Americans Still Dreamers -- About Retirement

Preparations and attitudes toward retirement years remain out of touch with reality.

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How about a Tea Party movement for retirement readiness? There is rising public opposition to out-of-control federal budget deficits and fiscal policies that we can't afford. We need a similar movement to get the public to wake up to the very, very unpleasant news that awaits millions and millions of Americans in their later years.

[See Best Affordable Places to Retire.] Like a lot of crises, this one has been hiding in plain sight for a long time. For the past 20 years, the Employee Benefit Research Institute (EBRI) has released an annual Retirement Confidence Survey. Invariably, each year's survey paints a picture of a nation that saves way too little for retirement and is ill-informed about the financial realities of retired life. EBRI is funded by financial companies, and they certainly do have an interest in scaring the heck out of us so we'll buy more investment and insurance products. But the data are sound and while this year's survey report is not exactly a page-turner, maybe it should be required reading.

Even this recession, nasty as it's been, doesn't appear to have materially changed long-held habits. Confidence in having financially comfortable and secure retirement years dipped to the survey's 20-year low in 2009 and has bounced back only a little in the recently released 2010 survey. We're also worried a lot about the future adequacy of the government's major benefit programs for retirees -- Social Security and Medicare. I'm sure you are just shocked that public confidence in Medicare has not soared during the interminable healthcare reform process.

Yet, if we're so worried about the future, there is precious little evidence in the survey that we're doing anything about it. How can 78 million Boomers be so self-aware about how they want to live their lives, and so clueless about the realities of retirement?

The headlines of the EBRI survey continue to be how little we're saving for retirement. Among persons still working, more than a quarter has saved nearly nothing (less than $1,000) and about two-thirds have put away less than $50,000. This excludes the value of their primary residence and any traditional pensions they might be entitled to receive. OK, you might reasonably say, what's the crisis? There probably are lots of younger employees who haven't begun saving for retirement. Well, EBRI polled retirees on this matter, too, and found the exact same numbers -- 27 percent with less than $1,000 in retirement savings and 67 percent with less than $50,000.

Many financial advisers say that retirees should conserve their financial assets by spending them down by 4 percent a year. This would result in two-thirds of all retirees having less than $2,000 of annual income from their savings. No wonder Social Security has moved from a source of supplemental retirement income to the only source of income for so many seniors.

[See Best Places to Retire.]

During the recession, many retirement nest eggs were cracked if not broken, and many employees said they would have to delay their retirements. While this is a logical response, it simply may not be feasible. EBRI has assembled a valuable picture of retirement plans among workers and retirement actions by persons who've actually retired. Huge variances exist.

"The differences between workers’ expected age of retirement and retirees’ actual age of retirement means that a considerable gap exists between expectations and reality," the report said. "Just 9 percent of workers say they plan to retire before age 60, compared with 31 percent of retirees who report they retired that early. Nineteen percent of workers plan to retire at age 60–64, although 30 percent of retirees retired at these ages. On the other hand, 24 percent of workers (compared with 8 percent of retirees) plan to wait at least until age 70 to retire." Even people who have planned well for a specific retirement date often retire earlier due to health and disability problems affecting them and also family members. EBRI says its surveys over the years consistently have found that many retirees stopped working earlier than planned; 41 percent of retirees fit that description in the 2010 survey.

Similar mismatches between expected and actual retirement experiences occur when it comes to spending levels and income sources. Some variation can be expected due to the age differences of the two groups. But across the board, there is a tendency for non-retirees to underestimate their retirement spending needs and to have overly rosy projections of their future income streams.

In looking at retirement income sources, only 77 percent of current workers expect to get income from Social Security, while 96 percent of current retirees receive such income. That's not a stretch, perhaps, given concerns about the financial soundness of Social Security. But look at the other assumptions: continued employment earnings (77 percent of workers versus 23 percent of retirees), employer retirement plan (75 percent of workers; 44 percent of retirees); IRAs (78 percent of workers; 40 percent of retirees); other savings (67 percent of workers; 50 percent of retirees), and, traditional employer pensions (56 percent of workers; 52 percent of retirees).

The pension category is particularly revealing, EBRI said, because only 37 percent of existing workers actually had such a pension benefit. How should the 19-percentage point gap be explained? EBRI doesn't know but with such pensions disappearing, it wondered, how do workers expect to see that expectation realized?

Retirement outlooks are even more of a puzzle in light of EBRI's finding that Americans do seem to be grasping the reality of ever-increasing lifespans. The typical respondent thought he or she would have a 20-year retirement, which is a close match with current longevity data. Among persons who reach the age of 65, men will live on average another 17 years, to 82, and women will have more than 19 years of life remaining, to an average age of 84.5.

So, adjusted for inflation, the $640,000 question is: If we know we're living longer, why are we doing so little to get ready for those added years?

[See 10 Trends in Longevity.]