Chasing down retirement

With most Baby Boomers short on savings, longer worklife urged Original Source by Gail Marks Jarvis It seemed like a good idea. Baby Boomers who never got around to saving as much as they hoped promised to keep working past retirement age. The joke in the generation has been: “I’ll just work forever.” And the intent has shown up repeatedly in research. But now along comes an economic downturn, and people are losing jobs. It looks as though Plan B, a lifetime of working, might not be an option to rescue undersavers after all. “It’s a perfect storm,” said Jack VanDerhei, a Temple University professor and fellow at the Employee Benefit Research Institute. Too many people approaching retirement age have saved too little, accumulated too much debt, stretched too far on homes that have lost value and never made good on the promise to save more tomorrow, he said. Working longer can make an enormous difference, but, now, tomorrow is working in reverse. Unemployment is climbing. Some Baby Boomers will be scrounging for employment in their 50s rather than sprinting toward the retirement homestretch by pouring last-minute savings into 401(k)’s and individual retirement accounts. With food and energy taxing overstretched family budgets, the opposite approach to 401(k)’s is evident: People are pulling money out of their workplace savings plans at unusually high rates instead of rushing to stuff extra cash into them. The economy’s latest uncertainties pose a twist for those looking for a way out of the nation’s expected retirement crisis. Aware that millions of Americans have undersaved, numerous think tanks have been constructing a case for longer working lives, hoping to convince workers to stay on the job longer than the average retirement age of 62 and hoping to convince employers to let them. For example, Alicia Munnell and Steven Sass of the Center for Retirement Research at Boston College recently wrote the book, “Working Longer: The Solution to the Retirement Income Challenge.” The authors hope to convince those with jobs to stay longer, although the current employment picture might leave fewer people with that option. The need to keep working is tremendous, they say: “401(k) balances are generally inadequate. At the same time, longevity is steadily rising,” and health-care costs are soaring. They point to data from the Federal Reserve’s 2004 Survey of Consumer Finances that shows that the median value of combined 401(k) and IRA assets for households of 55- to 64-year-olds is only $60,000. More reliant on Social Security The stakes are high for society as well as individuals. The average worker today can replace about 39 percent of his or her previous earnings with Social Security, but that is expected to decrease in the future as the system is stressed by demand from 77 million Baby Boomers. The researchers note that many retirees will be so financially weak, consumption will be affected, perhaps causing a drain on the economy. Last month, the Center for Economic and Policy Research, a Washington-based think tank, urged Congress to back away from proposals to reduce Social Security and Medicare for future retirees. With home prices plunging and the stock market down sharply, Dean Baker, co-director of the center, said: “The vast majority of near-retirees have accumulated little or no wealth. This means that they will be completely reliant on Social Security and Medicare to support them in their retirement years.” According to Baker’s calculations, if house prices decline no more than they have already and stay fixed through 2009, “the median household would have 24.7 percent less wealth than the median household in this age group in 2004.” If real house prices fall 10 percent more, the median household would see a 34.6 percent loss in wealth compared with 2004. If homes fall another 20 percent, median household wealth would drop 45.6 percent. The Case-Shiller housing index, which measures home prices in 20 major U.S. cities, has declined 15 percent from its peak. Economists at Goldman Sachs, Lehman Brothers and elsewhere are suggesting another 10 percent to 20 percent decline before prices stabilize in 2009. Baker applied the housing decline to the value of household wealth he gleaned from the Survey of Consumer Finances. Older job seekers passed by Throwing a job loss on top of the difficulties is likely to set people back further. Munnell and Sass note in their book that people in their 50s who lose their jobs often find it difficult to secure work quickly. According to the authors, a recent study showed that it took half of the people in their early 50s a year to find another job. In their late 50s, half were unemployed for two years, and the new job almost always had lower pay and benefits. “Older workers today should be more attractive to employers than they were in the past,” say the authors. “They are better educated, with no significant educational deficit relative to younger workers. … Nevertheless, there is little indication thus far that the employment prospects of older workers have significantly improved.” They are encouraging employers to change policies so workers can stay on the job longer and perhaps work part time in retirement. For workers who can delay retirement, working longer is a potent solution if they have not saved enough. “A few years of work can make retirees in 2030 as well off as those in the current generation,” Munnell and Sass contend. For each additional year in the workforce, people can save more and delay tapping their savings or Social Security. That increases Social Security by 7 percent to 8 percent a year, said Munnell and Sass. And the Congressional Budget Office in 2004 estimated that a middle-income married couple could reduce the assets needed for retirement from $560,000 to $327,000 if they retired at 66 instead of 62. If they are able to delay retirement until 70, they could get by with $130,000. If you are considering retiring early, make sure before walking out the door that you consider health-care costs. Munnell and Sass note that people in their 50s and 60s have a more difficult time than others finding new employment, and if they must pay for health insurance on their own, the cost can exceed $10,000 a year. That can quickly consume retirement savings. Researchers also encourage people planning for retirement to carefully add up likely monthly and annual expenses, including health-care costs in excess of Medicare. While people can collect Medicare at 65, they typically will need supplemental coverage to make up for what Medicare doesn’t cover. Depending on where you live, the price can be about $150 a month. Also think thoroughly about how your income will cover your spending. Keep in mind that as a rule of thumb you should remove no more than 4 percent of your savings a year in the first year of retirement. If you start with 4 percent, you can increase the amount to cover inflation. But tapping more than that means you risk running out of money. Copyright © 2008, Chicago Tribune