Friday, February 15, 2008

Retirement at risk, but can be saved, says researcher Alicia Munnell

Most Americans won't have enough income for a comfortable retirement. However, individuals, employers, and the government can take steps to improve the situation, said Alicia Munnell in her presentation on "Retirement 'At Risk': The Changing Landscape of Retirement in the U.S." to the Boston Security Analysts Society on February 14. Munnell is Peter F. Drucker Professor of Management Sciences at Boston College Carroll School of Management and director of B.C.'s Center for Retirement Research

A three-legged stool of Social Security, employer-sponsored pensions, and individual savings used to support retirement better than it does today. The situation is only going to get worse because:

  • Social Security will replace a smaller percentage of income in the futur
  • The shift to 401(k)s--and individuals' bad decisions about them at every step of the process--is not working as well as it could
  • Individuals save virtually nothing outside employer-sponsored retirement plans

As a result, 43% of households are at risk of not maintaining their standards of living in retirement. That's according to the National Retirement Risk Index, which you can read more about in "Is There Really a Retirement Crisis? An NRRI Analysis," a paper co-authored by Munnell.

To improve Americans' outlook for retirement, Munnell called for:

  • Individuals to work longer, to save more through 401(k)s and IRAs, and to consider tapping their home equity in retirement
  • Employers to revise personnel policies to encourage older workers and to make 401(k)s more effective through automatic provisions
  • Government to redefine what's old (in other words, no early retirement at 62) and to help individuals to save more, possibly by introducing a new tier of funded, privately managed retirement savings

I was intrigued by Munnell's suggestion that the government require that some percentage of 401(k)s should default into an annuity once the account holder begins withdrawals.

You can learn more about research by Munnell and B.C.'s Center for Retirement Research.

By the way, that 43% statistic might prove useful for starting a retirement savings conversation with your clients.


Feb. 16 update

Research from the Urban Institute supports Munnell's advice about individuals working longer. It found that:

  • On average, working an additional year increases annual retirement income about 9 percent (figure 1).
  • Working an additional five years boosts annual retirement income about 56 percent.
  • The impact is even larger for people at the lower end of the income distribution.
I read about this in the Feb. 16-17 Wall Street Journal.

Susan B. Weiner, CFA
Investment Writing
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