After the Storm, the Little Nest Eggs That Couldn't

A decade ago, Jonnie Worth had her eyes on retiring at age 62. Year after year, she funneled money into her 401(k), first when she worked as an event planner and later when she worked in the private banking department at JPMorgan Chase. But the financial crisis of 2008 swamped Ms. Worth. “Like everyone else, I watched my retirement savings plummet,” she said. “I lost a big percentage of my investments.”

Now 65, Ms. Worth is still working full time; her hopes of retiring at 62 sank along with the 2008 stock market. She does client liaison work for a financial planning firm in Fort Worth, and she still conscientiously puts aside money each month for retirement.

Photo: Tom Grill | Photographer's Choice | Getty Images

“Nobody else is going to do it for you,” she said. As for how much longer she plans to work, she said, “I would say at least five years, maybe longer.”

This wasn’t how it was supposed to be.

In many ways, things are looking up for America’s economy. After several years of roller-coaster-ish volatility, the Dow Jones Industrial Average [.DJI  Loading...      ()   ] has climbed to its highest level since the 2008 financial crisis. Economic growth, though not robust, has been gathering steam, and the unemployment rate has been inching downward, although fitfully.

While economic experts voice guarded optimism about the overall picture, many experts are highly pessimistic about the part of the tableau involving retirement — specifically how well (or not well) Americans are preparing for it.

The Center for Retirement Research at Boston College — the nation’s leading research group on this issue — estimates that 51 percent of households are at risk of not having enough to maintain their living standards after retirement.

A New York Times/CBS News poll in October found 63 percent of Americans said they did not think they would have enough money to live comfortably when they reached retirement age. And a recent Gallup poll found that 66 percent of Americans said their top financial concern was not having enough money for retirement.

“There’s a crisis situation because near-retirees lost 25 percent of their assets in the financial crisis,” said Teresa Ghilarducci, a retirement expert at the New School. “It looks like most middle-class Americans will become poor or near-poor retirees.”

Whether one is 30, 40, 50 or 60, there are two routes to being adequately prepared: saving enough in the years before retirement (which means many people should be saving considerably more than they are) or pushing back the year of retirement.

“We encourage people to work an extra year or two before retiring because every year you work is in essence a twofer,” said David Certner, the legislative policy director for AARP. “It means one more year in building up your pension or 401(k) and one less year withdrawing money to live on in retirement.”

Hurt by the downturn and worried that they have saved too little for retirement, many older Americans are working longer — 18 percent of Americans 65 and over are in the labor force, up from 13 percent a decade ago, translating into an increase of three million workers in that age group.

As for saving money, if someone begins saving $10,000 a year for retirement at age 35, that can easily turn into an impressive nest egg of more than $500,000 by age 65, thanks to compounded investment returns. But if one does not begin saving until age 50 and then sets aside $5,000 a year, that could mean a nest egg of less than $100,000, far less than many experts say is needed. According to the Federal Reserve’s most recent figures, the median family 55 to 64 had $98,000 in retirement accounts.

Worried about all the inadequate savings, George Papadopoulos, a financial planner in Novi, Mich., has a maxim. “I tell everybody I talk to — the earlier, the more, the better,” he said. “The earlier you can save and the more you can save and invest, the better the options you will have in life and in retirement.”

There is plenty of reason for all the retirement anxiety. Like Jonnie Worth, many Americans lost tens of thousands, even hundreds of thousands of dollars, when the markets and their 401(k)’s swooned in 2008 — all told, 401(k) plans lost $2.8 trillion in value. Thirty-six percent of American workers age 55 to 64 say they have less than $25,000 in retirement savings, according to a survey by the Employee Benefit Research Institute. (The number is 52 percent for workers age 45 to 54.)

Rock-bottom interest rates have squeezed older Americans who rely on interest from their bond or retirement accounts, and many companies, viewing them as too costly, have eliminated or frozen the traditional pensions that guarantee retirees a solid monthly stipend. Today only 17 percent of workers have such defined-benefit pensions, while 39 percent have 401(k)’s; some in those two groups have both, but an unfortunate 53 percent of all workers have neither.

Housing prices have not recovered from their tumble, making it harder to take sizable sums out of one’s home to help finance retirement — either by selling one’s house or through a reverse mortgage. On top of all this, Washington is awash with talk about scaling back Social Security benefits, even though about a third of America’s retirees receive at least 90 percent of their income from Social Security. “Half the population looks in pretty good shape, and the other half, I don’t know how they’re going to make it financially if they retire at 66 or 67,” said Jack VanDerhei, research director for the Employee Benefit Research Institute.

Alicia H. Munnell, director of the Boston College research center on retirement, said there was a simple reason so many Americans were unprepared.

“We as a nation have institutionalized too low a savings rate,” she said. “Retirement is really expensive. We need to budget a higher percent of our income to it than we are.”

Many Americans, she noted, retire at 65 naïvely thinking they can live comfortably just on Social Security and the $100,000 or so they have in a 401(k). If these people follow the advice of financial planners, she said, they will draw 4 percent each year from their 401(k)’s, translating to $4,000 a year. When that is added to the average amount retirees receive in Social Security — $14,700 a year — it translates to $18,700 a year or just over $1,550 a month (or around $33,000 for a couple when both receive benefits).

“That’s not a lot,” Ms. Munnell said. She warned that many Americans could slide into poverty in retirement because their nest eggs were so small.

View the original article here