Whether it's over or not, the recession has made retirement at age 65 more difficult. New analysis from the Center for Retirement Research at Boston College found that 51 percent of Americans have a high risk of not being able to maintain their current lifestyle in retirement, up from 44 percent in 2007. "If they retire at age 65, they will not be able to maintain the same standard of living as they did before," says the center's director, Alicia Munnell, about the households at risk. These Americans will have to significantly cut their expenses when they leave the workforce at age 65—or delay retirement. "The later you retire, the more likely you are to be able to maintain your standard of living," Munnell says. Here is a look at why half of Americans are now unprepared for retirement at age 65.
Housing market decline. The spike in households unprepared for retirement is largely due to the housing bust. Almost three quarters of the increase in Americans at risk of being unable to maintain their current standard of living in retirement was the result of the decline in house prices, the Boston College study, underwritten by Nationwide Mutual Insurance Co., found. "Even though people lost a lot of money in stocks, stocks tend to be held by the top portion of the income distribution, whereas everyone owns a house," says Munnell. Even people who don't plan to sell their home in retirement are affected by lower housing values. If they need extra cash and opt for a reverse mortgage, they'll extract less equity. And many Americans who have not paid off their home will need to continue making mortgage payments after leaving the workforce.
Stock market slump. The $7 trillion decline in stock holdings between 2007 and the second quarter of 2009 is also contributing to retirement unpreparedness, primarily among higher-income households. The disappearance of traditional pensions for private-sector employees in favor of 401(k) plans means workers are directly exposed to stock market shocks. Members of generation X, who are more likely to have only a 401(k) retirement plan, are at a higher risk of having to cut their standard of living in retirement (56 percent) than early (41 percent) or late (48 percent) baby boomers, many of whom still have traditional pensions. "Almost no gen X-ers in the private sector are going to be covered by a defined benefit pension, and they are going to live forever," says Munnell.
Lower interest rates. Declining interest rates mean retirement savers are getting less income from their accumulated wealth. For example, a retiree with $100,000 saved will receive $492 per month from an inflation-indexed annuity when the real interest rate is 3 percent, compared with $413 each month when the interest rate is 1.5 percent. However, falling interest rates can be good for borrowers. Retirees who own their homes can potentially withdraw a higher dollar amount from their primary residence through a reverse mortgage when interest rates are low.
Reduced Social Security. Although retirees can begin collecting Social Security at age 62, retirement benefits are reduced for people who collect before their full retirement age. And the full retirement age is no longer 65 for Americans born after 1937. The age at which seniors can collect full benefits has gradually increased by several months each year for those born in 1938 through 1942. Retirees born between 1943 and 1954 must wait until age 66 to collect their full due. Then an even higher retirement age is phased in for those born between 1955 and 1959, growing several months above age 66 each year. For example, a retired worker born in 1958 can claim his full entitlement at age 66 and 8 months. The full retirement age further increases to 67 for Americans born in 1960 or later. "As the age goes up, it means people who are retiring at 65 will get less," says Munnell. Americans born after 1937 will effectively have to delay retirement beyond age 65 to get payouts similar to those their elders received.