The nonpartisan Employee Benefit Research Institute regularly delivers the dreadful news of how unprepared so many Americans are for retirement. The findings give you a chill, much like seeing a photo of the iconic black-robed, scythe-carrying personification of death.
But that chill is needed. Washington-based EBRI continues to be at the forefront of sounding the alarm that we ought to be more aggressive in preventing people from falling into poverty in their senior years.
In 2003, the institute developed its trademark “Retirement Readiness Rating” to assess retirement-income prospects for American workers. The 2010 findings, released this week, show that a large percentage of people, including high earners, are likely to run out of money after 10 or 20 years of retirement.
Nearly one-half of baby boomers born between 1948 and 1954 and now between the ages of 56 and 62 are at risk of not having enough money in retirement to pay for basic expenditures, EBRI reports. For boomers born between 1955 and ’64 (now 46 to 55), the percentage who likely won’t have enough money was calculated at 43.7 percent. It was 44.5 percent for Generation Xers — people born between 1965 and ’74 (now 36 to 45).
The institute defines the retirement financial shortfall as not being able to meet minimum expenses, including uninsured costs associated with nursing home or home health care. After 10 years of retirement, 41 percent of Americans with low preretirement income will likely be struggling to meet their expenses.
Like I said, chilling news. However, one good note in the report was that many people are now more likely to have more retirement savings because their employers can automatically enroll them in company-sponsored retirement plans. The Pension Protection Act of 2006 made it easier for companies to force employees to save for their retirement. This has led to an increase in participation rates. The theory worked, which was that inertia would result in people not taking the time to opt out of the plans, as is their right.
“It shows how important savings in a defined contribution plan is toward reducing your probability of having inadequate retirement income,” said Jack VanDerhei, EBRI’s research director.
VanDerhei said even he was surprised by the findings that Generation Xers not eligible to participate in a defined contribution plan in the future have a 60 percent chance of having inadequate retirement income. This risk drops to 20 percent for Gen Xers who can participate in a defined contribution plan for 20 or more years.
The answer to the lack of savings for many is often to suggest people need to keep working long after age 62, which is about the average retirement age according to the Labor Department. But what if that’s not possible because your job is eliminated or you get sick and can’t work?
OK, so what can you do with the information from the latest EBRI report, other than wince and moan?
I know. Calculate how much you’ll need to save. Go to choosetosave.org and click on the link for the “Ballpark Estimate” retirement calculator.
When doing the calculation, you might find a few questions where you may not know the answers. That’s OK, do your best to estimate. For example, when asked about the expected inflation rate, VanDerhei suggests putting in 2.8 percent. For the question about expected wage growth, he suggests 3.9 percent. He’s pulled both percentages from the 2009 Annual Report of the Board of Trustees of the Federal Old-Age and Survivors Insurance and Federal Disability Insurance Trust Funds.
The rate-of-return question is a hard one because it’s based on an assumption of how well you think your investments will do. Need I say how hard that is, even for professional money managers? But if you want to be conservative, you can use a 4 percent or 5 percent return.
Just like you can take certain precautions to keep the Grim Reaper away — eat healthier, get regular physicals — so too can you make some life choices and changes for your retirement before it’s too late.