The scary state of retirement savings

Michelle Singletary
Thursday, July 15, 2010; A16

The nonpartisan Employee Benefit Research Institute regularly delivers the dreadful news of how unprepared so many Americans are for retirement. The findings give you a chill, much like seeing an image of the iconic black-robed, scythe-carrying personification of death.

But that chill is needed. Washington-based EBRI continues to be at the forefront of sounding the alarm that we ought to be more aggressive in preventing people from falling into poverty in their senior years.

In 2003, the institute developed its trademark "Retirement Readiness Rating" to assess retirement-income prospects for American workers. The 2010 findings, released this week, show that a large percentage of people, including high earners, are likely to run out of money 10 to 20 years into retirement.

"This is old news to those of us that spend our lives thinking about it, but surveys and focus groups and conversations with family tell us that people have not absorbed it," said Dallas L. Salisbury, EBRI's president and chief executive. "So, like water-drip torture, there is no such thing as getting this out too many times."

Nearly half of baby boomers born between 1948 and 1954 and now between the ages of 56 and 62 are at risk of not having enough money in retirement to pay for basic expenditures, EBRI reports. For those born between 1955 and 1964 (now 46 to 55), the percentage who are likely not to have enough money was calculated at 43.7 percent. It was 44.5 percent for Generation Xers -- people born between 1965 and 1974 (now 36 to 45).

The institute defines the retirement shortfall as not being able to meet minimum expenses, including uninsured costs associated with a nursing home or home health care. After 10 years of retirement, 41 percent of Americans with low pre-retirement income will probably be struggling to meet their expenses.

As I said, this is chilling news. One good note in the report, however, is that many people are now more likely to have more retirement savings because their employers can automatically enroll them in company-sponsored retirement plans. The Pension Protection Act of 2006 made it easier for companies to nudge employees into saving for their retirement. This has led to an increase in participation rates. The theory worked, which was that inertia would result in people not taking the time to opt out of the plans, as is their right.

"It shows how important saving in a defined-contribution plan is toward reducing your probability of having inadequate retirement income," said Jack VanDerhei, EBRI's research director.

VanDerhei said even he was surprised by the findings that Generation Xers not eligible to participate in a defined-contribution plan have a 60 percent chance of having inadequate retirement income. This risk drops to 20 percent for Gen Xers who can participate in a defined-contribution plan for 20 or more years.

The answer to the lack of savings is often to suggest that people keep working long after age 62, which is about the average retirement age, according to the Labor Department. But that's not always possible -- people get sick, and jobs get eliminated.

Okay, so what can you do with the information from the latest EBRI report, other than wince and moan?

I know. Calculate how much you'll need to save. Go to and click on the link for the "Ballpark Estimate" retirement calculator.

When doing the calculation, you may not know the answers to all the questions. That's okay -- do your best to estimate. For example, when asked about the expected inflation rate, VanDerhei suggests putting in 2.8 percent. For the question about expected wage growth, he suggests 3.9 percent. He's pulled both percentages from the 2009 annual report of the board of trustees of the Federal Old-Age and Survivors Insurance and Federal Disability Insurance Trust Funds.

The rate-of-return question is a hard one, because it's based on an assumption about how well your investments will do. Need I say how hard that is, even for professional money managers? But if you want to be conservative, you can say 4 or 5 percent.

Just as you can take certain precautions to keep the Grim Reaper away -- eat better, get regular physicals -- so, too, can you make some life choices and changes for your retirement before it's too late.

Readers can write to Michelle Singletary at The Washington Post, 1150 15th St. NW, Washington, D.C. 20071.

Comments and questions are welcome, but because of the volume of mail, personal responses are not always possible. Please note that comments or questions might be used in a future column, with the writer's name, unless a specific request to do otherwise is indicated.

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