Sunday, March 04, 2012

“Difference” Strokes

In response to concerns that tomorrow’s retirees will run short of money, we are often told to save more, to work longer, or – as often as not these days – to work longer AND save more. Certainly working and saving longer can do wonders in terms of stretching your retirement nest egg.

However, the timing of the retirement decision is often not within an individual’s control. In fact, the Retirement Confidence Survey has consistently found that a large percentage of retirees leave the work force earlier than planned. In fact, nearly half (45 percent) of retirees reported that they were in this situation in 2011 (see EBRI Issue Brief No. 355, March 2011, The 2011 Retirement Confidence Survey: Confidence Drops to Record Lows, Reflecting “the New Normal”).

Real-world data have shown (and shown for some time now) that the median retirement age for Americans is not even as old as 65 (it’s been 62). Still, EBRI research has shown that working longer – even working past the age of 65 – is no guarantee of a financially satisfying retirement. In fact, a June 2011 Issue Brief titled “The Impact of Deferring Retirement Age on Retirement Income Adequacy” ) notes that, even if a worker delays his or her retirement until age 80, just 61.7% of the lowest preretirement income quartile households would have a 50 percent probability of not running out of money in retirement.

What Matters

The research notes that how workers fare financially after retirement is directly tied to three factors: their salary level at retirement, how long they work beyond 65, and whether they save in a defined contribution retirement plan during their working lifetime. In fact, the report notes that “a major factor that makes a difference” in their ability to meet basic and uninsured health-care costs in retirement is “whether they are still participating in a defined contribution plan after the age of 65.” How much difference? At least a 10 percentage point difference in the majority of the retirement age/income combinations.

Ultimately, the research should remind us of a couple of things: first, that the assumption that we’ll be able to work past “normal” retirement age is just that—an assumption. Second, and more important, even if that assumption pans out, it cannot be assumed that it will, in and of itself, prove to be sufficient.

But finally, and significantly, there is at least one thing individuals can exercise some control over in the “here and now” – their current—and continued—participation in defined contribution plans.

And that’s something that can directly—and significantly—make a difference in building a financially viable retirement.

- Nevin E. Adams, JD

(1) Admittedly, except for those in the lowest income quartile, this would be a small percentage of the population, depending on your expectations of success (see “Short” Comings ). Still, according to the EBRI Retirement Security Projection Model (RSPM) baseline results, the lowest preretirement income quartile would need to defer retirement age to 84 before 90 percent of the households would have a 50 percent probability of success.

You can read more about how these factors impact retirement income adequacy HERE

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