Americans Not Ready for Retirement

Here's a piece from MarketWatch about how your home equity figures into your retirement plans. But what struck me were these figures on what Americans have saved for retirement:

The equity in your home represents a big part of your wealth. If you're married, your non-financial assets -- mostly the equity in your house -- represent about 70% of your total assets, according to a 2009 Society of Actuaries report "Segmenting the Middle Market: Retirement Risks and Solutions."

What's more, the report noted the median value of financial assets is less than 1.5 times median income -- $75,000 -- for the majority of middle-class households and that the median value of financial assets is just three times median income -- $132,000 -- for the vast majority of affluent households.

Ok, do these numbers say "yikes!" to anyone else? Granted, they don't include Social Security and traditional pension plans (the latter of which can't be much), but still! Think about this:

• If your home is 70% of your assets (or close to it), that means you only have 30% at most saved in investments for retirement. That's not very much at all when you think about how long most of us will be retired.
• If I'm reading this right, middle-class households have $112,500 saved for retirement and even affluent households only have $396,000 saved. Neither of these amounts will come near to supporting the savers at a level even close to what they were earning pre-retirement.

Maybe the data is off a bit -- maybe this is what people have NOW, not what they'll have at retirement. Then again, I'm not optimistic about that. After all, the author would have surely noted this if it was the case, wouldn't he?

Anyway, these numbers are way too low for my comfort -- even with Social Security factored in. I'm saving so that I can withdraw 4% of my funds per year, live at a level I'm living at today, and not count on Social Security for a penny (if I get anything, that will be gravy.) In addition, I plan to work as long as I can (I know, lots of people are thinking this way and physical ailments may not allow it), at least part-time, since I can't see myself retiring completely. I'd be too bored!

What's your take on these numbers? Too low or am I making a stink for nothing?

Comments

[LeanLifeCoach]

You are right to be concerned, not only for the good of the people represented in the report but also for the good of our country. Social Security or not, retiree's that have not adequately prepared for themselves will become a burden of the state in some way.

I'm beginning to wonder if the concept of Social Security was the worst thing our country could have done. If for the last several decades everyone knew there was not safety net at the end of life, would they have made different choices?

Frankly this scares the $#@#$ out of me!

[susan]

The numbers do seem way too low - although as you say, if it is what they have NOW (not anticipated to have at retirement) it's not as dire as it looks.

There just seems to be such a lack of personal responsibility - people would rather buy a flashy car, or a bigger house, or designer clothes/shoes rather than put money away for retirement.

I guess they figure that "someone" will take care of them when they retire and not let them starve, or go without medical care. The problem is when there's tens of millions of people assuming that "someone" will take care of them. Who is expected to bear that burden?

[MC]

How do these numbers mean anything at all without any indication of the median age of the people they are talking about?

Because if 30-year olds aren't ready to retirement tomorrow, I'm not really worried.

[tom]

We should all be very concerned, because it will be these populist voters that scream at their congressmen/women to change 401(k) plans, IRA plans, pensions, etc. because they weren't preparing.

I agree with LeanLifeCoach. Social Security was a terrible idea. It's insulting if you think about it. The Goverment looks at the people and says, you are to dumb to plan and save, we are smarter and will do it for you.

I'm not counting on SS at all. When I retire in 30-40 years, it'll be long gone. I have no idea what any US system will look like then.

[ctreit]

A few generations ago retirement was not even part of one's financial planning. Nobody thought about retiring or taking vacation. A hundred years ago the labor movement fought for retirement, vacation, paid holidays, etc. Still, if you want to retire, you better start planning ahead.

I find only one thing surprising: the fact that housing represents so much of one's wealth. I wonder whether this data took the recent decline in house prices into consideration.

@tom: I don't think Social Security is insulting. There are people in our country who may not be able to plan as well as you and I can plan. But there are also people who spell better than you can spell. Since we are all different and since we all have different strengths and weaknesses, I think it is ok to create a system that allows everybody to live a decent life at a minimum level.

[Jim]

They seem to be looking at current assets of all households regardless of age. Young people will skew the numbers low. You don't expect someone in their 20's to have a huge retirement nest egg.

As of 2007 people age 55-64 had median net worth of around $250k. Thats not great but its much better than the median if you include younger people.

[FMF]

Jim --

Yes, better, but still way low....

[jefffinWesternWA]

When folks PAY over $100+ a month for a package of Phones, cell phones, internet and TV (all of which can be had nearly free)and PUT LESS than the same amount into retirement plans, or over $500 a onth for a vehicle !! - do you wonder? I became a financial planner - acting as a fiduciary for several years (before I retired at AGE 47) and the frustration with getting folks who make decent livings (six digit incomes example) to pay off consumer debt AND at least 15% into retirement and another 5% into emergency savings, too many rather shop instead, so for the majority of Americans who complain or aren't ready for retirement, go look in the driveway, closets, garage full of "stuff" to crowded in for cars to fit)...THERE IS YOUR Retirement, so keep workin till age 70 anyway...I was able to save 5-15% of my pay even when my income was $16K~ a year....

[Kimberly]

Actually, I just skimmed the SOA report that the article references and the mean income numbers of $75,000 and $132,000 are for married couples aged 55-64. Their respective amounts of financial assets (non-home) are $108,000 and $416,000.

These are not good numbers for people who are nearing retirement.

[chynalemay]

SS is just one guarantted source of income (for those under age 50~ maybe not guaranteed at all??), most folks need at least 2 sources guaranteed, the so called 4% w/d rate from retiremnt funds DOES NOT WORK long term, correct planning means an annuity is need too, or if you worked for a government entity - a traditional PENSION is another source. For a couple, don't think a modest retirement "pot" and two social security checks is enough, get the other guaranteed source of income and start realizing your portfolio shoiuld be set up in a similair way to a "buckets of money" startegy, don't think a 4% w/d from a 401K will do it for the long term! Many of those average folks cited need to think of delaying SS and probably at least one working to age 70, JeffinWesternWA seem right on (again)...

[Bill]

These are scary numbers, but somehow they'll manage. (Idon't have a clue how. The Kids? Longer work life?) The folks who post or read here are clearly similar in some saving/finacial respects, despite obvious differences in life phiosophies.

Regarding Social Security. Leanlife and Tom while I share your concerns let's remember tow things at least. One it was never, I repeat never intended to be a complete pension plan. It was to be one leg of a three legged stool; company pensions and personal savings being the other two.

Second, when it was started the lifespan was closer to 67(I may off a year or two here. So you work till you were 65 and die at 67 not 85.

Tom, where the government erred was to not raise the retirement age way sooner than happened. IMHO. It could have been indexed way back then but who knew?

[Jonathan D. Edelfelt]

It seems like these scary studies come out every few months to sell advertising. After all, doom and gloom sells. Sure, for those people who expect to retire on a small island on a golf course, with a yacht and a luxury car in the driveway, the study is disconcerting. But for the rest of America, I'm not so sure.

Disparage Social Security all you want, but the fact is that it is the major source of income for almost two-thirds of America’s current retirees. For one-third of retirees, it is in effect the only source of income. The average Social Security retirement benefit is about $1,000 per month. So, one-third of retirees are living on about $12,000 per year. For retired couples, the amount is a little less than twice as much.

The secret to a successful retirement isn’t huge personal savings, it's a less expensive, simpler lifestyle. Remember that retirees are not in the accumulation mode like working people. They just don't consume as much as working folks. Out of the income retirees have, they pay a lot less tax, they don't need to save, and they have lower transportation, food, housing and other expenses. Most retirees do just fine on a lot less than you might think. In fact, a recent study (2005) found that the median, minimum consumption needs for older married adults were about $7,500 per person.

I'm not suggesting that people shouldn't save like misers for their retirement. After all, more money is always better. However, don't let these doom and gloom studies make you believe that you'll never be able to retire.

Jonathan Edelfelt, author of Who Said You Need Millions? Retirement Strategies for the Rest of Us.

[Jim]

Kimberly is right. The report cited does reference people who are near retirement (55-64) and older. The number I cited is from government data from 2007 and the data the report has is supposed to be current and should reflect the drop in assets from the recent recession.

[Tyler]

This is a major issue that will eventually result in very difficult choices for our society. As a country of majority rule, I fear the burden to fix the growing problem will fall on the shoulders of the minority who lived their financial life in a responsible manor- many of FMF visitors fall into this category. Inflation, taxes, income restricted benefits, etc are all ways to hurt the responsible in favor of the irresponsible over consumer. I look at this data from the perspective of someone who has over 30 years before even considering retirement, who has lived a financially responsible life thus far, and I am forced to ask myself if it’s even worth the sacrifice. When others of my generation are purchasing homes, season tickets, eating out, and enjoying a leveraged multiple of their labor, I have decided to build the financial foundation of my future. With cash for clunkers, 8k for a house, and demographic weight briefly discussed in this post, I wonder if I/we have been wrong in our prudence. It seems to me, the ultimate free ride dilemma is beginning to play itself out and I cant help but think I am on the wrong side.

[Tyler]

If 70% of people's net worth is wrapped up in their home, then propping up inflated home values is job one- imagine how bad things will get if this paper wealth evaporates over the next few years. Let the game of musical chairs begin.

[FMF]

For those interested, I was sent this email/press release today:

America’s 50-somethings are in a state of denial about the retirement lifestyles they’ll be able to afford – and even the severe economic crisis hasn’t shaken them out of their dream world. That’s one of the conclusions of Wells Fargo’s fifth annual Retirement Fitness Survey, released today. There’s also some interesting data on the differences in expectations and attitude between women and men.

Feel free to use this data in your upcoming retirement stories. Top findings include:

Retirement outlook and attitudes:

· America’s 50-year-olds clearly haven’t assessed how long their savings will last in retirement. They expect to live nearly 21 years in retirement, but plan on spending nearly 10% of their savings every year in retirement. The industry recommendation is to withdraw no more than 4% annually.

· People have been overly optimistic about their investment returns. When they started saving (typically in their 30s), both pre-retirees and retirees expected the value of their investments to grow by 8.7% each year, on average. In fact, the compound annual growth rate of the S&P 500 from 1958 through 2008 was less at just 6.6%.

What are they doing about it?

· Among 50-year-olds only 23% are saving more for retirement than they were a year ago. Most -- 57% -- are saving the same amount, and 20% are now saving less.

· Despite their inadequate savings, nearly two-thirds lack any formal plans for retirement savings or spending strategies. Only 35% have a written plan for retirement, and of this group, only 52% say they updated it in the past year during the market downturn.

Women vs. Men:

· Women are more likely than men to feel affected by the economic downturn, are less certain about their retirement and investing, and regret that they aren’t better prepared.

· Pre-retired women now expect to retire later than they did a year ago (62%, vs. 50% of men), and 41% now think they’ll need to work in retirement “just to make ends meet” (vs. 32% of men). Women expect they will have to cut back on their retirement lifestyle (60%) more than men (52%).

[Crystal]

Tyler,
I'm a 26 year old living a financially responsible life too.

The way I see it, I can save now and have a great retirement on my own terms. Or, I can live above my means and hope to be taken care of in the future in a minimal way. Even if the economy tanks, I will still have more than most and be able to live a life that will never include the necessity of only rice, beans, and Ramen for my final years.

Yes, as a responsible saver, people will be getting a "free ride" off my taxes. That doesn't mean I want to be forced to live like those people. They have no real options...they will have to take what they can get and live the life they can.

I sleep better because I know I have padding in the bank. I get to enjoy trips and vacations without worrying about the debt I'm coming back to. I get to have the satisfaction of watching MY money grow and the day dreams of what I want to do with it...not just dreams about what I would do IF I had money...actual thoughts about to do SINCE I have money.

You are not on the wrong side of the free ride dilemma...if you continue to live responsibly, you will enjoy a less stressful and restrictive life. :)

[Rick Francis]

>Neither of these amounts will come near to >supporting the savers at a level even close to >what they were earning pre-retirement.

I agree the numbers seem pretty scary... The best case scenarios I would see for someone who is 55 and hasn't saved is reduce their standard of living by 20-30% and save like a madman.

The only other alternatives are work until you drop, or live on only social security at retirement... with a 60-70% reduction in standard of living!

-Rick Francis

[billyjobob]

Well, this actually made me feel better about myself. I'm not rich. I'm not poor either. I'm in my 50s and I hope to retire in the next 2 or 3 years. My house isn't real fancey. 2 bedroom single car garage. But its all i really need. The good thing is that I have saved at least 5-6 times more than what my house is worth. So...this article make me think I must be doing it right. Also, when I think about how much money I'll have in retirement, I don't include my house in that number. After all, I'll be living in my house...not spending it.

[Terry]

Re:

"The equity in your home represents a big part of your wealth. If you're married, your non-financial assets -- mostly the equity in your house -- represent about 70% of your total assets, according to a 2009 Society of Actuaries report "Segmenting the Middle Market: Retirement Risks and Solutions."

WHEW, good thing I don't own a home!

[Francis]

If this data is the median of all American household, then I think the data is next to useless, since it doesn't take into account how soon the people in this group will be retiring. For example, I'm in my early 30's, and fall into the "median value of financial assets is just three times median income -- $132,000". Following this logic, I'm in a bad shape for retirement - which discounts the fact that I'm stocking away 22% of my gross income into retirement savings and have at least 20 years ahead of me for the portfolio to grow.

If I'm unlucky and the market stays flat (or dip even further), then I'll be feeling the pinch when I'm 50. I pray to the Lord such thing doesn't come to pass...

[JoeTaxpayer]

I know this wasn't your focus, but it just helps my conclusion - those retiring have such low amounts saved in retirement accounts, the benefit of converting to Roth now isn't an issue. So few will even be in the 25% bracket, let alone higher. The numbers you cite here were similar to those I've seen.

[Old Limey]

At the age of 75 I have wondered for some time how retirement is going to be for younger people like our 3 children when my wife and I are long gone. We left England in 1956 and arrived with $400 and have been extremely lucky and fortunate. I never had a day of unemployment - my career provided an excellent pension - social security has been a great help - my wife also has a pension and social security and was never unemployed once she entered the workforce.

We also have owned two homes, the first appreciated 335% in 14 years, the second and final home has appreciated 1030% in the subsequent 32 years. We also bought a vacation home that has appreciated 4300% over 42 years as well as providing rental income and tax benefits. In addition to being part of the real estate boom between 1963 and today we benefited greatly from the once in a lifetime DOT.COM stockmarket bubble between 1998 and 2000 but have never received any inheritances.

For 53 years we have also lived frugally within our means and have always been savers. We retired in 1992. Out of 3 children, one obtained a business degree at a state university, one went to a junior college and got an AA degree, and the youngest did an apprenticeship as a mechanic as well as sowing lots of wild oats, so we got off very cheaply with educational expenses.

Bottom line - my wife and I have no worries at all - how will the next generation fare - our kids?

Our three children are now 51, 49, and 45 and have not received money from us.
The 51 year old daughter worked for many years as office manager for an attorney, I have always managed her SEP-IRA for her which is now close to $1.5M, they have about $200K of other investments, their home is paid for, she is a power seller on eBay and her husband is a custom home builder but not building anything right now.

The 49 year old daughter was a stay-at-home-mom and divorced about 2 years ago receiving a $2M settlement (which I manage) and $20K/month for 9 years, she also does well selling used books at Amazon so her retirement is not going to be a problem.

The 45 year old son is his company's top sales producer with a good salary and a secure job even though the whole company just had a 5% pay cut for everyone. He and his wife have $385K in investments (which I manage) and own a condo outright worth about $600K, thanks to a couple of other real estate transactions that worked out well for him during the real estate bubble, so I don't worry about him too much.

Then when my wife and I check out they will inherit what we have accumulated. End of story.

[Financial Samurai]

Again, don't believe the numbers. People have much more money than the statistics say.

[Bill]

Old Limey,
good for you.
good for your kids.
I'm doing ok myself,not as good as you but good enough.
Sorry, but you seem to lack any feeling who were not as fortunate/lucky/skillful as you.

sorry if this is rude. but dang dude you have posted your rags to riches before,
you are now coming across as smug and arrogant.

Keep posting though, you have good comments.

[Terry]

I'd like to see a story about someone over 50 going from rags to riches.

Besides Colonel Sanders.

[Old Limey]

Bill:
Many times I have said how I was incredibly lucky to be born when I was, an event for all of us that is beyond our control.
The people that I feel genuinely sorry for the most are those young people that have worked their butts off to get a good education, have recently graduated from college with great qualifications and cannot find a decent job anywhere. These kids haven't screwed up, haven't wasted great opportunities to save money, haven't spent foolishly when they should have been saving - they are just victims of chance that are facing several years of very tough times until this great country can start creating large numbers of jobs again.

Our politicians and federal appointees take most of the blame for allowing the sub prime mortgage mess to happen, and for allowing the large investment banks and institutions like Lehman, Bear Stearns, AIG and many others to carry out greedy, self enriching strategies that brought on the mess we are in. Add to that the previous administration got us into two horribly expensive wars that have had very negative consequences for us, and now the current administration is being forced to go into debt and spend trillions of dollars/year for the next decade in an attempt to get back to the good old days, like the Clinton years where we were finally having budget surpluses and if Gore had been elected would have probably been able to retire the national debt by now. When a country messes up badly the people pay the price.

Who else takes the blame for the gigantic unfunded liabilities of Social Security and Medicare that are staring young people in the face - the politicians of course. Who allowed our corporations to recklessly close down facilities in the USA and reopen them in China, Vietnam, Thailand, Mexico and anywhere that costs would be dramatically lower. OK! so people pay less when they go shopping, but how does that help when they have lost their job. If you are unfortunate to experience a deep recession, a stock market collapse, and large periods of unemployment it obviously plays total havoc with your retirement plans.

In the lifetime that I worked we had 401K plans AND great pension plans. In the most recent lifetime the pensions have disappeared for most - that is a huge, huge loss for future retirees. That's what I mean by Luck and Chance. One's lifespan is analagous to a game of chance - if you are dealt a bad hand it's very difficult to win. This all makes Voting one of a citizen's greatest obligations so why do half of the population not bother to vote? I have never failed to vote during my entire life, and I take the trouble to understand what I'm voting on - it's the only voice we have.

[bob smith]

My account has increased 30%+ since the downturn due to massive savings.

[Bill]

Old Limey:

I retract my "smug and arrogant" remark.
I may quibble with who is to blame, though. I can see why you say politicians--but would suggest it is us, those who oted them in and did not want to properly fund or adjust Social
Security/ Medicare. Doyou recall the old comic strip "Pogo"? " We have meant the enemy and he is us".
As far as companies leaving the US, well how would the government stop them? The current political climate is very intense right now over "Free market, too much government intervention/regulation" vs the government needs to be more involved.

We are in for a couple of tough years, not the first time nor the last. I for one am confident that there will be a turnaround. It's not the end of the world. (Anyway, hope not)
Thanks for your response.

[Old Limey]

Terry:
I have a story of a man over 50 that went from rags to riches but it isn't the type you were looking for.
The man turned 90 this year and was my daughter's ex father-in-law (my daughter is now divorced). His father died when he was a teenager and being the oldest of 3 brothers he had to find a job in order to help his mother keep the family together. Later on he went into the Navy in WWII and came out of it untouched. With his two brothers, he then started a photo finishing company that concentrated on processing school pictures. This was a big deal back in those days and after many years his company went on to become the largest photo processing lab in New Jersey. When the brothers retired they sold the company to the employees and by the time they received all of the money they were each very wealthy to the tune of at least 10 million dollars each. The employees lacked whatever it took to keep the company going and as digital photography started taking over the company's business faltered and they finally closed their doors. None of the brothers had much education but each one concentrated on a different phase of the business and worked very hard and long to make it succeed. That's rags to riches all right.

[Terry]

Re: If 70% of people's net worth is wrapped up in their home, then propping up inflated home values is job one-

Please, no government social engineering, thank you.

By your standard, government needs to subsidize renters because their net worth tends to be very close to zero.

[Terry]

Crystal:

Could you live a financially responsible life on a minimum wage income?

Could you tell us how to do it?

[Terry]

Old Limey -

That is a GREAT story, what kind of story did you think I was looking for?

This sounds a lot like the story of a man (now deceased - he would have been 117 if still alive today) whom I knew, who started a photo finishing company in New Jersey with his brother(s). His company made millions through consumer mail order.

[Bill]

Terry,
Your comment On Crystal mirrors mine. Most of us on this blog are financially ok. But there are many who are struggling while living modestly and not living wastefully.

But btw, all gov't social engineer; even the absence of overt action is, in fact a form of engineering.

[aaktx]

So basically everyone will need a healthy seven figure retirement account to retire comfortably. I do not think most people generate that kind of income to create this type of wealth. We are going to have a drastic reduction in quality of life for most retirees. Or if more people recognize this dilemma, we will have a non-consuming society. Either way the government will try to take care of all of us.(health care for all, increased taxes to fund social security).

[aaktx]

Or hope you have a wealthy benefactor(Old Limey)

[Terry]

I predict destitution for many. At least I won't be alone in that department.