Americans are too optimistic about retirement, study finds

People don't save enough, rely too much on pension, Social Security or chance

April 06, 2004|By Eileen Ambrose | Eileen Ambrose,SUN STAFF

Americans are overly optimistic that they will be able to afford a comfortable retirement and are doing too little to prepare for one, a study released yesterday shows.

About 45 percent of workers have less than $25,000 in total savings and investments, excluding the value of their home, and 42 percent aren't saving for retirement at all, according to the 2004 Retirement Confidence Survey released by the Employee Benefit Research Institute and the American Savings Education Council.

Nevertheless, 68 percent of Americans are very or somewhat confident of being financially comfortable in retirement, compared with 66 percent last year.

Workers are "overly optimistic and need a stronger dose of reality ... on what it will really take to retire comfortably," said Don Blandin, president of the American Savings Education Council.

"Regardless of what's going on in the marketplace, people think they are going to be OK. Year in and year out, they got this feeling that somehow all this will work itself out."

For previous generations, that has often been the case because they could rely on support from families and a traditional pension from an employer, Blandin said.

"It's becoming a different world when it comes to retirement," he said. "Look at the double-digit increases in health care costs and the longevity of folks eating up money."

The survey of 1,002 workers and retirees age 25 and older was conducted in January and has a margin of error of plus or minus 3 percentage points.

One reason for workers' optimism, the study found, is that they tend to make rosy assumptions.

More than half of workers, for instance, expect to stay on the job until age 65 and older. And nearly seven out of 10 plan on working during retirement.

While that's a good sign that Americans are willing to work longer, Blandin said, it's a plan they can't count on if recent experience is any indication.

Today's workers typically retire at age 62, the survey said, and 37 percent of those who recently retired said they were forced to quit earlier than they wanted to because of health problems or layoffs.

Workers also often underestimate how much income they'll need in retirement, the survey found. Ten percent of workers figure they will need less than half their pre-retirement income; an additional 28 percent estimate needing 50 percent to 70 percent.

The rule of thumb has been that workers will need 70 percent to 80 percent of their pre-retirement income to maintain their standard of living.

But financial experts say even that number might be low: New retirees tend to spend as much as they did while working because they travel and dine out more.

Some of those most confident about their retirement prospects were workers relying on traditional pensions or retiree health insurance from their employer or their spouse's employer, the survey found.

Fifty-two percent say they or a spouse will get a traditional pension, although just 50 percent of retirees now get such a pension.

And 35 percent expect an employer to provide health insurance in retirement. Companies, however, have been backing away from these benefit promises in recent years, the survey said.

Other benefits, too, are not what many workers believe. For example, most workers don't know when they would be eligible for full benefits from Social Security. The age to get full benefits has been gradually rising from 65 to 67.

Fifty-four percent thought they would get full benefits earlier than they are slated to get them, while an additional 21 percent had no idea when full benefits kick in.

The workers who are not saving at all gave a variety of reasons. About one-third said they are counting on getting money from an employer. Others are relying on God, an inheritance, saving later and Social Security to take care of their retirement.

One hopeful note, Blandin said, is that other studies indicate younger Americans have increasingly sophisticated knowledge of savings options, in part because personal finance is being taught at more schools.

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