Americans underestimate their retirement needs
Most middle-class Americans are underestimating what they'll need for retirement by at least 25%, according to a new white paper.
Most middle-class Americans are underestimating what they’ll need for retirement by at least 25%, according to a new white paper.
The white paper, “The Future Shock of Retirement,” was released in May by Barclays Global Investors, a San Francisco-based subsidiary of Barclays PLC of London. It showed that, accounting for declining housing prices as well as steeper health costs, Americans aren’t saving nearly enough for retirement.
The report was even more dire than other studies have been, said Matthew H. Scanlan, head of Barclay’s Americas Institutional Business.
The bottom line is: about half the middle class will have 25% less in retirement than they think and that’s just by performing two adjustments,” he said. “That’s remarkable.”
The data from the research paper was compiled from the Health and Retirement Study, which is a national survey that began in 1992 with a sample of 7,600 households ages 51 to 61 and is completed every second year.
The analysis used the data from 2004 and only looked at household members who were ages 51 to 61 at the time of the survey. There were 3,424 households surveyed in the data set. The purpose of the analysis was to see how baby boomers’ retirement would be affected if they had to pay more money for health costs and if their houses weren’t worth as much as they’d expected, Mr. Scanlan said.
With Medicare facing insolvency, the analysts assumed that participants would need to pay $7,000 annually for a health insurance policy. The analysis also added assumptions to more conservatively depict housing prices. Assumptions were made that only about 40% to 50% of home equity will be available for non-housing consumption in retirement.
By making these adjustments, the paper showed that Americans are woefully unprepared for retirement, Mr. Scanlan said.
The problem is that many Americans are too dependent on the government for Social Security and Medicare, he said. They’ve also overestimated how much money they’ll have from the sale of their houses. Many people assume they’ll downsize in retirement, but often end up purchasing a house that may be smaller, but actually costs a similar amount to the one they currently own, Mr. Scanlan added. It’s possible the housing impact will be even worse, because the paper was written before housing prices began to plummet, he said.
“Advisers have to think carefully about clients’ individual liabilities and need to plan appropriately to meet a higher liability,” Mr. Scanlan said. “That means diversifying in safe and higher-return vehicles to try and match that return.”
Already, many clients of certified financial planner John Goodrich, president of Goodrich Financial Group LLC in San Diego, have seen their houses’ value fall. Mr. Goodrich said he’s made adjustments of housing prices when he works with clients. Some clients are holding off on retirement and others are being forced to save more. He’s telling most clients to stay in their houses as long as possible until prices rise again.
“As people get older and have to go to assisted living, they’re selling their houses for prices much less than they anticipated,” Mr. Goodrich said.
“If they don’t have to sell the house and they don’t have to move, we’re telling them to stay there and forget about a home equity loan,” said Mr. Goodrich, whose firm manages $25 million in assets. “For most of the people, it’s psychological.”
Health costs also are an important part of retirement plans, said Francis “Mike” Garvan, an adviser with Capital Management Partners LLC in Peabody, Mass. His firm manages about $300 million in assets.
“Our job is long-term retirement income planning,” he said. “Taking a long-term view, it’s hard enough to make judgments about the future tax rates and all other assumptions you have to make.”
While he’s increased the estimate of costs his clients will pay for health, he still counts on Medicare being there for clients, Mr. Garvan said.
It’s often hard making calculations when laws are constantly changing, he said. “We try to stress with clients that it’s a dynamic process and everything is a moving target,” Mr. Garvan said. “We review all tax assumptions on an annual basis. We know not everything is perfect.”
E-mail Lisa Shidler at [email protected].
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