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4 Reasons Your Retirement Is Riskier Than Your Parents’

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Alicia Munnell, the director of the Center for Retirement Research at Boston College, will contribute to “Encore” every Monday.

Everyone wants financial security once they stop working.  Americans weaned on post-war affluence have come to expect an extended period of leisure at the end of their work life.  And, indeed, the majority of today’s retirees are able to afford a decent retirement.  However, this group is living in a “golden age” that will fade as Baby Boomers and Generation Xers reach traditional retirement ages in the coming decades.

Many Baby Boomers and Gen Xers face a significant retirement income shortfall. To quantify the impact of this retirement security crunch, the Center for Retirement Research at Boston College developed the National Retirement Risk Index.  The Index measures the share of working American households who are ‘at risk’ of being unable to maintain their pre-retirement standard of living in retirement.  The results for 2004, 2007, and 2009 are shown in the table.  Even before the financial crisis, almost 45 percent of working households were projected to be ‘at risk’; after the crisis, this level increased to 51 percent.

Table: Percent of Households ‘At Risk’ at Age 65 by Cohort, 2004, 2007, and 2009

Cohort 2004 2007 2009
All 43% 44% 51%
Early Boomers 35% 37% 41%
Late Boomers 44% 43% 48%
Gen Xers 49% 49% 56%

Moreover, the percent ‘at risk’ increases with each cohort.  Late Boomers show more households ‘at risk’ than Early Boomers, and Generation Xers have even larger numbers ‘at risk.’  This gloomy forecast is due to the changing retirement income landscape.  Today’s workers will be retiring in a substantially different environment than their parents did for these reasons:

1. We’re living longer

The length of retirement is increasing, as the average retirement age hovers at 64 for men and 63 for women while life expectancy continues to rise. This longer retirement means retirees will likely need more savings than their parents’ did.

2. Replacement rates are falling

Replacement rates – retirement benefits as a percent of pre-retirement earnings – are falling for a number of reasons. First, at any given retirement age, Social Security benefits will replace a smaller fraction of pre-retirement earnings as the Full Retirement Age rises from 65 to 67.  Second, while the share of the workforce covered by a pension has not changed over the last quarter of a century, the type of coverage has shifted from defined benefit plans, where workers receive a life annuity based on years of service and final salary, to 401(k) plans, where individuals are responsible for their own saving.  In theory 401(k) plans could provide adequate retirement income, but individuals make mistakes at every step along the way and the median balance for household heads approaching retirement is only $78,000. Third, most of the working-age population saves virtually nothing outside of their employer-sponsored pension plan.

3. Out-of-pocket health costs are rising

Out-of-pocket health costs are projected to consume an ever greater proportion of retirement income.

4. Returns have declined

Asset returns in general, and bond yields in particular, have declined over the past two decades so a given accumulation of retirement assets will yield less income.

It is important to note that the Index is based on very conservative assumptions.  Everyone is assumed to retire at 65; they don’t, they retire earlier.  Everyone is assumed to tap the equity in their home through a reverse mortgage; only a fraction of those eligible elects this option.  All financial assets are assumed to be annutized so that retirees gain the maximum income from their assets; in fact, annuitization is rare.  In short, the NRRI probably understates the challenges ahead.

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    • Hey is this serious?

    • Folks;
      I’m 72 years old. In a society where we have to name our age groups Baby Boomers and Gen Xers to make them “feel good” instead of calling them in their 50 and 60s to keep them from sucking their thumbs, it would be thought they would actually be smart enough to think and plan ahead to be ready to retire with enough money to live in confort.

      I note that Ms Alica Munnell stated this younger age group made “some mistakes” regarding their 401 k’s and had only saved approximately $ 78,000 in a 45 working year career. Strange, I can save $2,000 in a month, and I’m retired, making twice as much as I ever made when I was working. Let’s take a look at how real adults save and invest for their future.

      1. Rule number 1. Rules 1, 7 and 9. Know all the other rules.
      2. No one else (other than you) is going to make you rich. Think, plan and act in your best interest.
      3. You were given a $ 100,000 education(k-12) What did you do with it?
      4. You will need an increasing stairstep lifetime retirement income.
      5. Stop buying everything you see advertised. Look at all the stuff you have now you don’t use.
      6. Figure out what you are good at and start you own business.
      7. Be flexable. Be creative. Think. Act. Do. Work hard. Rewards will come.

      I have a BS degree in Agriculture. I worked 12 years in broadcasting, 12 in life insurance sales, 12 in truck driving. 25 years in the Air Force Reserve.

      I never made more than $ 50,000 and currently am retired and have over $ 100,000 income. $ 60,000 from pensions (self and wife) and $ 40,000 from rental properties. And as I say again. NO ONE ELSE IS GOING TO MAKE YOU RICH.

      One last thing. My wife and I are travelers and have just compled our 18th cruise, including a back to back repositioning 11 day Miami to Barsceolina, Spain then flew to Rome and then 12 days on the easterm Med including Egypt, Turkey, Greece, Italy and flew home “free” on military “space a”. Just to show you what knowing the rules are all about, “Space a”, military retiree, means my wife an I flew free saving $ 1700 airline tickets and the two cruises cost only $550 and $850 each. Did I say I was a bargin hunter or what?

      Cheap and bargin hunter is how you have money to save and invest to have a future pool of money to spend in retirement so you can go on trips. It is very simple. Give it some thought and stop listening to those idiots with fifteen degrees behind their names with twenty dollars in the bank. Have a great day.

    • Bill,how can you say that “various Variable annuities” are more like mutual funds and are quite unpredictable – they are not like mutual funds – they are invested in subaccounts that are like mutual funds, but the income for life benefits act just like a pension and are very predictable for a stream of income for life for single or joint. The death benefit is nothing like a mutual fund – the benef. receives the value of the amount originally invested less any income – in mutual funds they just rec. the market value which can vary dramatically – if you would like to learn about variable annuities just let me know otherwise do not pass on bad information on message boards

    • Dan G, There are several kinds of annuities. Some are the kind that are recommended and others are the kind to avoid. The basic fixed annuity is like a pension, essentially a guaranteed payout over a period of time. The various variable annuities are more like a mutual fund and are quite unpredictable.

    • Anybody remember the “Jimmy Carter Social Security” tax increases? This was sold to the American public as being necessary to put Social Security on a permanent and sound footing. After he and his cohorts, and all those who have colluded, take some well-deserved public humiliation, we should take a hard look at the Chilean retirement system and how well it works for the Chilean people. Their retirement taxes go into accounts that essentially you own and manage as property. You can invest your account in a variety of ways. You can pass your account to your heirs. Their rate of return makes our U.S. Social Security system look like a joke. It has been working well for the Chilean people for something like 30 years. George W. Bush opened the discussion on citizen-managed Social Security accounts. That was tagged as unAmerican heresy by those who champion “the Nanny state.” Fat chance of an honest dialogue happening as long as our current President and those of similary ilk remain in power. For now, as JD alludes to in his comment, the ants are punished for sacrificing and planning ahead, and the grasshoppers are rewarded for spending like there is no tomorrow,…except now tomorrow has arrived, and it’s at the ants’ expense.

About Encore

  • Encore examines the changing nature of retirement, from new rules and guidelines for financial security to the shifting identities and priorities of today’s retirees. The blog also explores news that affects retirement, from the Wall Street Journal Digital Network and around the web. Lead bloggers are reporter Catey Hill and senior editor Jeremy Olshan. Other contributors include The Wall Street Journal’s retirement columnists Glenn Ruffenach and Anne Tergesen; the Director for the Center for Retirement Research at Boston College, Alicia Munnell; and the Director of Research for Pinnacle Advisory Group, Michael Kitces, CFP.

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