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Three ways to boost your confidence about retirement
By Robert Powell, MarketWatch
Last Update: 8:20 PM ET Mar 9, 2010
BOSTON (MarketWatch) -- I know, I know, we're starting to sound like a broken record, or MP3 player. But researchers are once again sounding the alarm that Americans are not saving enough for retirement.
What's more, Americans' plan to make up the difference by working longer, though admirable, is not without risk. In other words things are getting bleaker by the minute.
In fact, just 16% of Americans are "very confident" about having enough dough for a comfortable retirement, according to the Employee Benefit Research Institute and Mathew Greenwald and Associates, who have jointly conducted the Retirement Confidence Survey for 20 years now.
That 16%, the researchers say, is statistically equivalent to the 20-year low of 13% measured in 2009. Yes, things have bottomed out. And just three years ago, in 2007, 27% of survey respondents said they were very confident about their retirement.
What's happened to change confidence levels? Well, the economy, the financial markets and home values all crashed, and Americans are still reeling from those crises. So much so that it would appear many have simply given up, perhaps out of frustration, ignorance, or for other reasons.
It's true that 69% of workers surveyed say they or their spouse have saved for retirement, but just 60% say they or their spouse are currently saving. That's down from 65% in 2009.
What's worse, even though seven in 10 have saved and six in 10 are saving for retirement, the total saved is meager. More than half of workers -- 54% -- report that the total value of their household savings, excluding the value of their primary home and any defined-benefit plans, is less than $25,000.
What can be done to get America back on track here? Here are three ideas.
Determine how much you'll need
Folks who have calculated how much they need for retirement are twice as confident about having enough money for a comfortable retirement than those who have not, the research found. What's more, those who think they need to accumulate at least $1 million in retirement savings are six times as likely as those who think they need less than $250,000 to be very confident, 36% to 6% respectively.
There are several ways to calculate how much you might need in retirement. The easiest way is to say that you'll need about 20 times your final year's salary set aside in savings. So, if you earn $50,000 you'll need $1 million set aside in savings. And if you want to get a bit more sophisticated, you could subtract the net present value of your defined-benefit plan, Social Security benefits, and other assets that you might convert into income to fund your retirement, including any home equity, life insurance, an inheritance and the like. You might also take into account how much money you expect to earn during retirement. Add all those together and you might need something like 15 times your final year's salary set aside.
Another option would be to use any of the online software programs, including those on the American Savings Education Council's Web site. Visit that Web site.
Unfortunately, the researchers at the Society of Actuaries have suggested that those calculators in general don't take into account all the retirement risks you might face and thus might provide you with faulty results. See previous column on retirement-plan tools.
Still, a calculation with faulty results might be better than guessing or, worse yet, no calculation at all.
Steve Sass, the program director for the Center for Financial Literacy at Boston College, says there are four tasks people should undertake. The first two: Put together a retirement plan and save more.
Saving more is "quite effective," Sass said, especially for those who are not that close to retirement. That's not only because you're increasing your nest egg, but also "because it involves reducing current consumption and adopting a level of monthly expenditure that's much more sustainable in retirement," Sass said.
Try working longer
Working longer is how most Americans plan to make up for insufficient savings. In fact, plenty of Americans older than 65 already do just that. Earned income represents anywhere from 20% to 40% of the average 65-year-old-or-older American's total income.
More Americans are planning to work past normal retirement age, according to EBRI. The percentage of workers who expect to retire after age 65 has increased over time, from 11% in 1991 to 14% in 1995, 19% in 2000, 24% in 2005, and 33% in 2010. For some, delaying retirement is a function of the economy or a change in their current employment situation.
But working in retirement is not a sure bet nor should most Americans count on it as their lifeline. In fact, many people retire sooner than expected due to a variety of reasons, including poor health, disability, changes at their company (downsizing or closure), and having to care for a spouse or another family member.
According to EBRI, just 28% of workers expect to retire before age 65, but the reality is that 60% of current retirees left the workforce prior to age 65. In other words, odds are high, whether you believe it so or not, that you won't be able to keep working past age 65.
Despite those odds, Sass said working longer -- at least for those who are able to -- can be quite an effective response to insufficient savings.
Don't forget your house
Most retirees have more home equity than money set aside in their IRA/401(k) plans, Sass said. And, he said, for most retirees housing is their largest expense even if the mortgage is paid off. Still, few think about converting the equity in their homes into income. Doing so will soon become a necessity, according to a report issued yesterday by the Boston College for Center for Retirement Research.
"Despite the bursting of the bubble, the house is still a major component of most households' wealth," the report said. And if American homeowners don't tap the equity in their homes through a reverse mortgage, for instance, the share of households who will be "at risk" in retirement will be 61%, the report noted. "While few have reverse mortgages today, ignoring housing equity may be a luxury that future retirees can ill afford," the report said.
So there you have it. If you want confidence in retirement, get a plan, save more, work longer and don't forget the equity in your house.
Read EBRI's report at this Web site.Read the Center for Retirement Research at Boston College's report at this Web site.
Robert Powell has been a journalist covering personal-finance issues for more than 20 years, writing and editing for publications such as The Wall Street Journal, the Financial Times, and Mutual Fund Market News. Powell is the editor of Retirement Weekly. Learn more about Retirement Weekly at this Web site.
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