Unless the nation starts saving a lot more money and keeps working until 70, retirees won’t have the money for retirement.
Americans are going to have to work longer and tap the assets of their homes, a reverse mortgage as one option, if they want to avoid substantially lowering their standard of living in retirement, according to senior economist and specialist on the issue. In its most recent assessment, the Center for Retirement Research at Boston College says half of today’s working families are at risk of not maintaining their standard of living in retirement. The reason is half don’t have an employer-sponsored retirement plan and people save relatively little. Social Security isn’t enough for retirement.
“I have to say the people working at the Center take the view that we’re facing a crisis,” says Tony Webb, a senior economist. “We stand by our numbers, and we think the situation is getting worse.”
While Webb says other economists make different assumptions and are more optimistic about future retirees, the numbers seem to be bleak. If you look at house holds ages 55 to 64 that even have an IRA or 401(k) or both and add the two together, the median plan balance is $120,000. If you do an optimal drawdown or buy an inflation-indexed annuity, $120,000 gives you $400 a month, he says.
The latest assessment by the center says those in their 50s have so little time before retirement that middle-income households would have to increase their savings by an unrealistic 29 percentage points of income to reach their target. The latest assessment also shows that those at 45, they would need to save 44 percent to retire at 62; 27 percent to retire at 65; 20 percent to retire at 67 and 10 percent a year to retire at 70.
“If current retirees are in a mess, subsequent retirees are going to be in a bigger mess,” Webb says. “Our position is very simple. We see no evidence of higher wealth accumulation among succeeding generations. We see them traveling along the same path as the current retirees have followed. We see all kinds of headwinds that subsequent generations ought to be accumulating more wealth to maintain the same standard of living. They’re going to face lower interest rates in retirement, they will face higher longevity, higher healthcare costs and they will face lower Social Security replacement rates.”
Americans in their 50s who haven’t saved for retirement have a number of unpalatable choices, Webb says. The first is to accept a “very large drop in consumption” in retirement. The second is to save an “implausible amount of one’s current salary.” The third and “least unpalatable choice” is to postpone retirement, he says.
The problem is not everybody can postpone retirement, Webb says. There are the people in poor health or who were forced out of their jobs. If you’re a roofer, for example, you don’t want to be a 70-year-old doing roofing. These people really don’t have good options if they haven’t saved, he says.
“But for the bulk of people who aren’t doing physically-demanding work and are in decent health and who haven’t lost their job, then postponing retirement by even a few years can transform their situation,” Webb says.
Webb doesn’t envision a kind of society where older Americans are starving, panhandling and out in the streets as some experts have suggested could be part of our nation’s future. The outcome for them instead is “having a very significant and unpalatable drop in consumption.”
What is talked about the least when it comes to dealing with the looming crisis and ensuring older Americans have enough in retirement is the role of the house, Webb says. That’s the largest asset for many people. In previous generations people lived in them until old age until they had to go into nursing homes. The homes were sold, possibly to play nursing home fees.
“I think the subsequent generations have to be more creative in how they think about housing wealth,” Webb says. “There are many ways of tapping it. The households can downsize. The households can have a reverse mortgage.”
Downsizing has a couple of benefits. It frees up cash and it also cuts property taxes and heating bills, Webb says. Reverse mortgages are a niche product at this time. It may not be for everyone but people should consider it to enjoy a better life, he says.