retirement ($126).

In addition, Baby Boomers on average would spend almost as much money for vacations and entertainment ($111 of the $1,000) as they would save for retirement, even though a mere 1 percent of Boomers chose vacations as their primary savings goal.

But if instead of a $1,000 refund Boomers received a $25,000 inheritance, they would on average sock away $7,974 for retirement, more than they would save or spend for anything else.

Conclusion: Baby Boomers are much more likely to save for retirement when they have big amounts, even though saving smaller amounts over time can be just as beneficial.

"The problem is that life gives us a lot more $1,000 inflows than it gives us $25,000," Murtha said. "If people are waiting for those major inflows, they are missing the opportunities for saving."

More missed opportunities: Almost all or 99 percent of Boomers would go to another store to save $25 on the shirt but only 52 percent would do it to save $25 on the entertainment center.

"People just don't consider the $25 savings on a bigger purchase to be worthwhile." Murtha said.

"But 25 bucks is 25 bucks" either way.

The survey also found most Baby Boomers don't understand compound interest. For example, 76 percent thought that saving $100 a month from age 30 to 65 would yield greater returns than saving it from age 21 to 30. In fact, because the money has more time to grow, the investor who starts saving at age 21 will likely have a larger nest egg. (The answer would depend on the investment return. Assuming an 8 percent annual compounded return, I calculated that $10,800 invested between ages 21 and 30 would grow to $232,764 by age 65; $42,000 invested between ages 30 and 65 would become $229,388).

Also, 13 percent of Boomers said they would be satisfied with an investment that grew from $10,000 to $15,000 over 20 years. But that's a measly return of little more than 2 percent a year.

"It is not enough to save at these low rates," Murtha said. "You need to do better if you are going to overcome the impact of inflation."

The survey also makes it clear that Boomers have not adopted any savings discipline. Echoing results of other studies, 55 percent said they could comfortably live on 80 percent of their income. But in another question, only 27 percent said they could save more than 20 percent of their income (how is that for inconsistent?) When asked about their actual savings, only 16 percent of Boomers said they saved more than 20 percent of their income in 2003.

Humberto Cruz can be reached at or c/o Tribune Media Services, 2225 Kenmore Ave., Buffalo, NY 14207. Personal replies are not possible. Look for other columns by Humberto Cruz in Sunday's Health and Family and Monday's Your Business sections.

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