November/December 2009

Retirement Planning: A Moving Target?
By Janice I. Wassel, PhD
Aging Well
Vol. 2 No. 5 P. 22

At a recent national conference of gerontologists, two themes were common during discussion periods and personal conversations alike: delaying retirement and the recent loss in retirement savings. The audience was comprised primarily of baby boomers who teach and research issues related to retirement and aging. Many of these experts reported that they have begun tossing their retirement account statements into drawers unopened. In fact, an impromptu survey of one audience of these gerontologists found that more than one half file away unopened statements, regardless of age. Both younger and older individuals were assuming they would work longer to make up for lost savings.

It is no surprise that the recent economic downturn is forcing many to rethink retirement timing and savings. However, failure to fully review retirement statements borders on foolishness. This is especially true for those with defined contribution plans, retirement savings accounts with no promised, guaranteed retirement income. The benefit related to such a plan is based solely on the employee’s, and sometimes employer’s, contributions and the investments’ earnings. Once the funds are depleted, they’re gone. It is common knowledge that younger individuals have more years to adjust for market downturns that may affect retirement goals and defined contribution plans. But how is the current economic downturn impacting those on the threshold of retirement, those aged 50 and older, or those who have already retired? How will they adjust spending and savings if their statements remain unopened?

For 17 years, the Employee Benefit Research Institute has been asking workers questions about retirement. One question in the 2009 Retirement Confidence Survey asks how confident they are they will have enough money to live comfortably throughout their retirement years. The most recent response to this question shows a sharp 50% decrease in American workers’ confidence in their ability to live comfortably upon retirement. Only 13% of workers reported being very confident they will have enough money to live comfortably. This is the lowest level of retirement confidence reported since 1993, when this question was first asked, and is noticeably down from the 27% in 2007 who thought retirement income would be very good.

The number of those who said they were somewhat confident also dropped. Combining both categories, those who were very confident and somewhat confident, totals just over one half (54%) of all workers reporting any level of confidence that they’ll have the funds necessary in retirement. Recent economic uncertainty is producing the lowest outlook for future retirement financial security in decades.

The Right Age
Retirement age has become a moving target. A nationally representative study of Americans conducted last spring by the Pew Research Center found more than one half of the Threshold Generation, or adults born between 1945 and 1959 and nearing traditional retirement ages, are now seriously contemplating delaying retirement. Another 16% of the Threshold Generation plans never to retire. The current economic recession is also causing younger people to think about future retirement options. More than one third (36%) of younger workers aged 30 to 49 believe they will need to delay retirement. And women, more so than men, are now considering delayed retirement.

However, the current recession is impacting workers differently, depending on their ages. Younger workers may be rethinking future retirement ages, but they have more years to save, plan, and adjust than the Threshold Generation does. Members of the Threshold Generation, now at or near their peak earning levels, are unnerved by lost savings and economic uncertainty. Delaying retirement, many are hopeful they will recoup some savings, while others are fearful they will outlive retirement savings.

Those currently retired are faring better than current workers. The Pew Research Center study reported that more than one half (56%) of those aged 65 and older experienced no financial losses during the past year. Only one third of the Threshold Generation’s investments did as well. The remaining two thirds of the Threshold Generation had substantial retirement investment losses. For example, 29% of them reported losses between 20% and 40%, and another 14% had losses of 40% or more of their retirement investment. The recent economic downturn has had less impact on those aged 65 and older simply because older individuals tend to move retirement savings to more conservative investments and downsize their lifestyles.

Looking to the Future
People are planning to work longer because Americans, in general, have saved little for retirement, and the current recession is negatively compounding the effect of insufficient savings and using housing as a personal piggy bank. Plus, the piggy bank housing market continues a downward spiral. Excluding primary housing and defined pension plans from savings wealth, more than one half  (53%) of workers have saved $25,000 or less. In response to the current economic crisis, saving and conservative spending have attracted new interest for workers intent on changing their fiscal behavior. The majority (81%) said they are reducing expenses; 43% are moving investments to protect the savings they have left; and nearly 40% have increased work hours or taken a second job.

Although they are noble responses for adjusting to current needs, this is not enough. Retirement requires planning. A significant cause of difficulty is that people often guesstimate the income they’ll need in retirement. Few effectively seek information to make these complex decisions. Only about four in 10 workers formally analyze financial needs for retirement savings, and only one of five current workers used a financial professional to help determine retirement savings goals. Retirement planning directly and positively impacts retirement savings and wealth.

Emotions influence saving behavior, according to a study by the Center for Retirement Research at Boston College. The study found that two different emotions—hope and hopefulness—affect retirement savings. Those who hoped for a good retirement outcome (meaning they yearn for a good outcome even when unlikely) were less likely to invest in a 401(k) plan than those with hopefulness for retirement (those who believe there is a strong likelihood that something good will happen). Emotions appear to factor into workers using a retirement needs calculation to estimate future needs. When the stock market is up, as it was in 2000 and 2008, more workers calculated the retirement savings needed. When the market declined, as it did in 2003, fewer did so. Studies show that individuals who do a retirement needs calculation are twice as likely to feel very confident that they will have a comfortable retirement (19% compared with 9%).

The Threshold Generation has few options other than delaying retirement, reducing spending, and living more conservatively to make up losses in retirement savings that have been compounded by market losses. Even if (or when) the stock market rallies, investors will have less in their stock market funds to invest. After all, it took 20 years for the market to regain its Great Depression losses of 86%. Many of the Threshold Generation do not have 20 years to rebuild. Boomers have been criticized for excessive debt driven by consumption; yet it is, in part, that consumption that provided many years of economic growth. Unfortunately for those nearing retirement, there is no quick fix to recover losses. Life and retirement have changed. Planning for retirement has always been and continues to be important. When the retirement statement arrives, open it before tossing it into the drawer. It may be time for some serious retirement planning.

— Janice I. Wassel, PhD, is director of the gerontology program and a member of the sociology department at the University of North Carolina at Greensboro and a founding member of the North Carolina Gerontology Consortium.