It is a major fear for many Americans. In fact, there is excellent research to support the idea that Americans fear running out of money in retirement more than they fear death. Moreover, while one may argue about their relative fearsomeness, the retirement fears themselves are extremely well-founded.
The wealth-to-income ratio for current workers is a good way to gauge their retirement preparedness, as the Center for Retirement Research (CRR) at Boston College has pointed out. While that ratio maintained remarkable stability across all ages for many years before and leading up to the 2008-09 financial crisis, a report the CRR released in August discloses that these ratios dropped substantially in 2010, signaling even more serious problems ahead for future retirees.
The CRR’s research is based upon the 2010 Survey of Consumer Finances, the Federal Reserve’s comprehensive triennial survey of household wealth in the United States in relation to prior such surveys (which began in 1983). The ratio in 2010, in the wake of the financial crisis and ensuing recession, was “way below” that for all the other survey years (and which wasn’t all that hot to begin with).
The CRR emphasizes that retirees actually need to increase their wealth-to-income ratios well beyond previous levels for four reasons that are well-known to those of us who pay attention to such matters: significantly increased life expectancies; the shift from defined benefit plans, typically pensions, to defined contribution plans, typically 401(k)s; rising health care costs; and much lower real interest rates.
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This research again shows what we have known for a long time. National retirement preparedness is not nearly what it needs to be and has been deficient for quite some time. Moreover, the recent financial crisis and ongoing economic difficulties have made a bad situation much worse.
An important new study from the National Bureau of Economic Research authored by James M. Poterba of MIT, Steven F. Venti of Dartmouth and David A. Wise of Harvard further demonstrates that these retirement fears are well-founded, but this time not from the perspective of retirement preparedness, but from the perspective of actual end-of-life experience. The astonishing (and terrifying) finding of the NBER study is that 46% of American seniors die with less than $10,000 in financial assets (including the present value of pension and annuity income).
Think about that for a moment. Nearly half of all Americans die essentially broke and entirely dependent upon Social Security payments and the kindness of others for support. Not only are they unable to withstand financial upheavals such as medical needs which are not covered by entitlement programs, but because Social Security payments are generally relatively low—they were never designed to be one’s sole source of retirement income—these seniors live out their lives every single day in serious financial peril. Not surprisingly, this group was also in disproportionately in poor health during retirement too.
Most financial advisors and most retirement research understandably focus upon saving enough money for retirement and upon how to deal with that money during retirement. This new NBER research takes a unique approach by looking at how things actually play out and turn out.