Why Working Longer Won't Close Retirement Shortfalls

Even working several more years won’t be enough for most lower-income retirees.

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Deferring retirement, even for several years, won't guarantee even a bare-bones retirement for millions of older Americans, according to a detailed study by the Employee Benefit and Research Institute (EBRI). In fact, the lowest-earning 25 percent of Americans would have to work until age 84 so that 90 percent of them would have even a 50-50 chance of having enough money to afford basic living expenses and out-of-pocket medical care.

As Congress wrestles with enormous budget deficits and possible cuts to big safety-net programs, the shaky state of retirement finances shows that millions of people near retirement age have no cushion to absorb even modest benefit cuts.

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"A large proportion, certainly of baby boomers and maybe Gen X-ers, are already going to be in a situation that is extremely perilous in terms of running out of money," said Jack VanDerhei, EBRI research director and co-author of the study. "As depressing as the numbers are in my report, they would be a lot worse" if government retirement and healthcare benefits were reduced.

The EBRI study provides tangible outcomes for a decision that many people nearing retirement are facing. Although most people have been retiring near age 62, numerous recent surveys have found that older baby boomers say they plan to work significantly longer to make up for losses suffered during the stock- and housing-market declines. Even so, it won't get the job done, according to EBRI.

"Despite conventional wisdom where everybody thought that delaying retirement for a couple of years would be enough for nearly everyone," VanDerhei said in an interview, "there's a huge percentage of baby boomers and Gen X-ers, especially in the lowest-income quartile, for whom that will obviously not be sufficient."

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EBRI looked at different retirement ages and lifetime income levels and calculated the odds of different groups having enough money for what it describes as "retirement income adequacy." This does not mean playing 18 holes of golf, then returning to the yacht. It covers only non-luxury living essentials and out-of-pocket medical costs.

Even using this bare-bones living standard, most lower-income Americans will fall short of having only a 50-50 chance that their money will last. "The problem with using a 50 percent probability of success, of course, is that the household is in a position where they will 'run short of money' in retirement, one chance out of two," the study said. Most people would prefer better odds, it said, but "switching to a higher probability of success will significantly reduce the percentage of households capable of satisfying the threshold at any given retirement age."

Here are EBRI's calculations of the various percentage likelihoods that people would have enough money for retirement income adequacy. The numbers reflect what would happen if people retired at 65 or kept working four additional years and retired at age 69.

The four income groups are determined by adding a person's lifetime income during their working years, adjusting the amounts for inflation, then determining a year of average income stated in 2011 dollars. The dividing lines for the four groups, VanDerhei said, are zero to $11,700, $11,701 to $31,200, $32,201 to $72,000, and $72,001 and higher.

Odds of Achieving Retirement Income Adequacy
Odds by Retirement Ages Retiree Lifetime Income Quartiles
  Lowest Second Third Highest
50 Percent Odds        
Retire at 65 30% 61% 78% 89%
Retire at 69 47% 76% 88% 95%
70 Percent Odds        
Retire at 65 6% 24% 49% 76%
Retire at 69 15% 37% 61% 81%
80 Percent Odds        
Retire at 65 < 1% 10% 33% 61%
Retire at 69 1% 15% 41% 69%

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The EBRI calculations come from what it calls the Retirement Security Projection Model (RSPM), which it has developed during the past decade. The model includes detailed information from millions of 401(k) participants to build projections of future wealth generated by retirement plans.

"These household projections are combined with the other components of retirement income and wealth (such as Social Security, defined benefit annuities and lump-sum distributions, IRA rollovers, non-rollover IRAs, and net housing equity) at retirement age, and run through 1,000 alternative retirement paths to see what percentage of the time the households 'run short of money' in retirement," the EBRI study explained.

Twitter: @PhilMoeller