I get tired of reiterating studies on the shortfall between pre-retirement preparedness and post-retirement reality. But that doesn't mean workers should ignore the message; it just means they should filter the noise.
The statistics are startling, and what's even worse is there's no telling whether anyone's listening. But specifics on the obstacles pre-retirees need to confront can help narrow down the situation. Better to face challenges head-on than save as much as we can and hope for the best.
That being said, I'm glad researchers from the Robert Wood Johnson Foundation and the Harvard School of Public Health took a hard comparative look this week at views from those nearing retirement versus those who have retired. Unfortunately (or eye-opening, depending on how you look at it), 25 percent of retirees think life in retirement is worse than before they retired.
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With pre-retirees being so far off in their expectations, at what point does optimism become delusion? For example, only 13 percent of pre-retirees thought their health would be worse, while 39 percent of retirees say it actually is. And just 22 percent of pre-retirees predict their financial situation would be worse in retirement, but 35 percent of those already retired say it is worse.
That's only a snapshot. I'd like to run a full rap sheet of retirement downers, but for now, I'll briefly touch on some more of the recurring handicaps that I've seen outlined in recent research:
1. Employers are increasingly shifting more of the burden of funding retirement to employees and the government is expected to follow suit with reductions to Social Security. Less than 17 percent of employees will receive income from a traditional pension plan, down from 62 percent in 1983, and all signs show that this number will continue to decline as more employers freeze or terminate their defined benefits plans. Social Security is also expected to replace less retirement income with recent changes to normal retirement age and anticipated changes that will need to be made to shore up the system.
2. Stock market illusions and common investor errors. Long-term market returns are lower than expected, and investments with low-interest rates are killing yields. The stock market has performed well below its historical average over the last 11 years. From 1926 through 2000 the stock market (as represented by the S&P 500) had an annualized return just over 11 percent. Since then it has had an annualized return below 2 percent.
Choosing an inappropriate level of risk for a worker's age and years until retirement is a common investor error. Up until 2008, many workers within five years of retirement carried too much risk, allotting a large portion of their money in stocks. After the meltdown, 401(k) investors lost a third of their account balance. But even after accounts have recovered, trepid investors get scared and pull money out of stocks when the market tumbles, and then fail to reinvest before the market recovers.
3. Home equity, once a major source of retirement income, has significantly declined since the mortgage crisis and is showing no signs of improving. The ratio of homeowners' equity to value at the end of the March, 2011 was just 38 percent, the lowest on record. Prior to the onset of the housing bubble, the ratio of equity to value rarely fell below 60 percent and it had been near 67 percent until the late 1980s.
4. You don't have to buy into insurance pitches, but you do need a plan for long-term care. The 2009 national average for a private nursing home room is $204 a day or $74,806 a year. The average assisted living private room is $2,714 a month or $32,572 a year. The average for home care providers is $25 an hour and certified care providers averages $36 an hour.
(Sources: Financial Finesse, Aon Hewitt, Financial Engines, and guidetolongtermcare.com)
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