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Retirement at
Risk: Who's Falling Short
By Jeanne Sahadi, CNNMoney.com
July 31, 2007
How would you feel about
doubling or tripling your 401(k) contributions?
For some people, that may be the only solution if they want to maintain
their current lifestyle in retirement. The Center for Retirement
Research (CRR) estimates that 36 percent of high-income households -
those with a median income of $117,000 - won't be able to live as well
in retirement as they do today. Among middle-income households, 40
percent are at risk of having to downsize, while 53 percent of
low-income households are likely to fall short.
That hasn't always been the case."We're at the tail end of the golden
era of retirement," said CRR Director Alicia H. Munnell. In a report
released Tuesday, CRR notes that only 20 percent of those who were
between ages 51 and 61 in 1992 were at risk of falling short of money in
retirement. Today, 32 percent are.
Why the increase? Munnell points to the shift from traditional pension
plans to 401(k)s. Plus, she notes, people are living longer, and
Medicare and taxes will take a bigger slice out of Social Security
checks.
In another report released Tuesday, the Employee Benefit Research
Institute (EBRI) and the Investment Company Institute showed that while
401(k) balances have increased, they are still low. For example, among
long-tenured employees in their 50s who make between $60,000 and $80,000
a year, their median 401(k) balance in 2006 was just under $164,000.
But a 51-year old who makes $80,000 but only has $164,000 in savings
would need to put away 23 percent of his salary - or close to $19,000 a
year - if he wanted to retire at 65, according to savings guidelines
from Ibbotson Associates. That would give him enough money, in
combination with his Social Security benefits, to live on 80 percent of
his pre-retirement income minus his annual 401(k) contribution.
That 23 percent is almost three times the average contribution rate (8.3
percent) among people in that age and income group. And it's twice the
total contribution rate (11.3 percent) when you kick in a 3 percent
employer match.
Do It Now: Get on track for retirement
CRR considers households to be "at risk" if your savings plus Social
Security and pension benefits combined will fall at least 10 percent
short of the income you'll need in retirement to support the same
standard of living you enjoyed while working.
CRR assumes you retire at age 65, annuitize your 401(k) savings and take
out a reverse mortgage, where a mortgage lender pays you for your house
in regular installments. Change any of these assumptions and the
percentage of households at risk becomes considerably higher.
"People enter retirement thinking that they'll be able to live exactly
as they did before," Munnell said. But among households at risk, she
predicts, they will find out they're spending more and their income is
less than they thought.
Munnell supports changes to employer-based retirement savings, such as
auto enrollment in 401(k)s and the proposed auto IRA, whereby an
employer that doesn't sponsor a 401(k) could let workers direct-deposit
payroll deductions into IRAs.
But those measures alone won't solve the problem, Munnell said. She
believes a new retirement savings tier needs to be added on top of
Social Security and work-based plans. Specifically, she thinks
government should require workers to make small mandatory contributions
from their paychecks.
Of course, for families who aren't saving adequately because they're
pressed financially, suggesting they save more isn't going to do much.
Instead, Munnell thinks workers will come a lot closer to having
adequate savings if they work until they're 66.
Today, the average age men retire is 63 and for women it's 62.
Meanwhile, a majority of Social Security eligible workers opt to take
their benefits early, which means they receive a permanently reduced
check. Retiring at 66 or later lets your investments to compound longer,
ensures you get a bigger Social Security check and reduces the number of
years in retirement.
A CRR survey of early retirees found that 30 percent had retired early
either because of job loss or health reasons. "So a lot of people
wouldn't be able to take the prescription to work longer," Munnell said.
"But 70 percent can."
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