Half of Baby Boomers Likely to Miss Retirement Financial Targets - Here Are Three Strategies to Recover
The retirement readiness of UK Baby Boomers is a cause for concern, with half of this generation not financially equipped for their golden years, according to a report by Vanguard.
Most low-income workers manage to meet their relative spending goals due to reliance on the state pension, but many fall short of even the minimum absolute retirement living standard. Middle-income Baby Boomers are at the greatest risk, with most not projected to meet their spending goal under either measure. On the other hand, most high-income Baby Boomers have sufficient savings for a comfortable retirement.
The situation is far more promising for those with defined benefit (DB) pensions. Around 69% of Baby Boomers with DB pensions are on track for a comfortable retirement, compared to only 28% of those relying mainly on defined contribution (DC) pensions or the state pension. The Office for National Statistics shows that 65% of those in their 60s have pension wealth in DB schemes, while only 25% have defined contribution pension wealth.
Defined Benefit pensions offer a fixed, lifelong income based on a formula (salary and years of service), which is often inflation-protected. The pension fund trustees manage investments to ensure liabilities (future payouts) are met. This guarantees a more stable and predictable retirement income for Baby Boomers.
In contrast, defined contribution pensions depend on accumulation of contributions plus investment returns. The individual assumes investment risk and must manage how and when to access the pension pot, with no guaranteed income level. These pensions offer flexibility but require active planning, and many Baby Boomers with DC pensions are not saving enough to meet retirement needs.
Georgina Yarwood, senior investment strategy analyst at Vanguard Europe, expressed concern that half of UK Baby Boomers aren't on track to meet their retirement goals. However, she suggests that there are things people can do to improve their financial situation in retirement. Accessing the money tied up in property can be a potential solution for retirees with a spending shortfall. This can be achieved through downsizing, relocating to a lower-cost area, or equity release.
Delaying retirement or taking a phased approach can also enhance financial security and improve retirement readiness. Careful thought needs to be given to an individual's own unique needs and circumstances when resetting spending goals.
In conclusion, defined benefit pensions provide Baby Boomers with more reliable and predictable retirement income, which significantly improves their retirement readiness. Those reliant on DC pensions face greater uncertainty and risk of falling short financially in retirement. This difference explains why many Baby Boomers without DB pensions are at risk of not achieving comfortable retirement outcomes.
Pensions play a crucial role in ensuring a comfortable retirement, with defined benefit (DB) pensions offering a fixed, lifelong income and a more stable retirement income for Baby Boomers compared to defined contribution (DC) pensions. Those relying on DC pensions or the state pension have a higher risk of falling short of their retirement goals, which highlights the importance of personal-finance management and other strategies such as savings, accessing property funds through downsizing or equity release, and delaying retirement.
