At FPA San Diego, Alicia Munnell Paints Bleak Retirement Picture

People taking Social Security early are doing so ‘almost as a way to supplement unemployment,’ BC's Alicia Munnell says

Alicia Munnell, director of the Center for Retirement Research at Boston College, presented the afternoon general session at the FPA’s national conference in San Diego on Friday, telling attendees, “We have a significant increase in retirement needs and a decrease in available retirement resources.”

Munnell said the reason for this is the fact that people are living longer and health care costs are rapidly rising. “Two-thirds of older people will need some sort of long term care, and a quarter will need to be in a nursing home for at least a year,” she said.

She then turned to the traditional “three legs” of retirement; Social Security, retirement plans and personal savings.

With regard to Social Security, she noted it will replace “less and less” of pre-retirement income. Of retirement plans, she said only half of workers currently have a retirement plan. For those that do, defined contribution balances were far below their potential even before the market crisis hit in 2008. Lastly, she said human behavior causes people save too little beyond Social Security and pensions, and personal savings continue to suffer as a result.

“This was all occurring before the crisis of 2008,” she said. “Then we experienced a 57% drop in the stock market, a 31% drop in home values and unemployment that peaked at 10% (and remains at 9%). For this reason, baby boomers flooded the labor market, but there were no jobs to be found, which contributed to unemployment, especially for older men.”

In order to combat the situation, people took their Social Security early, almost as a form of unemployment. They were then locked in to low monthly payments for the remainder of their lives.

She quoted numbers from the center’s National Retirement Risk Index, saying that 44% of households were considered “at risk” before the crisis, and 51% of households are now.

“The biggest reason, we feel, for the increase is the fact that home prices had such a steep decline,” she said.

The presentation turned more optimistic when Munnell noted that baby boomers look better than subsequent generations because they enjoyed a significant run-up in the stock market during their peak earning years. Generation X and Y, by contrast, did not have time to accumulate significant assets in order to take advantage of the market’s rise, and keep getting knocked down with each market crisis.

She then offered three possible solutions for consumers to take advantage. The first is to achieve a sustainable standard of living, since it is more effective to reduce spending than to increase savings. The second is to work longer, although she admitted this was difficult in the current job market, and employers do not like older workers as much as younger workers. The third solution was to make effective use of retirement resources by decumulating assets in an orderly manner, recognize that the house is a valuable retirement asset and consider reverse mortgages, which Munnell said she likes even though sales suitability issues are a concern.

“Those are some things consumers can do,” she said. “Financial planners can help by moving boomers to action by ‘clarifying their constraints,’ meaning that they are choosing to live a lower quality of life in retirement.”

She said once those constraints are clarified, the percentage of people who say they are going to do nothing in order to prepare for retirement decreases from 43% to 5%.”

The government, for its part, can help with better financial education initiatives, noting the current crop is “really awful.” She also said it could make 401(k) enrollment more automatic, and promote annuitization during the distribution phase.

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