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Our next big crisis will be a retirement crisis

  • By Brett Arends,
  • MarketWatch
  • – 03/03/2014
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Remember how everyone sensible knew the housing market was in a bubble 10 years ago but nobody really focused on what that would mean? I wonder today if we are in a similar situation regarding retirement.

Everybody sensible knows we are facing a looming retirement crisis. Tens of millions of baby boomers are starting to retire. They are going to live in old age far longer than previous generations. Tomorrow's grandma is going to need medical care and nursing care beyond the imagination of grandmothers of yore. Yet so few people or families have saved anywhere near enough. And our public safety net is poorly managed, ill-thought-out, and threadbare.

Focus on retirement

More on retirement topics — from planning to spending, and other issues that affect you.

But even though we know the overall picture doesn't add up, somehow everyone keeps whistling and hoping for the best.

It reminds me of a funny poster someone put up in the offices of the Boston Herald, where I worked, back around 2005. It featured a character made of soap suds called "Mr. Housing Bubble". He was saying, "If I pop, we're screwed!" How we laughed.

On retirement, three new reports paint a bleak picture of what the future may look like for Americans when they retire.

For example, they may enjoy an overall standard of life well below that enjoyed by retirees in many other developed countries, according to a new analysis by money management giant Natixis (which owns bond firm Loomis Sayles, among others). Natixis looked at a broad array of measures, from economic factors to health care, and found that the U.S. ranked 19th in the world for retirees — far below countries such as Switzerland and Norway, which (apparently) have sorted themselves out, and behind most of the other leading developed nations.

"The United States narrowly holds its spot among the top 20 nations globally in its capacity to need retirement security needs and expectations," report Natixis researchers. They looked at 20 key performance indicators across four areas: health care, material well-being, finances in retirement, and broader "quality of life" and the environment. As an illustration, Natixis notes that we rank number-one in the world — by a country mile — in health spending per capita, but we are only 33rd in life expectancy, 52nd in the number of doctors per capita, and 58th in hospital beds per person.

And, as I have observed here before, even though America in aggregate contains an enormous amount of wealth, that isn't much help to a lot of people: We have one of the most unequal distributions of income among developed countries in the world.

Many people are also in terrible financial shape for their retirement. The Boston College Center for Retirement Research has just updated its "National Retirement Risk Index," a measure of just how many people can expect to be financially comfortable in retirement.

It doesn't make for happy reading. According to Boston College, based on current projections, about half the country is at risk of being unable to maintain their standard of living in retirement. Among low-income workers that rises to 60%. But it's 40% even among the higher-income workers.

The picture has improved a bit since 2010, of course, as the economy has recovered somewhat from the financial crisis. But it remains worse than it was in 2007.

One of the stark issues that comes out of the report is how little the stock market boom has helped. As the Boston College researchers note, citing data from the Federal Reserve's 2010 Survey of Consumer Finances, most people don't own many stocks. Equities account for just 17% of the wealth of high earners, 6% of middle earners and 2% of low earners. Far more important is the value of housing — which has recovered much less dramatically than the stock market.

Meanwhile, by suppressing short-term interest rates, the Fed has effectively levied a harsh tax on savers who need income from short-term deposits…like retirees.

The picture is similar in a new study by the Employee Benefits Research Institute, a Washington, D.C.-based think-tank. Their Retirement Readiness Rating says that 43% of Boomers and "Generation Xers" are at risk of running out of money in retirement. Among the poorest half of the country, that number rises sharply. Among those in the poorest 25%, EBRI estimates a stunning 83% are at risk.

Do the math: According to an EBRI survey conducted last year, 66% of workers have saved less than $50,000 for their retirement. And 28% have saved less than $1,000. Good luck with that.

The most alarming news, though, is in the fine print. Even these bleak numbers are based on the most rosy financial scenarios. EBRI assumed no changes in Social Security or Medicare. It also assumed wacky financial returns: It estimated people would earn about 8% above inflation each year on their stocks and about 2% above inflation on their bonds — net of fees!

John Hailer, CEO of Natixis, calls the picture worrying. "Individuals need to be concerned about their own retirement needs, and not just be dependent on government and corporations," he says. He notes that most people don't even understand the problem. For example, 89% of Americans told Natixis researchers that they were on track to reach their retirement goals — but 54% of them didn't even have a plan, and 45% of them couldn't even define those goals.

Boston College's Alicia Munnell, Anthony Webb, and Rebecca Cannon Fraenkel, authors of the risk-index report, warn: "The only way out of this box is for people to save more and/or work longer." No kidding.

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