Retirees may be doing better than you think 

Dec. 5, 2012 at 10:29 AM ET

Contrary to what you may have heard, new retirees are doing better financially than previous generations, according to research being published on Wednesday by a mutual fund industry trade group.

"On average, more-recent generations of households have higher levels of resources to draw on in retirement than previous generations," said the study by the Investment Company Institute, a trade group. "Other measures also indicate improvements in retiree well-being. For example, the poverty rate among people aged 65 or older has declined from nearly 30 percent in 1966 to 9 percent in 2011."

These findings -- culled from a survey of academic, government and industry research -- run counter to the oft-quoted conventional wisdom that older people will be left impoverished by the decline of traditional defined benefit pension plans. It also seems a change in tone for the industry, which has funded countless surveys showing how worrisome to workers the retirement landscape is.

"The extent to which previous generations of retired households relied on income generated by private sector (defined benefit) plans is often exaggerated," the study said. The shift to defined contribution plans like 401(k)s "will increase retirement resources for most households."

Perhaps the new tone is aimed at fending off rumored threats to the favorable tax treatment that 401(k) plans and similar accounts receive as Washington tries to cut deficits and avoid large tax increases scheduled to take effect in 2013.

"We feel it is very important to preserve the tax incentives for those plans," Sarah Holden, senior director of retirement and investment research at ICI, said in an interview. "This is an area that we've seen works well for American workers. These plans can provide significant income in retirement."

To be sure, the ICI findings are in the aggregate, so not every retiree will be on more solid financial footing than his or her forebears. But the study shows that the money Americans have earmarked for retirement -- now topping $18.5 trillion -- is substantially higher than at any other time in U.S. history, even when defined benefit plans are included.

"Recent cohorts of retirees tend to enter retirement wealthier than previous cohorts," the study says.

Households led by people of all ages had more retirement assets than ever, the study found. The average amount of retirement assets per U.S. household was $153,100 on June 30 of this year. Adjusted for inflation that is 2.7 times higher than in 1985 and 5.6 times higher than in 1975, the study said.

The findings should encourage survey-weary workers heading into retirement, but not so much that they stop saving. Here's some more perspective.

• Older people save more for retirement than younger people, but that's OK. "A younger worker might be saving for a home. That's not formally earmarked for retirement, but you can live in it while you are retired. It's going to be a resource that is important," said Holden.
  
• Not everyone will be OK. But teasing out who will and won't have enough in retirement is complicated and a little bit counterintuitive. The folks at the bottom of the earnings spectrum might be better off than expected, because Social Security will make up a higher percentage of their income, says Holden. She predicts that those who will face the biggest challenges funding their retirements are the same people most challenged at funding their earlier years. "Folks who were vulnerable while working (either by being underemployed, unemployed, working part-time or retiring early for health reasons) will tend to remain vulnerable in retirement," said Holden.
• Other assets count. In 2010, roughly 82 percent of near- retirees owned homes, and for the typical homeowner, their home-equity made up almost one-third of their net worth. People approaching retirement will be able to tap their IRAs, 401(k)s, home equity (either by downsizing or using reverse mortgages), Social Security, private pensions and any other savings they might have. For retirement savers, mixing that up is usually a good idea. Saving some money outside of retirement accounts allows for greater tax flexibility when it comes time to make withdrawals. A home that is paid off or almost paid off can be a significant resource for the later years of retirement.
• There's good news on spending too. It's not just in their pre-retirement savings that workers are displaying some encouraging behavior. There are starting to be shreds of evidence that people are withdrawing less from their retirement accounts than might be expected.
  

That observation comes from T. Rowe Price, an investment company that holds a substantial number of retirement accounts. Its advisory clients often tend to withdraw roughly 4 percent of their assets during their first year of retirement, said Christine Fahlund, a senior retirement adviser with the company. But they tend not to raise their withdrawals in every subsequent year, even though T. Rowe Price retirement plans typically allow for annual inflation adjustments of those withdrawals.

Moreover, Fahlund says some of her retired clients are unhappily surprised when they hit age 70-1/2 and must take required minimum distributions from their accounts. "In many cases, they don't need the RMDs and they don't want to take them," she said.

That's another surprising and nontraditional retirement story line: There's too much money.

Linda Stern tweets at http://www.twitter.com/lindastern .