Still Not Wise

by Beth Ann Bovino

Two months ago Robin Varghese of 3QD turned the ripe old age of 40 and celebrated with many of his closest friends in Vegas, including me. Robin planned to make his riches at the tables, but success eluded him (and almost everyone else). And while Robin still has a few more years left in him to repair the damage Vegas did to his nest egg, the rest of America is aging and moving close to retirement. Most Americans are not prepared to stop working as they age.  With baby boomers close to retirement, a weakening economy could force many older Americans to stop working earlier than planned, while the weak stock and housing markets could mean that they will have less wealth than they expected. 

David Wyss, of Standard and Poor’s (my boss), wrote that the combination of rapidly approaching retirement and the weak financial markets is adding to Americans’ fears about post-retirement financial security.  But, that hasn’t been enough to induce more saving, as the household saving rate remains near 0%. The lack of saving has helped keep economic growth positive, but it will make it more difficult for older Americans to finance their retirement. (“Older But Not Wiser: Why Americans Remain Dangerously Unprepared For Retirement”).

Most Americans continue to rely on the government to provide for their retirement.  But with everyone unsure about future Medicare and Social Security benefits, including our politicians, Americans are doing little to increase their wealth before retirement. More retirees may seek more post-retirement work to cushion the blow, a so-called bridge job in early retirement. Unfortunately, health and labor market conditions often prevent even those who intend to work from doing so. In addition, in a weakening economy, bridge jobs could be harder to find.

The oldest Baby Boomers turn 62 this year, so these Baby Boomers are about to step into the post-employment world. Based on 2004 data from a recent paper, only 37% have a traditional pension coming from their employer (down from 60% in 1983), with 43% of workers likely to suffer a significant drop in living standards after retirement.  When most Americans finally think about growing old, it’s very hard to play catch-up for a lifetime of not saving.

Job Insecurity

The retirement decision can be shaped by the labor market.  In periods when jobs are less secure, like now, workers might choose an early retirement, either in response to a sweetened retirement offer or under the impression that jobs aren’t available for someone their age. With the Baby Boomers now starting to turn 62, the number of workers near the average retirement age will jump.  A jump in layoffs could convince many of these workers to retire early, either because of buy-out offers or as a result of weak job prospects. A worker laid off at the age of 62 could well decide that it’s better to retire than look for work, in a weak labor market.

The result could be a drop in payroll employment with a much smaller rise in the unemployment rate, with these workers not even counted as “discouraged” by the Labor Department, because they will report themselves as retired. It may also explain why we have recently seen a sharp drop in the number of people employed, while the unemployment rate is relatively low. If they are good health and not ready to stay home, early retirees may find work, likely something part-time. This extended employment may also be necessary for many retirees who haven’t saved enough to live on comfortably. Note that the retirement age was set at 65 in 1933, when life expectancy was 63.

Where Did All The 401ks Go?

The poor performance of the asset markets in recent years is another problem for the near-retired. Down almost 40% from a year ago in October, equity markets still haven’t found a bottom, with the decline in home prices is also eroding wealth. Most retirees live in their homes rather than on them.  Still the wealth in second homes and investment properties is part of retirement assets and will hurt their plans to take that next vacation to Vegas.  In addition, low interest rates mean low incomes for retirees. Stocks aren’t rising, home prices are falling, and bonds aren’t yielding enough to live on. If their asset values are falling, and their savings rates near 0%, the prospects of a comfortable retirement are receding.  It’s another reason to work past retirement, if they can.

No Answers Yet

Americans are worried about retirement. The 2008 Retirement Confidence Survey (Employee Benefit Research Institute, April 2008) showed that only 18% of workers were very confident they will have enough money in retirement, well below the 27% seen a year ago. The picture deteriorated even more for those already in retirement. 

However, the fear isn’t translating into much action. The household saving rate rose to 1.3% in September, but is still very low, with not much current income is going into savings. Only 64% of workers report that they’re saving for retirement now, and only 51% have any nonretirement savings.  The only response seems to be to retire later. Ten years ago, the planned retirement age was 62; current workers plan to retire at 65. Those who express the least confidence in their ability to retire comfortably also report higher planned retirement ages.

The bottom line: We’re in trouble. The average American is worried about retirement but is doing little to provide for it. Maybe working longer is the best answer. After all, the retirement age was set at 65 in 1933, when average life expectancy was 63. With life expectancy today at 78 years, perhaps we should just plan to work until we’re 80.