Rethinking retirement in tough times

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Former heavyweight boxing champion George Foreman once said, “The question isn’t at what age I want to retire, it’s at what income.”

While Foreman was savvy enough to parlay a fading boxing career into one that made him millions selling fat-reducing grills, most of us will probably need a well-defined savings strategy if we expect to retire comfortably.

And many people still have some hurdles to overcome. For starters, we don’t know how much we need to save for retirement. In Bankrate’s retirement poll, 37 percent of Americans admitted that they haven’t figured out how much they’ll need to retire, and another 15 percent said they took a wild guess at a number.

And our savings are paltry, generally speaking. According to the Employee Benefit Research Institute’s, or EBRI’s, 2009 Retirement Confidence Survey, more than half of Americans (53 percent) have less than $25,000 saved, not including the value of their homes or their pension plans.

Retirement attitudes
  • Blame the consumer culture
  • Generational differences
  • Retirement savings killers:
    • Credit cards
    • Inflation
    • Changes in the landscape
    • Fear of investing
    • Inertia
  • The future of retirement

The notion of a traditional, leisurely retirement is undergoing a transformation. It’s likely to happen later in our lives, and it may involve working at least part time. There’s a multitude of underlying reasons for this likely outcome: rising health care costs, a dearth of traditional pension plans, faltering Social Security and Medicare systems and, most of all, the fact that Americans are just not saving enough for retirement.

Blame the consumer culture

One popular explanation for our moribund personal savings rate is the replacement of the work-and-save culture of the past with the ubiquitous spend-like-there’s-no-tomorrow mentality.

“I think it’s the idea of keeping up with the Joneses,” says Henry “Bud” Hebeler, a recognized retirement expert and author of “Getting Started in a Financially Secure Retirement.”

While consumerism is nothing new, Hebeler says in the decades following World War II, certain socioeconomic factors emerged that encouraged lavish consumption at the expense of fiscal frugality. Americans found themselves with more disposable income, for one thing, and they tended to dispose of it.

Widely available consumer credit and increasingly sophisticated marketing campaigns fostered detrimental changes in consumer spending habits over the past several decades, according to a 2008 personal savings analysis by EBRI. In more recent years, the run-up in real estate prices gave consumers a false sense of instant wealth, which deterred personal saving.

“All of a sudden everybody’s got to have the latest in electronics, everybody is getting a big home and every kid has to have a car in high school,” Hebeler says.

Generational differences

Over time, the thrift of the silent generation took a backseat to the splurge mentality of baby boomers, Generation X and now the millennials.

Kevin Reardon, a Certified Financial Planner based in Brookfield, Wis., contends that the savings problem is a generational issue largely facing baby boomers and their children.

With the exception of a few upticks in the ’70s and ’80s, our national savings rate declined steadily from a high of 26.1 percent in 1944 to roughly 0.4 percent in 2007, according to the U.S. Bureau of Economic Analysis. The number has since moderated somewhat, rising to 4.6 percent in 2009 as consumers have sought to strengthen their financial position in the wake of the economic crisis.

“I point to lifestyle as far as that goes,” Reardon says. “They’re (baby boomers) choosing the nicer car and the higher lifestyle versus saving money.”

Eventually it hits home. “All of a sudden they walk in and say I’m 50 years old and I need to get on track,” he says.

Retirement savings killers

Credit cards. Despite growing concerns over the economy and lackluster personal savings, Americans love to use their plastic.

And our debt levels continue to climb. Credit card debt stood at $888.1 billion in October 2009, up from $770 billion in 2003, according to the Federal Reserve Board. 

Inflation. Rapidly rising inflation for key consumer expenditures is another savings exterminator.

“One of the problems is they’re (baby boomers) spending those retirement dollars on rising energy costs, rising medical costs, rising housing costs and there’s only enough to go around,” says Carl George, CPA, immediate past chairman of the National CPA Financial Literacy Commission at the American Institute of Certified Public Accountants.

Some 33 percent of respondents to an AARP survey in May indicated that they stopped putting money into their 401(k), IRA or other retirement account because of concern over the economy and inflation. In Bankrate’s own survey, 23 percent of those polled either decreased contributions or stopped making them altogether, and 9 percent have pulled money out of their IRA or retirement account due to the economy.

Changes in the landscape Credit card debt, inflation and scant personal savings aren’t the only reasons why early retirement isn’t in the cards for most of us.

Changes in retirement incentives within the Social Security system and the elimination of mandatory retirement have contributed to the recent trend toward later retirement, according to the “Health & Retirement Study,” an in-depth, long-range study on retirement issues released last year by the National Institute on Aging and the University of Michigan.

Another culprit: a reduction in the availability of private pension plans. Over the past 20 years, defined-benefit pension plans have gradually become scarce while defined-contribution plans, such as 401(k) plans, have become much more widespread. While about 40 percent of workers in the private sector had only traditional pension plans in 1985, only 10 percent of workers had these to the exclusion of other plans in 2005, according to EBRI. Over the same time frame, those who had both types of plans fell from 35 percent to 27 percent. Meanwhile, 63 percent of workers participate exclusively in defined contribution plans such as 401(k) plans, up from merely 25 percent in 1985.

The shift is ushering in an era where workers must take more of an active role in retirement planning whether they’re prepared to or not.

“Contrary to the past, workers are much more in charge of their retirement well-being and of making decisions for their retirement,” says Annamaria Lusardi, an economics professor at Dartmouth College in Hanover, N.H., and contributor to the “Health & Retirement Study.”

There’s a silver lining here. Lusardi says defined-contribution plans such as 401(k)s are ideal for workers who change jobs a lot because of their portability and flexibility. You can take a 401(k) with you to a new employer and roll it into your new plan if the plan permits, or your can roll it into an IRA. With the old-style defined benefit plan, you were generally stuck at one job for many years if you wanted to collect a pension.

However, defined-contribution plans require a lot more hands-on involvement and financial literacy from the worker, Lusardi says. Unfortunately, in many cases, workers fall short.

“Most workers are not well informed about their pension plans and often don’t even know which type of pension they have,” she says.

Fear of investing. Susan Trammell, a New York-based Chartered Financial Analyst, says people sometimes have psychological barriers to saving. Procrastination and risk aversion are two biggies, she says.

“To get people to save, there has to be an atmosphere of trust (between the employee and employer or financial institution) and trust is something the industry is only beginning to look at,” she says.

Once you establish a relationship of trust, you can start setting up the environment to place a person in an investment plan, she says.

Trammell believes financial institutions and employers must also be more active in promoting financial literacy if they expect greater employee participation in retirement plans.

Inertia. The disinclination to take action is a widespread national phenomenon, particularly when it comes to saving money.

For those who view retirement saving as a bigger nut to crack than it actually is, starting with a small automatic deduction from their paycheck and gradually increasing the amount is the best way to save, says Anita Grossman, a wealth planning adviser at Lincoln Financial Group in Cherry Hill, N.J.

“Some people think it’s just not doable because they’re used to spending all their money and they never tried to save some of that money, so they think they can’t live without it,” she says.

“If you start with extremely small amounts and just keep increasing it, most people will get to the point where they’ll be saving a good amount of money and they won’t even notice it missing from their paychecks.”

The future of retirement

The oldest of some 78 million baby boomers, those born between 1946 and 1964, are eligible for Social Security benefits starting this year. The rest will become eligible over the next 18 years.

Many will find themselves working past age 62 because they won’t have enough saved or they’ll need to keep company medical benefits.

Ironically, the good news is that American attitudes toward retirement savings may have turned a corner — as a result of the bad news all around us. Hebeler says that as the national attention is focused on the credit crunch, failed mortgages and the souring economy, many of us are starting to ask more questions about saving.

“There’s a wakeup call out there right now, and I believe a lot of people will heed it,” he says. “People are going to be much, much more dependent on personal savings in the future.”

Reardon adds that baby boomers may be ushering in a new period of austerity where ditching McMansions and SUVs for a downsized lifestyle will have “more to do with our current savings rate than anything else.”

He predicts the future may hold a progression toward more federal programs and higher Social Security payments, as well as a spike in households with three generations under one roof.

There is increased chatter about the need to revamp how defined-contribution plans, such as 401(k) and 403(b) plans, are administered. Employers may have to take a look at the types of retirement plans they’re offering to employees and provide better education about how to choose investments based on individual retirement goals.

Some changes in the way retirement plans are administered have already been felt. Even before the Pension Protection Act was passed in 2006, many companies had adopted automatic enrollment, in which new employees actually have to take action to opt out of their retirement plan to avoid saving money. An informal poll by in 2008 found that the automatic enrollment trend continues to grow among companies offering defined contribution plans, with nearly four out of 10 companies participating in the poll now offering this feature — one in five introducing it in 2008 alone.

Studies have shown that automatic enrollment does increase plan participation. For example, prior to automatic enrollment, 45 percent of employees at 50 different companies participated in their respective plan, according to one study by the Vanguard Center for Retirement Research. Under automatic enrollment, 86 percent participated.

Another idea that’s gaining momentum is to increase the default contribution setting on employer-sponsored 401(k) plans.

“The default settings determine to a great extent what people end up doing,” says Stephen Horan, CFA and head of private wealth and investor education at the CFA Institute in Charlottesville, Va. “Suppose you join a company 401(k) plan and they say ‘We’re going to put 5 percent of your salary into a 401(k) but you can change that if you like.’

“Those default settings have a dramatic effect on what people ultimately do,” Horan says. “If the default is zero, participation is far lower than if the default is 5 percent.”

Trammel predicts the emergence of custom retirement plans that will no longer be geared toward how you’re doing against an index fund like the S&P 500. Instead, she envisions plans that take into account your specific situation, where you are in life in terms of time horizon, liquidity needs and so on.

“You’ll have the creation, the bundling and the packaging of products that are really very much tailored toward you,” she says. “This may come from people who will understand what your needs are in terms of saving, long-term health care and disability — and you will actually be able to see from month to month where you are in terms of your planned goals.”