Retirement: The Good News In The Bad News

The Employee Benefits Research Institute has issued the 2011 Retirement Confidence Survey. And the answer is: We are not confident. We are somewhere between pessimistic and hands-thrown-in-the-air hopeless.

This, the smart people at EBRI tell us, is good. You must recognise any problem before you can solve it. It’s not that our retirement situation nationally has gotten all that much worse. It’s that we’re finally facing reality.

“People are increasingly recognising the level of savings realistically needed for a comfortable retirement. We know from previous surveys that far too many people had false confidence in the past,” offers Jack VanDerhei, EBRI research director and co-author of the report. “People’s expectations need to come closer to reality so they will save more and delay retirement until it is financially feasible.”

He had me until the “delay retirement” part. In EBRI’s own report, 45% of retirees say they retired earlier than they wanted to, either due to layoffs or health issues. Almost three-quarters of workers contacted by EBRI said they plan to work (for pay) even after retirement. That too may be wishful, since it’s more than three times the percentage of retirees who told EBRI they actually worked for pay in retirement, 23 per cent.

Still 20% surveyed said they’re planning to work longer. 20 years ago, 11% of those surveyed told EBRI they expected to retire after age 65. This year, 36% said they’ll be working past 65.

(For more on this dichotomy see Working Longer as the Retirement Solution Has its Flaws.)

Some of EBRI’s findings:

  • 27% of American workers are “not at all confident” about having enough money for retirement, up from 22 per cent in 2010 and an all-time high. (EBRI has been doing this survey 21 years.)
  • Only 13% say they are “very confident” about having enough money for retirement, the lowest level recorded.
  • One third of all Americans say they had to tap an IRA, 401(k), savings or investment accounts, or had to take a loan against those accounts, in order to pay for basic expenses.

One statistic that really surprised me: 31% of people surveyed said they expected they could recover comfortably on under $250,000 in savings.

That sounded incredibly low to me, so I reached out to Mike Piper, the author of Can I Retire? and the Oblivious Investor blog, and asked him, how crazy is that?

Piper did some extremely quick back-of-the-envelope noodling and found that while such a retiree would probably be taking more than ideal out of their savings each year, they weren’t completely off the reservation.

Here’s how he parsed the question:

According to the US Census Bureau, in 2008, 24.7% of households earned less than $25,000. And another 10.9% earned between $25,000 and $35,000. So $30,000 appears to be a decent ballpark estimate of the 30th percentile for household income in the US. (We’re going for 30th percentile here so that it lines up with the idea that 31% of people estimate needing less than $250,000.)

If we go to the Social Security Administration’s “Quick Calculator” and plug in 1/1/1946 as a birthdate (such that they’re 65 now, and about to retire) and $30,000 as current earnings, we get a ballpark estimate of SS benefits of $10,848 per year.

If we assume the person ends up paying 7.65% less total tax (due to not having to pay payroll tax), that’s $2,295 in tax savings.

That leaves approximately $16,857 per year left to be satisfied by pension income, work income, and withdrawals from investments. If we assume no work or pension income, that’s a withdrawal rate of 6.74% based on a $250,000 portfolio. [editor’s note: compared to the most common 4%  rule of thumb.] Definitely a bit too high for comfort from a regular portfolio. But if the person annuitizes via a single premium immediate lifetime annuity, it’s not terribly outside the range of possibility.

Other factors that could work in the investor’s favour:

  • We didn’t back out the no-longer-needed savings for retirement from the $30,000 figure.
  • If the person is married, there could be spousal SS benefits as well. (Though exactly how this works out depends on the breakdown of the $30,000 income between the two of them.)
  • The tax savings could be greater than we estimated, as income tax would likely be lower as well.
  • There could be some pension or work income.

Of course, there are a whole list of factors that could work in the opposite direction. For example:

  • Many investors probably wouldn’t recognise that they’d need to annuitize in that situation.
  • Most investors pay far too much in investment fees, making even a 4% withdrawal rate too high for safety

That’s certainly more upbeat than I’d thought on first blush. On the topic of retirement it’s amazing what passes for the good news these days.

How confident are you in your retirement savings? What modifications have you made to your plans or assumptions to better prepare?

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