Scary Statistics: Retirement Risk Running Rampant

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With a whopping 10,000+ baby boomers turning 65 each day, the number of Americans in or approaching retirement – and heading into a financial disaster – is downright shocking. “Study findings continue to reveal the ominous outlook for current and future retirees.

Equally unnerving is that most Americans actually admit to being unprepared for retirement, with the majority unsure of how much money they will need in retirement, also operating without any kind of plan or intention. Most concerning, over one third of Americans have NO retirement savings whatsoever!

According to a 2010 report prepared by Prudential Research, Asian Americans on the Road to Retirement, “despite their rational perspectives on the importance of planning, less than 30% have given serious consideration to important retirement preparation topics, such as what will it cost to live their desired retirement lifestyle and how much is needed to fund it.” The report also cites that, “today, only about one in four Asian Americans have a formal, written plan in place. This is a critical step that should be taken to achieve their desired retirement lifestyle, particularly those closest to retirement.”

Just how much deeper does this problem run? Consider this compilation of scary statistics:

The 2010 Wells Fargo Retirement Fitness Survey

  • 72% don’t have any idea how much they will be able to spend or on what.
  • 67% don’t have a written plan related to their life expectancy or how long their savings will need to last.
  • 37% of all respondents (43% of respondents age 60 to 69) aren’t sure or can’t estimate how much money they will need during retirement.
  • The typical respondent is not knowledgeable about health care costs, life expectancy, income needs, inflation, the future of Social Security, and the many other risks that retirees face.
  • Only one out of every three Americans has a written, detailed plan for how they will manage their finances during retirement.
  • 65%  believe they should be saving more and could save more if they made some minor changes in their spending habits and had help in the form of financial advice.
  • 32% (34% male, 29% female) are excited and look forward to retirement. 38% (39% male, 37% female) never think about retirement. 27% (23% male, 30% female) are worried about retirement due to financial stress or worry.

Annamaria Lusardi (Dartmouth College and NBER), February 26, 2010.

  • In addition to not preparing for unforeseen emergencies, people do not prepare for predictable events. Despite the changes in the pension landscape in the past twenty years and the increased individual responsibility for financial security after retirement, the majority of Americans have not done any retirement planning. Making decisions about how much to save in order to afford a comfortable retirement requires collecting information about several important variables (including Social Security and pension benefits) and doing some, even rudimentary, calculations. Yet, when asked whether they have ever tried to figure out how much they need to save for retirement, only 42 percent of respondents who are not retired said they did.
  • Lack of planning is high not only among young respondents, but also among older adults: only 51 percent of respondents who are 45–59 years old and not yet retired have tried to calculate how much they need to save for retirement.
  • Financial illiteracy is widespread among older Americans: only half of the age 50+ respondents could correctly answer two simple questions regarding interest compounding and inflation, and only one-third correctly answered these two questions and a question about risk diversification. Fewer than one-third of our age 50+ respondents ever tried to devise a retirement plan, and only two-thirds of those who tried actually claim to have succeeded. Overall, fewer than one-fifth of the respondents (19%) believed they engaged in successful retirement planning.
  • American workers are increasingly responsible for securing their own retirement. Yet only a minority of American households feels “confident” about retirement saving adequacy, and one third of adults in their 50s say they have failed to develop any kind of retirement saving plan at all (Lusardi 1999, 2003; Yakoboski and Dickemper, 1997). What explains this low level of retirement preparedness? Why do people do such a poor job, when it comes to designing and carrying out retirement saving plans? This paper explores the hypothesis that poor planning may be a primary result of financial illiteracy.

Findings

1. Financial illiteracy is widespread among older Americans.

2. Retirement calculations are not an easy task: only 31% of these older people had ever tried to devise a retirement plan, and only two thirds of these succeeded. For the sample as a whole, only 19% engaged in successful retirement planning.

3. Financial knowledge and planning are clearly interrelated.

4. The respondents who did plan were less likely to talk to family/relatives or coworkers/friends than they were to use formal means such as retirement calculators, retirement seminars, or financial experts.

5. Keeping track of spending and budgeting habits appears conducive to retirement saving.

In as much as planning is an important predictor of saving and investment success, we may have uncovered an important explanation for why household wealth holdings differ, and why some people enter retirement with very low wealth (Venti and Wise 2001, Lusardi 1999). Our preliminary empirical analysis finds that financial literacy has an effect on both savings and portfolio choice.”

Harris Interactive, March 2009

  • Today’s pre-retirees say they will need to postpone their retirement 4.2 years on average, which would be the first time in history that retirement age significantly increased in America. The uninsured costs of healthcare are now considered the biggest potential financial wildcard in retirement.
  • Today, the biggest financial worry among the age 55+ population is being unable to afford uninsured medical expenses during retirement. In fact, older Americans are 2.5 times as likely to say they are worried about paying for uninsured medical expenses in retirement as they are about a lack of personal savings
  • Almost seven in 10 people will need some long-term care, such as home care, assisted living, or nursing home care, after age 65. In 2008, the average annual cost for a private nursing home room was $76,460 a year.2
  • Although 35 states mandate sex education, only three states have made personal finance courses a requirement in high school.
  • When we asked Americans what their ideal plan would be for balancing work, leisure, and money in retirement, 70% told us they wanted to include work in their retirement.
  • In prior Age Wave studies, pre-retirees told us that what they most seek from their retirement work experiences are flexible schedules, the opportunity to continue learning, and the ability to teach younger workers.


Ernst & Young, July 2008

  • Three out of five (60%) middle class retirees would outlive their financial assets if they didn’t cut back on spending significantly.

    An exploratory study by Jim Sundali of University of Nevada, Reno, James W. Westerman of Appalachian State University and Yvonne Stedham of University of Nevada, Reno

    • The researchers asked people whether they worried about not having enough income to get by in retirement. Less than 20% of respondents reported no worry at all.
    • Pantis (2004) found that retirees reported higher levels of satisfaction when they had guaranteed income streams (as in Defined Benefit plans), and reported that retirees with household income of between $15,000 and $30,000 with a Defined Benefit pension were just as likely to be very satisfied in retirement as retirees with income above $50,000 with no guaranteed pension income.

    Julia Valentine

    Surveys show that the typical American is not knowledgeable about health care costs, life expectancy, income needs, inflation and other risks.  Understandably, this lack of clarity creates apprehension and distress. Now is the time to take control and start creating the senior lifestyle you want.  But you have to get your head in the game! Today, successful retirement requires a proactive, take charge approach with realistic planning and a road map for creating financial and emotional well-being. To ease and expedite the process, take advantage of specialized resources that are readily available such as the Ideal Living Resort & Retirement Expos. These regional events provide convenient, one-stop access to a myriad of retirement solutions. These Expos and other such widely available tools help retirees explore their comprehensive options, gain insights, make comparisons, and create a realistic blueprint for retirement.

     

    Speaker and JoyCompass.com founder Julia Valentine is the author of ‘Joy Compass: How to Make Your Retirement the Treasure of Your Life.’ Through cutting edge research in finance, motivation and creativity, JoyCompass.com offers a revolutionary new approach to preparing for, designing and enjoying life in retirement. Julia may be reached online at www.JoyCompass.com.

     

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