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Is Insufficient Financial Preparation for Retirement Exaggerated?

By , with Annuity FYI

You hear it all the time. Many Americans save very little. Far too many have to rely almost solely on Social Security to bolster financial security in retirement, even though Social Security was never meant to be the sole source of retirement funds. 

Perhaps nobody has made this case more chilling than Vermont Senator Bernie Sanders, a socialist, who says the following on his web site:

At a time when about half of American households over the age of 55 have no retirement savings and one out of five seniors are  trying to live on less than $13,500 a year, our  job is not to cut Social Security. Our job is to expand Social Security so that everyone in this country can retire with the dignity they have earned.”

Similarly, an article in The Wall Street Journal in June 2018 said that a generation of Americans is entering old age the least prepared in decades. Here is a quote from the article:

Americans are reaching retirement age in worse financial shape than the prior generation, for the first time since Harry Truman was president. In total, more than 40% of households headed by people aged 55 through 70 lack sufficient resources to maintain their living standard in retirement.

Are things really this bad? No, according to strong cases made by the Manhattan Institute and RAND Corporation. We don’t hear from them nearly as much as the media in general, but they offer excellent perspective. While they acknowledge there is no panacea for some low-income retirees, a huge majority are faring better than you might expect in a highly competitive, capitalist society. 

To this end, here are some key points from the Manhattan Institute:

+ The so-called golden days of defined benefit pensions, now largely a thing of the past, were never really golden. Even at the peak, fewer than 40 percent of Americans enjoyed one. While defined benefit plans often were and remain more generous than defined contribution plans, they aren’t particularly valuable if you change employment, as many people did in the past and still do today.  

+ More than 53 percent of Americans today have some form of retirement plan in addition to Social Security.  The median savings balance among 61-to-69-year olds with defined contribution plans is a relatively respectable $150,000 because defined benefit plans, while often less generous than pensions, are offered to more workers.

+ Only about 20 percent of Americans rely exclusively on Social Security in retirement. They obviously have some savings.

+ During the 1970s, often cited as the peak of the so-called golden years for retirees, the elderly were far more likely than today to be poor. Poverty rates among Americans older than 65 hovered around 30 percent. In 2019, the latest figure available, the poverty rate for seniors 65 and older was only 8.9 percent. In recent years, in fact, the poverty rate of the elderly has declined to historical lows, according to the Congressional Research Service.

As for the Rand Corporation, it has produced a report about the financial health of retirees that moves away from the focus of previous studies and instead analyzes consumption in retirement to gain a better understanding of what is actually needed for adequate financial preparation. This reflects the fact that retirement spending isn’t flat throughout retirement and needs to be taken into account to determine poverty levels. For the vast majority of people, spending declines with age because they spend less on travel or other leisure activities and also less on transportation and clothing.

Given this, the Rand study says, 71 percent of individual’s ages 66-69 are adequately economically prepared to retire. To meet this standard, the 1,725 individuals studied had to have at least a 95 percent chance of dying with positive wealth, assuming that reductions in in remaining lifetime spending were roughly about 10 percent.

Not surprisingly, the study also found a discrepancy in the lifespan of seniors, which, of course, can easily impact their financial health. For example, a 62-year-old single male with low education has a 50 percent chance of surviving to age 75,  it found, while a 62-year married man with a high education (college and above) has a 50 percent chance of surviving to age 90. 

Since older people tend to have more health issues and long-term care is expensive, this obviously suggests that people in their late 70s and beyond should have long-term care insurance. This is relatively costly, but the people who really need it are far more likely to be able to afford it because they have greater financial resources.

To mitigate financial concerns in retirement, people of all means should maximize saving money – 10 percent of income is good guidepost – early in their adult life and continue to do it consistently. Even for people of relatively modest means, the difference in financial assets in retirement and can easily be in the hundreds of thousands of dollars.

While the financial affairs of the aged could be better still, the added burden to improve things shouldn’t rest solely on the government. Citizens themselves have to help, and the way to do that is to develop the discipline to save over time, at least at a conservative level.

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