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.

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“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 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.

Americans also live longer

One piece of upbeat news is that Americans are generally living longer. For couples retiring this year, there is a 50 percent chance that one spouse will live to 92. But there’s a downside to this increased longevity: Many retirees are depleting their nest eggs by age 80 or 85, and they then have to rely on Social Securityand the generosity of their children, many of whom are already squeezed financially.

“I have tons of clients in their 90s who never thought they would live this long,” said Diahann W. Lassus, a financial planner in New Providence, N.J.

elderly woman with financial advisor
Rolf Sjogren | The Image Bank | Getty Images
elderly woman with financial advisor

Bemoaning the small size of many people’s nest eggs, Mr. VanDerhei said workers with traditional pensions were generally in far better shape than those with 401(k)’s, because pensioners receive a defined monthly benefit for life. In even worse shape, he said, are the majority of workers who have neither a pension nor a 401(k) plan at work.

Many Americans with 401(k)’s do not save enough, many empty their accounts for living expenses when they lose their jobs, and many, Mr. VanDerhei said, skew their accounts too much toward equities, often in their own companies’ stock — bitter medicine when the stock market plunged. And some workers drain their 401(k) accounts to help pay for college for their children; indeed, the soaring cost of college prevents many parents from even saving for retirement.

A big question is, how much should one save? Traditionally, many financial planners put forward a rule of thumb that one’s postretirement income — through Social Security, savings and pensions — should be 65 to 85 percent of one’s preretirement income. Postretirement income can be lower, the logic goes, because one will no longer be making contributions to Social Security, commuting or buying as many suits.

But many financial planners steer people away from relying on a theoretical retirement replacement rate. Instead, they recommend using a retirement calculator to estimate how much they will need to save each year to reach their goal. (AARP has a highly recommended calculator:

Some calculators ask people to insert the annual return they hope to achieve, but planners warn against seeking ambitious returns because they can involve a lot of risk. It is vital to assess one’s risk tolerance, said Tom Orecchio, a financial planner in Westwood, N.J.

“Everyone thought their risk tolerance was one thing until they lived through the financial crisis, and then they realized their risk tolerance was very different,” he said. Some still expect investment returns of 8 percent a year, but, Mr. Orecchio said, 4 to 5 percent is a far more realistic goal.

Fred Sanford, 59, moved to Orlando, Fla., from Illinois in 2004 to take a job as a financial adviser with Merrill Lynch, helping to attract clients and invest their money. He steadily put aside money for retirement, he said, investing it conservatively, but nonetheless “lost a chunk” in the stock market after Lehman Brothers collapsed in 2008. Not only that, Merrill laid him off 18 months ago. “I guess I hadn’t saved enough for retirement, nor do I think anybody else has,” he said. “What is enough?”

He has tried to climb back into financial services, but to no avail. To help make ends meet, Mr. Sanford and his wife have begun letting out a room in their house. In addition, helped by his Web site, he plays piano several nights each week — “boomer tunes, Billy Joel and Stevie Wonder,” he said — at wine bars and country clubs. Retirement is nowhere in sight, he acknowledged, adding, “60, 65 is the new 40, 45.”

Fortunately, his wife still has her job as a school paraprofessional who works with autistic children in Orlando, where thousands of homes have been foreclosed upon and many families with children are homeless.

“You have to be grateful in life for what you have because no matter how bad you have it, there are those worse off than you,” Mr. Sanford said.

Mr. Orecchio recommended that everyone sit down to do retirement planning as well as a cash-flow analysis to determine how much is coming in and spent each month. Without that, he said, it is hard to figure out how much one can afford to save for retirement.

He said not just households with incomes of $1 million a year need financial planners but also those with incomes of $50,000, $70,000 or $100,000 a year. They can often find such planners through the National Association of Personal Financial Advisers, a fee-only group.

Financial planners like him often say that Americans do not begin to understand how much they should be setting aside. If a couple hopes to live on $60,000 a year in retirement, they might receive $30,000 in Social Security benefits and then draw down $30,000 a year from their savings and investments. Assuming the recommended drawdown of 4 percent a year, a nest egg of $750,000 might be needed.

Financial experts generally urge workers to try their hardest to invest the maximum amount allowed into their 401(k) each year — $17,000 for 2012 under current law, with a catch-up provision allowing people 50 and over to contribute an additional $5,500. “I tell my clients that is nonnegotiable; they’ve just got to do it,” Mr. Papadopoulos said.

Of course, that is far more than many workers can afford to set aside, but putting $17,000 instead of $5,000 into one’s 401(k) means no income taxes on an extra $12,000. (In case you are wondering, some tax experts have noted that the 401(k) tax breaks go disproportionately to the affluent.)

Mr. Papadopoulos said, “I tell my clients to practice these basic things: diversify, keep costs low, be mindful of Uncle Sam and focus on the things you can control.”

One thing many Americans can control is when they will start receiving Social Security benefits. Many advisers recommend delaying that move until you really need the money. For Americans born from 1943 to 1954, the retirement age for full Social Security benefits is 66. That age rises in steps to 67 for those born in 1960 or later.

If one qualifies, say, for $1,500 a month in Social Security benefits at 66, and begins taking early benefits at 62, under current rules, those benefits will be 25 percent lower, or $1,125 a month. But if one takes a chance on longevity and decides not to draw benefits until age 70, then one would receive 32 percent more than normal benefits or, in this case, $1,980 a month. “It’s an inexpensive way of taking a better annuity,” said Mr. Certner of the AARP.

Among financial planners, there is considerable debate about whether to buy annuities. Ms. Lassus said she did not recommend annuities, saying, “We look at Social Security as an annuity.”

Mr. Orecchio disagreed, occasionally recommending annuities “as a steadying factor for income in retirement.” Mr. Papadopoulos, however, cautioned against buying variable annuities that rise with inflation, calling them too expensive. “Fixed annuities will serve the purpose,” he said. An annuity starting at age 70 and paying a lifetime monthly income of $2,000, or $24,000 a year, can cost about $300,000 for a man and $330,000 for a woman (the actuarial tables say she’ll live longer).

There is a similar debate about long-term care insurance. Mr. Certner said many people did not plan ever to enter a nursing home, which can be very expensive. So he recommended that people consider long-term care insurance, lest nursing homes wipe out all their savings.

Ms. Munnell is less enthusiastic about long-term care insurance. Not only can it be very expensive (typically, $2,800 annually if purchased at age 55, for a plan offering $150 a day for four years) but insurers sometimes increase the premiums 20 percent or more in a year, forcing some to drop their insurance after they have paid tens of thousands of dollars for it over decades.

She said she worried that nursing home costs and the failure of many older Americans to save nearly enough for retirement would saddle many of their children with major burdens: providing financial support and care for their parents.

“Older people are reluctant to turn to their children, but their children are going to feel compelled to help,” Ms. Munnell said. “You can’t have a vulnerable elderly population in isolation. It’s going to affect everybody.”