Many Retirees Face Prospect of Outliving Savings, Study Says
By Nancy Trejos, Staff Writer
Sunday, July 13, 2008
Nearly three out of five middle-class retirees will probably run
out of money if they maintain their pre-retirement lifestyles, a
new study from Ernst & Young has concluded.
The study, set to be released tomorrow, finds that Americans
will have to drastically reduce their standard of living before
retirement to live comfortably, or even avoid destitution, later
in life. Middle-income Americans entering retirement now will
have to reduce their standard of living by an average of 24
percent to minimize their chances of outliving their financial
assets, the study found. Workers seven years from retirement
will have to cut their spending by even more -- 37 percent.
"People are going to have to adapt in a number of ways that they
weren't anticipating or hoping for," said Tom Neubig, national
director of the Quantitative Economics and Statistics practice
at Ernst & Young. "I think a lot of people are hoping to
maintain roughly the same standard of living after retirement.
Our study suggests they are going to have to make some changes."
About 77 million baby boomers are expected to retire over the
next few years. The study warns of an impending national crisis
if workers, and lawmakers, do not react now to the changing
pension structures in corporate America. Most
companies have moved away from defined-benefit plans, in which
they provided their retirees with a set benefit each month, to
defined-contribution plans such as 401(k)s, in which the
employee takes most of the responsibility for saving money. But
with the U.S.
savings rate abysmally low and people underestimating their life
spans, economists warn that aspiring retirees will have to work
longer if they do not spend less, no small feat at a time when
inflation and the cost of living are rising. Fluctuating
investment returns on 401(k)-style plans in this wobbly stock
market are not helping matters.
"Most people, if they look at their life expectancy and they
think they will live to 90, they are nuts to retire at 60.
They're going to be living in poverty at 80," said
Peter Morici, an economist at the
University of Maryland. "I think it's a wake-up call to baby
boomers to get serious about getting their houses in order."
Compared with the rest of the nation, District residents making
$50,000 to $100,000 a year are less vulnerable because a high
percentage of them are covered by government-defined benefit
pension plans, Neubig said. The same is true for
retirees, however, are on par with most other states: 59 percent
of new retirees and 74 percent of near-retirees are at risk of
running out of money in retirement, Neubig said.
The study was commissioned by Americans for Secure Retirement, a
coalition of more than 50 organizations representing women's,
small business, agricultural, Hispanic and African American
groups, among others. It looked at married and single near- and
recent retirees at three pre-retirement income levels: $50,000,
$75,000 and $100,000.
Retirees would be much better prepared if they had a guaranteed
source of retirement income beyond Social Security, the study
concluded. Married couples relying on income aside from Social
Security and making $75,000 at retirement have a 31 percent
chance of running out of money if they maintain their
pre-retirement lifestyles, the study pointed out. But those who
rely solely on Social Security have a 90 percent chance.
Congress has taken up the matter. One bill, for instance, would
make it easier for workers to get a particular non-Social
Security retirement vehicle: an annuity, which is an
income-generating contract between the employee and an insurance
company. The legislation would exclude from taxation 50 percent
of the income received from a lifetime annuity, up to $20,000
"It's that paycheck every month for the rest of their lives that
will allow people to have some standard of living," said Joe
Reali, chairman of Americans for Secure Retirement, which has
life insurance companies as members.
But David B. Armstrong, managing director of Alexandria-based
Monument Wealth Management, said the best way for Americans to
live well in retirement is to plan for it early. Save your money
and make sure you start your 401(k) at an early age, he said.
Figure out what your nonnegotiable expenses and assets are. If
you don't have enough money to cover your necessities, he said,
cut out any luxuries in your lifestyle.
"Eating out five nights a week, is that something that is
important or is that something you can forgo?" he said.
"Retirement ends up being a negotiation."