NEW YORK -- If you think money is scarce now, wait until you retire.
That's the message from Merrill Lynch, which, as the nation's largest brokerage, has a vested interest in solving the problem by encouraging more investments in stocks and bonds.
Merrill projects that the number of elderly living in or near the government-designated poverty level ($7,500 in 1989 dollars) will grow from 6.1 million today to 7.8 million in two decades, creating "indigence on a scale previously unseen in the United States."
While bleak projections for the retirement system are common, a nationwide survey by Merrill of 400 people suggests that preparation is inadequate and misguided. Most of those polled believe Social Security and employee pensions will provide the bulk of their retirement income. That, says Merrill, is wishful thinking, at least if the retirees expect to enjoy 60 percent of preretirement income, as most do.
"Expectations are not in line with reality," said John L. Steffens, head of the firm's massive retail brokerage operations.
Social Security and employee pensions are headed down, medical costs and life spans are headed up, and the result, Merrill claims, is that people will live longer, poorer. Currently, the average person age 45 to 54 has a mere $2,300 in financial assets, or "not even enough to buy a good car," Mr. Steffens said. By retirement, financial assets have grown to just $19,500.
The situation gets even gloomier given Merrill's projection that most people will spend three to five years either needing home care or in a nursing home (average cost: $32,000 a year). "Where will those dollars come from?" Mr. Steffens asked.
Merrill's answer is savings, and if begun early, the number needn't be extraordinarily large: $1,542 annually starting at age 35, $2,089 by age 40, and so on. That, Merrill contends, would allow the person living in a $40,000-a-year household, who receives a 7 percent return on his money and 4 percent annual raises, to receive 60 percent of preretirement income until death (at age 78).
Receiving a good return on savings, though, won't be easy. Merrill's chief strategist, Charles Clough, said that interest rates on risk-free short-term investments such as 90-day certificates of deposits are at low levels and likely to stay that way.
Mr. Clough said individuals will have to take larger risks by investing in equities or longer-term bonds.