Americans Face Steep Retirement Shortfall

A study released July 13 has found that nearly half of early Baby Boomers – those 56 to 62 – may not having sufficient income to pay for basic retirement expenditures and uninsured medical expenses. “Generation X” is similarly poorly positioned.

The 2010 Employee Benefits Research Institute “Retirement Readiness Rating,”  finds “a dramatically high percentages of Americans – even in the upper-income categories – are likely to run short of money after 10 or 20 years of retirement.  According to the findings, 20 years into retirement, 29 percent of upper middle class people will have run out of money. The news is worst for those with lower incomes. Almost two-thirds of them will be running short after 10 years in retirement.

Needless to say, a lot of that shortfall comes down to insufficient saving and inadequate investing in the new world of 401 (k) financed retirement.

“As the private-sector retirement plan system evolves from a largely paternalistic one to a system in which workers must make their own decisions, policymakers need to understand what percentage of the population is likely to fail to achieve retirement security under current conditions,” said Jack VanDerhei, principal author of the study. “Even more important is to identify which of those households still have time to modify their behavior to achieve retirement security, and how they need to proceed. This analysis demonstrates that in ways we have not seen before.”

401 (k) provisions like automatic enrollment, automatic escalation of contributions, and diversified default investments enabled by the Pension Protection Act of 2006, have helped,  though they were not enough to counteract the broader market and savings trends.

The study goes on to try to calculate how much more we need to be saving to fund retirement.  Lower earning babyboomers should be saving 25% or more of their income per year until retirement age just to get  a 50% probability of “adequate” retirement. Lower paid Gen Xers should be saving 17%.

It also attempts to quantify how some current proposals might affect our ability to retire including: the idea of reducing  Social Security benefits in 2037, and reducing the value of Medicare benefits for retirees with incomes above stipulated thresholds. Short version: they make the problem worse.

At The Daily Money, Linda Stern notes some important points about the study that may accentuate it’s doom and gloom point of view. For one, it assumes everyone retires at 65. It also excludes any non-retirement household savings, so if you have any any money stocked away in savings not “not classified as “retirement” funds such as IRAs, you’re ahead of the EBRI results,” Stern argues.

What to do? Paul Petillo sums the options up pretty well on the Boomers Retirement blog — save more and invest better.

In short, we haven’t put enough money to work for our plans to be successful.  We haven’t allowed the plans to use the risk available to grow the plans the way they need to be nurtured.  And we have not harnessed our own budgets in such a way as to alleviate the pressures that accumulated debt takes away from our ability to save and invest more.

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