Your assignment: work longer and/or save more

Back in 2010, near the Great Recession’s nadir, the National Retirement Risk Index (NRRI) released a finding many regarded as troubling in the extreme.

That discovery was that even if Americans worked until age 65 and annuitized all their assets, including the proceeds from reverse mortgages on the homes in which they lived, fully 53 percent of U.S. households were at risk of being unable to maintain their pre-retirement standards of living in retirement.

The announcement got a lot of play in 2010, and fit the prevailing doom-and-gloom outlook of that day. But that was then and this is now. Right? We now have entered a new era of economic vitality, with growing consumer confidence, a more robust jobs picture and renewed hope for the future. Right? So there should be a much brighter picture of retirement readiness. Right?

Au contraire, buster.

Just this month, the Center for Retirement Research (CRR) at Boston College released a new examination of Americans’ retirement readiness. They had no new report for 2013, but did have the next best thing.

Given that the stock market has rebounded by 45 percent since 2010 in inflation-adjusted terms, and that house prices have climbed by six percent, the report writers wanted to know how the depressing 2010 picture would have looked had it benefited from 2013 equity and housing prices. The answer: Not a whole lot better. Half of all American households remain at risk, and overall retirement readiness is significantly worse than it was six years ago in 2007.

How can that be?

I know what you’re thinking. If the underpinnings of retirement readiness are retirement portfolio-swelling-stock-market upswings along with even small surges in home values, shouldn’t that translate to much improved readiness for home-owning wage and salary workers across the entire country?

For several reasons, it doesn’t. First, while stock market indexes have enjoyed a truly astounding gallop higher since reaching their lows in 2009, those broad-based gains haven’t benefited the majority of Americans. That’s because 89 percent of equities are owned by the top-third wealthiest Americans. Equities comprise only a modest two percent of the assets of low-income Americans and just six percent of those in the middle-income population. By contrast, equities make up 17 percent of the wealth of the highest income group.

The other half of the disappointing story is told in the housing values increase. In contrast to equities, housing is an asset common to all income groups. “But despite all the favorable press reports, Federal Reserve data shows that — on a national basis — house prices have increased only about six percent in real terms since the third quarter of 2010, ” the CRR authors wrote.

House prices have a substantial weight in the NRRI, because it is assumed households will access their home equity through reverse mortgages at the time of retirement. In short, a house is a much more important source of income for most households than stocks. And the higher the home’s value, the more a household can withdraw in income streams through annuitization. But the paltry six percent gains haven’t done much to help most Americans assure themselves they will live as well in retirement as they do in pre-retirement.

Worse than six years ago

The findings for 2013 are really eye-opening when they are compared not with the recession year of 2010 but with the pre-recession year of 2007.

At present, stocks are up a bit from their levels of 2007. But housing values in real terms remain below where they were in 2007. Again, it’s the value of the homes that most Americans own, not the stocks that mostly the wealthy own, that are more important in determining the nation’s retirement readiness. Remember that 50 percent of households in 2013, and 53 percent of households in 2010, were at risk of not living as well in retirement as in pre-retirement.

What was it in 2007? Back then it was just 44 percent of households.

Two other factors also contribute to the lack of retirement readiness. They are the increase in Social Security’s Full Retirement Age, which impacts poorer people who depend on Social Security checks more, and the decline in interest rates, which translates to retirees reaping less from their financial assets.

The conclusion of the CRR? “The fundamental message [is] that half of today’s working-age households are unlikely to have enough resources to maintain their standard of living once they retire, ” the authors wrote.

“And that conclusion is based on very conservative assumptions. People are assumed to retire at age 65 — above today’s average retirement age of 64 for men and 62 for women — and they are assumed to derive the maximum possible income from the assets they hold at retirement.”

The authors’ only advice is for Americans to “save more and/or work longer.” But might there be one more? Knowing that long-term equity exposure is necessary for significant growth of retirement assets, shouldn’t there be some effort to increase the long-term exposure low- and mid-income households have in the stock market? It’s not just the best savings accounts and best credit cards they should be researching, but the best ETFs and index funds as well.

If half of Americans have to take a step down in quality of life in retirement, we should give retirement a new nickname.

Instead of the Golden Years, how about the “Fool’s Gold Years”?

2 Responses to “Your assignment: work longer and/or save more”

  1. Anonymous

    This is a very worrying situation to be in. I’m lucky insofar that I’m quite young and aware of all the problems that lie ahead, I’m saving at a 70% rate and investing all the money in a diversified portfolio which has insurance. Hopefully I can look forward to an early retirement.

  2. Anonymous

    “fully 53 percent of U.S. households were at risk of being unable to maintain their pre-retirement standards of living in retirement.”

    This logic is fallacious. There is not a direct relation between current standards of living and those of retirement. Generally speaking, the cost of living before retirement is dramatically different than that of retirement. The costs of going to work, maintaining a separate wardrobe, income taxes, living space, etc are all lower for the majority of Americans who are full or partial retirement. In fact, the idea of retirement being this single, measurable thing is itself a bad assumption as “retirement” is defined by the individual and not any standards body.

    For one person, retirement may mean changing from high stress to low stress job, to another it may mean spending all day at home reading, to another it starting a new career that they always wanted to do but were held back because it would not produce sufficient income.

    Some may need to pay for their own living costs, some may live with family, some may move to another country with a very low cost of living.

    There is no way measure how ready Americans are as a whole for retirement because, once again, retirement is an idea, not a thing. If you look at my situation, I have a paid for home and farm in another country where the cost of living will be practically zero until the end of my days.

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