Most Households Not Saving Enough for Retirement, Analysis Shows

One of the most detailed retirement planning surveys to date shows that more than half of U.S. households are saving too little to maintain their current standard of living in retirement, with low-income and minority workers particularly at risk of running out of money.

An in-depth analysis of Federal Reserve consumer finance data found that only 44% of American households appear to be saving enough for retirement, based on their spending habits, retirement assets, savings rates, projected Social Security payments and expected retirement ages, according to a report commissioned by the Consumer Federation of America and DirectAdvice.com, an Internet financial planning service. The survey was conducted by Ohio State University economics professor Catherine P. Montalto.

The Federal Reserve data are considered the most current and comprehensive information available on consumers’ finances. The survey’s conclusions are consistent with other academic research on the inadequacy of American retirement savings, retirement experts said.

Montalto surveyed 2,400 households with a member in the work force. Other studies have focused just on baby boomers or pre-retirees. Previous surveys also have been criticized for failing to take sufficient account of home equity or stock market assets.

Virtually all the studies come to the same conclusion, however: that many Americans appear unlikely to be able to afford a retirement that maintains their current lifestyle, said Paul J. Yakoboski, head of retirement planning research for the Employee Benefits Research Institute in Washington.

The survey also confirmed financial planners’ anecdotal evidence that people aren’t saving enough.

“Most people have extraordinarily unrealistic expectations” about how long their retirement nest eggs will last, said Harold Evensky, a leading financial planner in Coral Gables, Fla., who has helped create retirement planning software for consumers.

Rather than save more, many Americans expect to simply live on less in retirement. A public opinion poll sponsored by the federation revealed that 59% of Americans expect their standard of living to be lower in retirement.

Using the Federal Reserve data, the survey found that the likelihood of maintaining a pre-retirement standard of living in retirement generally increased with income. Sixty-nine percent of households with annual incomes of more than $100,000 were saving enough for retirement, based on the report’s projections, compared with only 23% of households with annual income between $10,000 and $25,000.

The gulf existed despite the study’s inclusion of projected Social Security benefits, Montalto said. Social Security generally replaces a higher percentage of lower-paid workers’ incomes, with the replacement percentage declining as incomes rise.

The survey found 47.6% of white households were likely to have enough saved, compared with 24.5% of Latino households and 28.4% of black families.

Participation in an employer-provided retirement savings plan seemed to boost a household’s chances of a comfortable retirement. The survey found 55% of those who participated in an employer plan were likely to have sufficient retirement savings compared with 24% of those who were not in a plan.

Using data collected in 1998 by the Federal Reserve and released earlier this year, the study examined the 2,400 households’ finances, including what each had saved and how it was invested. Montalto then applied historical rates of return for each asset class--bonds, stocks, cash, home equity, real estate and business assets--to project how much each participant’s existing and future savings were likely to be worth in retirement.

The evaluation also included projected future income from Social Security. Pension values were evaluated by estimating how much the participant was likely to receive in retirement and discounting the amount back to a present value, using historical rates of return for long-term bonds to determine the discount rate.

Montalto examined household spending data to determine how much each participant was likely to need in retirement. Though most retirement planning studies and financial planning calculators apply a fixed percentage of pre-retirement spending, such as 70% or 80%, to determine retirement spending needs, Montalto’s analysis included whether the participant was a homeowner and when the mortgage was likely to be paid off, as well as how much each person was saving, to determine what each was likely to need in retirement.

Montalto assumed households would want to maintain their pre-retirement standard of living, not a certain percentage of their pre-retirement income.

“We were not comfortable using a fixed percentage, because, for example, some high-income households may be saving a lot of their income and may not have the same [income] replacement needs as households saving less,” Montalto said.

Evensky said the survey’s conclusions may in fact be too optimistic, especially for higher-income workers who may be more likely to live longer than statistical averages. Montalto used IRS life expectancy tables to determine how long each participant’s retirement was likely to be. Evensky said better access to health care and other demographic factors could lead to longer retirements for more affluent workers.

Although the survey did not include historical data, Evensky believes current workers are less likely than their parents to enjoy a comfortable retirement and more likely to have to reduce their standard of living. The growth of 401(k)s and the long bull market in stocks is unlikely to make up for the decline in defined-benefit plans, which offer workers a set pension benefit for life, Evensky said. Social Security also is likely to face benefit cutbacks as baby boomers retire, he said.

In fact, the Fed-based survey showed that 61% of those who had defined-benefit pensions were likely to have a comfortable retirement, compared with just 38% of those who had no pension. Only 28% of workers surveyed had pensions, however. “All over the world, governments have transferred responsibility for retirement savings to the workers,” said Evensky, who added that the workers don’t seem to be saving enough. “There’s a big cultural change happening.”