Caution: Golden Years May Not Shine

Many Americans are stumbling toward retirement with big misconceptions about how to prepare financially for old age and, to make matters worse, with inadequate savings for a time of intensified economic pressures on the elderly.

That assessment is found in a flurry of recent reports about preparations for life after work by older employees, including members of the baby boom generation. In different ways, the reports illustrate that workers are struggling to prepare for a future in which traditional pensions and Social Security will replace a relatively small proportion of their income in retirement, and that many will have only modest nest eggs to fall back on.

“Americans are not saving enough for retirement,” said Marc Lackritz, president of the Securities Industry Assn., which recently found that 43% of the nation’s households were not setting aside any cash for the long term.

The trade group’s analysis cautioned that as much as 20% of the baby boom generation -- those born from 1946 to 1964 -- might end their lives in poverty.

Because the Securities Industry Assn. represents companies that sell investments, its warning -- and those sounded by investment firms in other recent reports -- may be seen as self-serving.

But there is wide agreement among independent experts that the risks are real and that many of today’s workers face lower-than-expected living standards in retirement because of pension cutbacks, low savings levels, early retirements and rising healthcare costs. On top of that, people born after 1959 won’t get full Social Security benefits until they’re 67, instead of 65.

“I don’t think people out there understand the nature of the challenges ahead at all,” said Alicia H. Munnell, a Boston College economist and authority on the financial aspects of retirement.

Some of the pressure on future retirees comes from far-reaching changes in the retirement landscape that are forcing people to dig deeper into their pockets to survive. For example, they can expect to shoulder additional healthcare costs in the years ahead, according to a June report by consulting firm Watson Wyatt Worldwide.

Only 5% of the 163 companies Watson Wyatt surveyed said they anticipated no new restrictions on medical benefits for future retirees over the next five years. Beyond that, 14% of companies said they planned to eliminate healthcare benefits altogether for future retirees over age 65.

“The bad news is that retirees -- especially future retirees -- will have to pay more for their coverage,” said Cara Jareb, director of retiree medical consulting for Watson Wyatt.

And with each passing year, fewer Americans can count on the security of a lifetime pension. As of 2003, about 17 million workers were active participants in pension plans, down from more than 22 million in 1988, according to the Employee Benefit Research Institute.

Yet there are indications that many workers don’t fully understand the significance of this trend. According to a survey released by the institute in April, 40% of the workers polled or their spouses said they had a traditional pension.

At the same time, 61% of respondents said they expected to receive income from such a plan at retirement.

“This means that up to 20% of workers are counting on getting this benefit from a future employer -- a scenario that is becoming increasingly unlikely,” the report found.

Further, many workers still anticipate getting health benefits when they retire, even though such plans are commonly being curbed.

“Many workers are counting on employer-provided benefits in retirement that are increasingly unavailable,” the report from the employer-sponsored institute found.

Prudential Financial Inc., which sells an array of retirement investments, weighed in with a survey last week that promoted the concept of a retirement “red zone,” which it described as a crucial decade spanning the last five years of work and the first five of retirement.

The firm surveyed 1,038 Americans in this stage of life, divided almost equally between retirees and workers. The results, Prudential said, show that relatively few knew how to “deftly navigate” the financial challenges of these years.

For example, when asked how they would respond to a serious financial setback shortly before or after retirement, their most popular answer was to postpone retirement or reenter the workplace.

In theory, delaying retirement can pay off handsomely. It gives workers more time to build up savings accounts rather than draw them down, and it increases the likelihood of getting a complete Social Security benefit rather than one discounted for early retirement.

But the frustrating reality is that many older people are not able to remain in the workforce, much less cruise out of retirement and back into a good-paying job. Indeed, 4 in 10 retirees are forced out of the workplace, largely because of health problems and layoffs, according to a survey released this year by McKinsey & Co.