According to analysis from the BlackRock Retirement Institute, retirees that began leaving the workforce in the early 1990s were able to preserve the vast majority of their savings throughout retirement.
Using data from the Employee Benefit Research Institute, BlackRock’s analysis shows that the wealthiest households held 83% of their savings nearly two decades after retirement.
Savers in the median wealth bracket retained 77% of retirement savings, and those in the lowest wealth bracket retained 80%.
So Much For a Retirement Crisis?
While the level of prosperity those retirees enjoyed may be used by others to counter claims that the country is facing a retirement savings crisis, Bruce Wolfe, executive director of BlackRock’s Retirement Institute, cautions that future generations will not be as fortunate.
“For those close to retirement today, the environment is going to be dramatically different,” Wolfe told BenefitsPRO, a partner site to ThinkAdvisor. “The point we are trying to make is that looking back at the spending patterns of past retirees is probably not the best way to think about the retirement landscape going forward.”
Retirees that had the option of not spending down retirement savings were at peak earning potential in the 1970s and 1980s, and began to retire in the early 1990s, explained Wolfe.
Back then, defined benefit plans were relatively common. About 42% of the retirees examined in BlackRock’s research had income from a pension.
For those in the median wealth category, which had total assets of about $330,000 at retirement, pensions accounted for 33% of retirement income. At the lowest and highest wealth levels, pensions accounted for 20% and 15% of retirement income, respectively.
Pension income will of course wane precipitously going forward. EBRI’s data shows that only 2% of private-sector workers were saving solely through a defined benefit plan in 2014.
Future Investment Returns Expected to Lag
The last generation of retirees came of age professionally about the time 401(k)s were introduced in the late 1970s.
Adoption and enrollment of the plans lagged until the 1990s — after many of the retirees BlackRock studied had left the workforce.
Workers expecting to retire in the next decade will be far more dependent on defined contribution savings. According to Wolfe, the investment returns previous retirees benefited from can’t be expected going forward.
“The consensus is that returns will be dramatically lower,” Wolfe said. BlackRock’s study shows a 60/40 investment portfolio returned an annual average of 6.3% from 1978 to 2016. Going forward, the consensus forecast is 2.9%, according to data from Horizon Actuarial Services.
Further complicating the prospects of future retirees will be tax implications.
“Most of the retirees we looked at were not contributing to a 401(k) because they weren’t that prevalent. Savings were on a post-tax basis. But future retirees depending on 401(k)s will have tax exposure — that creates a very different dynamic from past retirees,” noted Wolfe.
Will Social Security Be There?
The retirees BlackRock studied were largely able to replace 60 to 70% of working income.
Social Security benefits provided the bulk of income for retirees across the wealth spectrum. For the wealthiest, which BlackRock defines as those who had assets over $900,000 at retirement, Social Security accounted for 56% of retirement income.
Dependence on the program, as expected, increased for lower- and middle-income retirees. For the lowest income segment, which had less than $50,000 in assets at retirement, Social Security accounted for 80% of retirement income. For middle-income retirees, the benefits supported 61% of income.
The Social Security Administration is projecting its primary trust fund will be depleted by 2033, after which Americans will see an across-the-board benefit cut of more than 20%.
When or how Congress will address Social Security’s looming insolvency is anyone’s guess.
But that elephant in the room is yet another of the systemic challenges facing future retirees, says Wolfe. “The question of Social Security is just one of the multiple reasons why those retiring going forward will have to navigate a very different environment,” he said.
End-of-Life Medical Expenses Less Than Expected
Wolfe thinks many past retirees may have shorted their quality of life by squirreling away retirement savings.
“Could they have had a higher standard of living, and spent a little extra money on themselves? The answer is yes,” said Wolfe.
One explanation for the frugality is the fear of out-of-pocket end-of-life costs, he said.
But for most of the retirees BlackRock studied, those expenses were nominal.
Retirees who died between the ages of 75 and 79 spent a median of $308 in their last two years of life. For those that lived to see 89, median out-of-pocket expenses were about $500.
Some retirees were not as fortunate: an 89-year-old on the higher end of the cost curve spent more than $55,000 on caretaking expenses in the last two years of life.
But by and large, end-of-life expenses were low for the vast majority, according to BlackRock.
Wolfe said that part of the analysis most surprised him.
“The common narrative is that everyone needs to be worried about significant end-of-life health care costs, but that may not necessarily be accurate,” he said.
While most of the retirees BlackRock studied did not suffer exorbitant end-of-life costs, the fact that some did presents yet another factor future retirees will have to manage, said Wolfe.
“When all of the factors add up, it’s going to be a much more difficult environment for retirees going forward,” he said. “We’re going to have to help the next generation find ways to be comfortable spending down their retirement savings principal.”
— Check out Get Ready to Work Longer Before You Can Retire, OECD Says on ThinkAdvisor.