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updated 10/30/2007 7:25:09 PM ET 2007-10-30T23:25:09

“Crisis seems like such a harsh word,” says Michael Kitces, director of financial planning with the Pinnacle Advisory Group in Columbia, MD, when asked if he thinks there is a retirement savings crisis.

Yet, crisis is how the Center for Retirement Research at Boston College (CRR) characterizes the current state of retirement savings in its latest study.  It concludes: “nearly 45 percent of Americans will be ‘at risk’ of being unable to maintain their  standard of living in retirement.” 

While frighteningly high, it does imply that the statistical majority is on the right track to retirement.

Also somewhat encouraging: “Those currently in retirement or new to it, are actually doing fairly well,” says Andrew Eschtruth, spokesperson for CRR.  Among pre-retirees — early Baby Boomers — CRR finds only 35 percent are considered ‘at risk’ of reducing their lifestyles in retirement. Those farthest away from retirement, Generation Xers, are most ‘at risk,’ with 49 percent on the path to shopping in the cat food aisle. But they also have the most time to make amends in their savings strategy and catch up.

Working our way out of  a crisis
The CRR study assumes retirement occurs at age 65 with no further wage earning.  That assumption raises the amount of savings required to keep standards of living level in retirement.

But a recent report from the Employee Benefit Research Institute (EBRI) finds an increasing percentage of Americans work past the traditional retirement age. The percentage of those aged 65 to 69 still on the job in 2006 rose to 29 percent from 18 percent in 1985. EBRI says these are not just part-timers, but include full-time, full-year workers. Whether it is for continued access to health care coverage, for financial reasons, or for the mental stimulation is unclear, but EBRI sees this trend building.

“Working longer does make a significant difference [in retirement savings preparedness],” says Eschtruth.  “Just two or three additional years at the same income level lowers our study’s overall ‘at risk’ scores from 43 percent to 33 percent.”

Why Gen X lags
Current retirees make retirement financing look deceptively easy.  Partly, observes Eschtruth, because they began receiving full Social Security benefits while still in their early- to mid-sixties. Future retirees will not qualify for full benefits until their mid-to-late sixties or after the ‘retirement age’ of 65 — assuming Social Security remains intact.

Many of today’s retirees are also receiving something few Gen Xers will — a company pension.  Current retirees are also likely to have old-fashion personal savings accounts and insurance along with their 401(k) or IRA accounts. 

The lack of this variety of retirement funding sources is what creates the pressure for younger generations to save more. But, Eschtruth says CCR data finds few of today’s savers meeting this challenge by saving outside of their 401(k) accounts.

Within those 401(k) accounts, however, balances are growing. Among those who consistently saved money in 401 (k) plans between 1999 and 2006, balances averaged $121,202 versus $67,760 at year-end according to EBRI.  Median balances among that same group are up to $66,650 from $24,898 over that same seven year period. 

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While it is easy to conclude Americans are not saving enough, some financial planners think confusion over what ‘enough’ is, gets some of the blame.

“No one seems to be getting it right,” says Laurence Kotlikoff, professor of economics at Boston University and co-developer of ESPlanner, a financial planning program designed to help individuals get ‘it’ right throughout their lives.

“It takes more than a few questions to calculate how much a person needs to save for retirement,” he says referring to the bare-bones online retirement calculators many use for this task.

Because these calculators treat all retirement goals alike without regard to lifestyle preferences or individual goals, he asserts they can produce savings targets four to five times higher than necessary.  By inflating the targets, it can cause people to give up because it seems hopeless or over save and “squander their youth instead of their money,” says Kotlikoff. 

Ty Bernicke, a certified financial planner in  Eau Claire, WI, has raised similar concerns about inflated savings targets based on some of  his clients’ experiences at retirement. “I am not suggesting people should not save, but that they should have a better idea of what they want to do in retirement so they save the right amount,” he explains.  “People get fixated on the benchmarks they read about, but you can not benchmark across populations,” he adds. “Some can take early retirement and live the rest of their lives comfortably on a $1 million nest egg.  For others, that would not last them five years.” 

While the benchmarks may be too high for some of Bernicke’s Mid-Western clients, Arthur Stein, a certified financial planner in Bethesda, MD, thinks they are too low for his clients who are hoping to maintain their pre-retirement  lifestyles in the Washington D.C. area. “This is why we plan for specific situations not national averages,” he says.

“Telling people unilaterally to ‘save more’ is a good sound bite, but you really need to isolate the correct assumptions for each individual,” concurs Rick Brooks, a certified financial planner with Blankinship and Foster in Solana Beach, CA.   By contrast to the instant savings goals calculators, he spends two hours with a client in their first meeting, then another ten to fifteen on analytical work before he generates a retirement savings strategy.

Like many planners, his process focuses on answering questions  like: What does retirement mean to you?  Do you want to work? Where do you want to live? How do you want to spend your time?  What do you think you will be spending your money on?

Age, assets and income help determine how clients will achieve their goals. But like the other financial experts, he warns against relying on them exclusively when determining what retirement savings goals should be.  Instead, when using basic calculators treat the result as a starting point not as retirement planning solution.

Regardless of whether there is a retirement savings crisis in the aggregate or not, to avoid a personal one still requires consistent savings. Kitces also advises that you maintain control over both pre- and post-retirement spending.  Having a viable plan to achieve personal goals also helps improve the odds of ultimately getting the savings part of whatever calculation is used, right. 

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