Retiree Portfolio Will You Have Enough to Retire?

Two recently released studies indicate the nation faces a substantial education effort to ensure today's workers plan for their financial security in retirement. One study shows that more than half of today's workers have yet to calculate their income needs in retirement, while the other shows that the risks for providing retirement income have shifted to retirees.

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By David Braze (TMF Pixy)
May 14, 2001

Last week the Employee Benefits Research Institute (EBRI) released its 11th annual study on the national trends and attitudes of workers and retirees regarding retirement planning. Cosponsored by and compiled jointly with the American Savings Education Council (ASEC) and Matthew Greenwald & Associates, EBRI's 2001 Retirement Confidence Survey (RCS) presents the results of interviews conducted with 1,000 individuals (762 workers and 238 retirees) ages 25 and older. The results of this effort, at least to this observer, are disheartening.

Only 63% of today's workers said they were confident that they would have enough money to live on in retirement, compared to 72% who believed so last year. Seventy-one percent of those interviewed say they have personally saved for retirement, down from 75% who reported doing so in 2000. Only 46% of this year's respondents reported they had made any attempt to calculate their retirement needs, compared to 51% last year.

Paradoxically, 34% of today's workers (compared to 28% in 2000) are confident that the Social Security system will continue to provide future retirees benefits equal in value to those received by today's retirees. And sadly, like last year, an amazing 55% of workers are blissfully unaware that the age at which one may receive a full Social Security benefit is increasing from age 65 to 67.

Looking at those numbers, I just have to shake my head. What goes through the minds of those three out of 10 folks who are not saving for retirement? Do they truly believe they will be able to survive on Social Security alone? Fortunately, two of every three workers recognize the Social Security system probably won't provide the same value of benefits as it does to today's retirees. Nevertheless, the study indicates many underestimate what Social Security will provide.

For more alarming news, look at another study EBRI released last month: The Changing Face of Private Retirement Plans (CFPRP). This study looked at the changing nature of income derived from private retirement plans. The report highlights the shift from traditional lifetime annuities provided by company pension plans to the onetime lump-sum payments that come from 401(k) and other contributory plans.

Traditional pensions are known as defined benefit (DB) plans, whereas vehicles like 401(k)s are called defined contribution (DC) plans. The CFPRP notes that the percentage of workers participating in a DB plan declined from 38% in 1977 to 22% in 1996. In the same period, the percentage of workers participating in a DC plan jumped from 7% to 23%. In other words, more workers now participate in a DC plan than a DB plan.

Given this shift, the CFPRP study reached three conclusions:

  1. Instead of receiving a regular paycheck for life, most future retirees will control the timing and the amount of non-Social Security income received, and retirees' spending rates will determine how long that income will last.

  2. In the past, employers and plan trustees usually managed retirement assets and bore all investment risks. Now the retiree must increasingly manage those assets or hire a professional money manager to do so. Regardless of who manages the investments, though, the risk increasingly falls on the retiree.

  3. The traditional pension plan paid a benefit for life regardless of how long that life might be. Now the retiree must control spending and investments to ensure that retirement assets will last for life, or the retiree must transfer that risk to an insurance company through the purchase of an annuity.

The CFPRP report ends with this warning: "[F]inancial issues in retirement must become a higher education priority in the future. Most Americans have relied on Social Security to provide a basic monthly annuity for life, and the life of a spouse. Should the nation move to individual accounts in Social Security in the future, these same issues of asset management, rate of spending, and financial literacy may apply to that program as well."

I look at how the risk for providing a sufficient retirement income has shifted more to the retiree. Then I compare that with the statistics on how today's workers are planning for retirement. That's when I instantly see a giant disconnect. If today's workers don't plan now, they won't know what they will need in retirement. If they don't know what they will need, then chances are they won't save enough to sustain that retirement. And, in the words of the CFPRP study, that means the "tag line from the Choose to Save education program will become more relevant with each passing year: Save now or work forever."

Do you know how much you will need in retirement? Do you know how much you should be saving now? The Motley Fool's Roadmap to Retirement Seminar can help you answer those questions, and more. You'll walk away with your own retirement plan! 

See you next week. In the interim, post away on the Retirement Investing and/or Retired Fools boards.

Best to all...Pixy

The Motley Fool is all about investors writing for investors, and retirees are investors, too. Dave Braze just hopes that the vast majority of future retirees will have the wherewithal to invest. If current workers don't heed the signs, then today's statistics indicate about half of future retirees may be in for a very unpleasant surprise.