43% of retiree savings found to be lacking

Your Money


I'm not going to preach, because, as I have been reminded, preaching doesn't work. I will simply lay out the facts, which are bad enough, and discuss things that we can do.

The subject is a new National Retirement Risk Index, developed by the Center for Retirement Research at Boston College. The index, built on data from the most recent Federal Reserve Board's Survey of Consumer Finances, estimates the percentage of working-age American households considered at risk of being unable to maintain their pre-retirement standard of living in retirement.

"The most important result is that a large percentage of households - 43 percent - are at risk of having inadequate retirement income," concludes "Retirements at Risk," a report prepared by Alicia Munnell, director of the Center for Retirement Research; Anthony Webb, the center's research economist; and research associate Luke Delorme. Younger households are particularly vulnerable, as are those with low incomes and/or no pensions.

Sounds bad? The 43 percent figure is actually "a very conservative number," Munnell said. "We did not want a Chicken Little-type of announcement."

The Retirement Risk Index could have been 66 percent or higher by changing basic assumptions in the report, including the age workers retire, how much they save and how they use their assets to generate income.

The center's report assumes Americans work longer than they do now and retire at age 65, and use all their financial assets - including the proceeds from a reverse mortgage on their home - to buy an inflation-adjusted immediate annuity that pays them an income for life.

A reverse mortgage, though, is not for everyone, and no financial planner I know would recommend anything close to a 100 percent annuitization strategy, which would leave the retiree with no liquid reserves. This is just a way to compute - and maximize - the lifetime income the retiree's assets could generate.

The report also considers households to be "at risk" only if their projected retirement income falls more than 10 percent below their target. For example, a household projected to need 70 percent of pre-retirement income is not labeled at risk if it can generate at least 63 percent of that figure. Changing the definition to require reaching the income target would raise the number of "at risk" households to 53 percent.

The index figure also does not take into account the potential impact of catastrophic health-care expenses. "My personal view is that the health-care system is imploding," Munnell said. "Something is going to happen, but I have no clue what that is going to be."

One silver lining is that the index number does not include any potential income from work in retirement, including possible part-time work. Recent surveys have found that most American workers plan to continue doing at least some work past traditional retirement age.

But Munnell cautioned that the average American today retires earlier (about age 63 for men and 62 for women), including many who are forced to quit because of health problems or layoffs.

For retirement security, "individuals need to have a mindset that they are going to work till 65," Munnell said. "They are going to need to have a plan and keep their eyes on the prize."

Younger workers in particular can boost their retirement security outlook significantly by increasing their savings by 3 percent a year.

"Only if people realize there is a problem can they change their behavior," Munnell said.

Humberto Cruz writes for Tribune Media Services.

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