How much will the Great Recession affect your retirement?
The answer is more than you might suspect.
A joint study by the Urban Institute and the Center for Retirement Research at Boston College concluded that workers who were unemployed for many months accumulated fewer Social Security and employer-sponsored pension credits and were unlikely to have been able to contribute to retirement accounts or save in other ways.
But even if you didn't lose your job, the recession will take its toll because it caused wages to stagnate. Even if wages resume growing at their pre-recession rates, workers will never make up the ground lost during the recession. Researchers calculated that average age-70 incomes for those ages 25 to 64 when the recession began will fall 4.3 percent from the levels that would have prevailed had the recession not occurred, almost entirely because of the long-term reductions in wages.
For those people on the verge of retirement, the impact is more immediate.
- Less Social Security. Wage freezes during the recession is reducing the index factor in the Social Security benefit formula for everyone who turns 60 after 2008, effectively lowering the earnings counted by Social Security, even those earned long before the recession began.
- Fewer years on the job. Relatively few adults return to work after becoming unemployed in their early 60s.
Researchers calculate that between lowered Social Security and reduced income, the average age-70 income will be 4.1 percent lower for adults who are currently 58 to 67 than it would have been without the recession.
What can you do about this? The report concludes with a couple of retirement planning suggestions:
- Be realistic about what it takes to get by. The federal poverty level is $10,890 for a single and $14,710 for a couple, but this study says that doesn't reflect health care costs. To pay those, you need at least 125 percent of the federal poverty level or $13,613 for a single or $18,388 for a couple. Average Social Security is about $1,000 a month, clearly not enough to keep most people solvent.
- Work longer. This study cites another study that says working an additional year boosts average annual retirement incomes by 9 percent overall, and increases annual incomes in the bottom 20 percent of income by 16 percent.
- Encourage your grown children to work and save. Saving for retirement is going to be much more difficult for them -- and you probably aren't going to be able to afford to help.