As if you haven't been scared enough by the projections that most Americans haven't saved enough to maintain their lifestyles as they enter retirement, here's something even more terrifying:
Nearly half of all Americans will outlive their assets, dying with practically no money at all.
Even more worrisome, that's true even among households that met the traditional standards for secure retirement income. Economic factors and changes in employer pensions and in economic reality have made it much harder to stretch income and assets so they last, especially as people live longer.
"The oldest old are suffering a great deal now," says Debra Whitman, an AARP expert on the financial issues facing retirees.
The facts are sobering. According to studies Whitman presented last week at a Financial Security Summit organized by the Aspen Institute, Americans ages 75 and older lost one-third of their household financial assets and one-sixth of their net worth from 2007 to 2010, reflecting the devastation of the 2008 crash. Their balance sheets may have improved since then, but obviously they have less time than other age groups to make up the losses.
The 75-plus generation is struggling more than others to keep up. Although most age groups have sharply paid down their credit card debt since 2007, credit card debt among the oldest retirees has risen. From 2007 to 2010, AARP found, the percentage of families 75 and older with credit card balances rose from 18.8% to 21.7%; the rate fell in every other age group.
Economist James Poterba of MIT put it all together with colleagues at Dartmouth and Harvard's Kennedy School and estimated that about 46% of Americans die with less than $10,000 in assets, many of them lacking even home equity and relying almost entirely on Social Security.
The results can be measured in more than merely dollars and cents. Poterba's paper found that this group is "disproportionately in poor health," in part because they have no resources to cover medical expenses outside Medicare. Most shocking, many of these households were considered to have entered retirement in good financial shape; they didn't count on outliving their plans.
For the most part, the consequences of these economic trends have been overlooked in the debate over the future of Social Security.
For example, the most commonly proposed "fix" for the program, embraced by President Obama and conservative Republicans alike, is to change its inflation index to one that produces lower cost of living increases. Because the difference resulting from the "chained consumer price index" builds over time, the effect of the change would be greatest on the oldest retirees.
Those retirees are already heavily dependent on the program: AARP's analysis of census data shows that about one-third of retirees ages 65 to 69 rely on Social Security for more than half their annual income, but the figure rises to more than 60% of those ages 80 and older.
It isn't hard to figure out why the retirement crisis is magnifying into a late-retirement crisis. An important factor is the shift in employer pension plans from the defined-benefit to the defined-contribution model. The former, which guarantees employees a fixed stipend based on their earnings and longevity with the sponsoring employer, minimizes the risk that market downturns will erode their pension values.
Defined contribution plans such as the 401(k) can be carried from employer to employer, but because their benefits are based purely on how much workers contribute and how they invest the money, the market risks can be crushing. The oft-told joke about the 2008 crash reducing the average 401(k) account to a 201(k) isn't so funny if you're the account holder.
Another blow delivered by the downturn is the long period of low interest rates that has followed, partially as a result of government efforts to jump-start the recovery. Because retirees' funds tend to be heavily invested in fixed-rate assets such as bonds, low rates eat those funds' value.
Remember the rule of thumb that retirement assets can be made to last 30 years if one withdraws 4% of their original value every year? That may not work when inflation-adjusted interest rates remain close to zero, as they are today, over long periods, or when the nest egg has been slashed by a third. (The 4% rule was developed by a California investment advisor in 1993, when average bond returns were more than 2% over inflation.)
Options for shoring up Americans' retirement future are few. One important step would be to enhance Social Security benefits for older retirees. Another option is to encourage retirees to convert their retirement savings from lump sums to annuities. These are essentially insurance products that guarantee monthly payments over a long period ranging from a decade or two to life.
But annuities have never been a popular option in the U.S., for several reasons. Americans have an aversion to locking away their financial assets indefinitely. "There's a psychological issue with taking something you've earned all your life and turning it over to an insurance company," AARP's Whitman observes.
Another is that annuities can be expensive, especially in low-interest-rate periods such as today. They represent a bet against an insurer that you'll live long enough to collect as much in monthly payments as you paid upfront; the insurance industry is plenty smart enough to stack the deck so that's unlikely to happen.
The best option may be a relatively new device known as an advanced life deferred annuity, or ALDA: You pay a lump sum at retirement age for an annuity that only starts paying at, say, age 75, 85 or 90. Because the chances are higher that the annuitant will die before taking payments, in which case the insurer keeps the lump sum, prices are significantly lower.
The virtue of an ALDA, however, is that it guarantees income late in life. Instead of trying to stretch a retirement fund into the indefinite future and risking dying in poverty, one can devote a relatively modest portion of one's nest egg to an ALDA and figure out how to stretch the remainder over a finite period of 10, 15 or 20 years. That's an easier calculation, which is why Anthony Webb of the Center for Retirement Research at Boston College, writing with his colleague Guan Gong, called ALDAs "an annuity people might actually buy."
The reality is that the crisis facing older Americans is shifting inexorably from the transition from work to retirement and toward the transition from old age to very old age. Policymakers and financial service firms have flubbed the first challenge. They have a chance to get the second one right.