Invest Wisdom

A study from the Urban Institute came out a couple weeks ago analyzing how the stock market crash of 2007 and 2008 will hurt baby boomers’ retirement income.

They looked at three possible recovery scenarios: 1) No recovery - The market simply grows at its historical pace. 2) Full recovery - The market grows at a rapid pace and in 10 years hits the point that it would have had there not been a crash. and 3) Partial recovery - In 10 years, the market hits a point halfway between scenario 1 and 2.

You could argue that all three scenarios are optimistic. A lot of economists and experienced investors are saying that our growth rate going forward will actually be slower than the historic average. So the “No recovery” scenario might even be growing the market too fast.

But the study is good if for no other reason than to show that if you have more than a decade to retirement, you really don’t have to panic about this crash.

The study looked at three groups of baby boomers: pre-boomers (born between 1941 and 1945), middle boomers (1951 to 1955) and late boomers (1961 to 1965).

For late boomers, they found that retirement income for the average household would decrease 7.2% under the no recover scenario, but increase 3.2% under the full recovery scenario because of the crash. Remember that the “full recovery” scenario is a probably implausible rapid return to the pre-crash highs.

Pre-boomers lose money in all circumstances, shedding 8.5% of retirement income with no recover and 6.9% under a full recovery.

They also found that those high on the socioeconomic ladder were much more heavily affected because they tended to have more money invested. Middle boomers, for example, would lose 14% of their retirement income due to the crash under the no recovery scenario.

Anyway, the study slices the data many different ways. It’s decidedly optimistic, but for all you people under 30, seeing that even some boomers might actually come out ahead if optimism prevails has got to be heartening.

— Joe Light