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Study: Grim Retirement Awaits Many

Workers are not saving enough to counter cuts in pension and Social Security, researchers say.

June 07, 2006|Jonathan Peterson | Times Staff Writer

WASHINGTON — Almost 1 in 2 American families is headed toward years of financial struggle in retirement, according to a new report that says workers are unprepared for cuts in pension and Social Security income.

Much of the pain will fall on Generation X, those born between 1965 and 1972, the report said. That's primarily because these younger workers face the prospect of diminished Social Security income and fewer of them will have pensions.

Baby boomers, born between 1946 and 1964, are generally in better shape.

The study by Boston College is the latest addition to a growing body of research that suggests households headed by working-age adults are poorly prepared for retirement.

The study estimates that most people need 65% to 85% of their annual income in their working years to stay secure in retirement. But 43% of U.S. households will fall at least 10% short of that range, the study found, using what it said were conservative projections.

The percentage of households at risk of an insecure retirement rises to 66% under a less rosy set of assumptions -- for example, if workers retire at age 63 instead of at 65.

"Unless Americans change their ways, many will struggle in retirement," said Alicia H. Munnell, director of the study and a former member of the White House Council of Economic Advisors.

"There is no silver bullet," she added. "The answer is saving more and working longer."

The report advises workers to "consistently set aside 6% of their paychecks (with a 3% employer match), invest prudently and leave the money alone."

Saying it hoped to draw attention to the issue, Boston College unveiled a new National Retirement Risk Index based on survey data from 4,500 households in the Federal Reserve's 2004 Survey of Consumer Finances. Researchers calculated that the risk of falling short had risen from 31% in 1983 to 43% in 2004.

"Americans weaned on postwar affluence have come to expect an extended period of leisure at the end of their work life," the report says. "However, this group is living in a 'golden age' that will fade as Baby Boomers and Generation Xers reach traditional retirement ages in the coming decades."

The report notes:

* Social Security will replace a smaller share of people's pre-retirement income in the future. The reasons include increased taxation of benefits and higher Medicare premiums. In addition, the retirement age for full benefits will increase to 67 for people born after 1959, up from 65 now.

* Companies have abandoned costly traditional pensions, which guarantee monthly income for life, in favor of contributions to individual 401(k) plans overseen by the employees. In 2004, the typical older worker nearing retirement had just $60,000 in 401(k) and individual retirement accounts, an amount that would yield less than $400 per month in retirement, the researchers say.

* People save too little. "Most of the working-age population saves virtually nothing outside of their employer-sponsored pension plan," the report says.

* Retirement lasts longer as longevity increases. The price tag of retirement goes up with its increased duration, particularly for healthcare expenses. At the same time, future retirees may find it difficult to make their nest eggs grow through investing, the researchers say.

On the hopeful side, the picture can change significantly if people work longer and save more. For example, retiring at 67 instead of 65 reduces a household's risk by 11 percentage points, the report found. Saving more also can help a person's long-term outlook, particularly if the added savings start when a worker is young.

At the same time, a recent report by consulting firm McKinsey & Co. found that 4 in 10 workers were forced to retire earlier than they intended, usually because of health issues or job loss.

Not surprisingly, poorer people face even greater risks when their working years end, the report found. Such households risk "not being able to meet basic needs and actually ending up in poverty," study director Munnell said.

"People in the future are going to just face enormous pressure when it comes to retirement," she said.

In April, the Employee Benefit Research Institute cautioned that many Americans "have accumulated only modest retirement savings, underestimate the share of their pre-retirement income they are likely to need in retirement, and have made no estimate of how much they will need to live comfortably once they retire."

The institute said people's expectations for retirement were "like a piece of Swiss cheese -- full of holes."

Meanwhile, those employees still lucky enough to have pensions may get less than they expected.

In a report issued Tuesday, financial rating firm Standard & Poor's said federal employee programs were short about $4.5 trillion of the money they needed to make good on their pension promises. In addition, companies in the Standard & Poor's 500 stock index have about $140.4 billion less set aside than the amount they're expected to need to pay pensions, S&P said.

That's an improvement over 2004, when pension plans were $164.3 billion short. However, corporations have fallen further behind in funding so-called other post-retirement benefits, which include retiree healthcare programs. Those programs are now $320.9 billion short of what they need to back promises made to retirees, S&P senior analyst Howard Silverblatt said.

Times staff writer Kathy M. Kristof in Los Angeles contributed to this report.

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