Saturday, August 4, 2007

Are We Saving Optimally for Retirement?

Scott Burns has written an article entitled "We're Better Off Than We Think" on the subject of how well we're saving for retirement. He points to “Are Americans Saving ‘Optimally’ for Retirement?” which is the results of a study at the University of Wisconsin concluding that we're not so bad off.

However, as pointed out in the article
"Is There Really a Retirement Savings Crisis?" published by the Center for Retirement Research of Boston College, that for Boomers the answer may be "No, we're not saving optimally."

The Wisconsin study sampled people who were in the age range of 51 to 61 in 1992. The youngest of this group was born in 1941, 5 years before the earliest Boomer. There are a number of factors involved which will make it more difficult for Boomers than for the older generation.

Boomers will be increasingly subject to having their Social Security benefits reduced by increasing Medicare premiums. Additionally, Boomers are more likely to have their Social Security benefits taxed since the exclusion thresholds of $25,000 for a single person and $32,000 for a married couple are not indexed for inflation. If other income (including some that is not ordinarily taxable) plus 50% of your Social Security benefits exceed your exclusion level, then some or up to 85% of you Social Security benefits are added to you Adjusted Gross Income and may cause you to pay tax. The seemingly inexorable march of inflation will make it so -- even at a modest 3%/year inflation rate prices will double in 24 years (per the rule-of-72).

The defined benefit pension is going the way of the dodo bird, with more and more companies freezing pensions and/or restricting participation by new hires. A larger percentage of the people sampled by the Wisconsin study have a a pension to help with retirement than will the percentage of Boomers when we retire.

The Federal Reserve's 2004 Survey of Consumer Finances shows that the median net worth of a household in the age range of 55-64 (with retirement imminent) is $248,000. However the median net worth of the vehicles and home of this age range was over $150,000. What will happen to the price of McMansions if a large number of Boomers try to downsize by selling to the smaller Generation X following? (The basic supply Vs demand curve.) But then you have to ask whether the average boomer will want to downsize, or prefer to continue living in the same house. Would you want to sell your house in which your kids grew up and in which you've grown comfortable and move to an efficiency apartment? If you want to stay in your house, its effective net worth is reduced. Even with a reverse mortgage, you will extract only a portion of the equity during your lifetime.

Personally, I think the average Boomer is in trouble when it comes to retirement. I'm doing my best to ensure that I'm not one of them. I suspect that most people really haven't given it much thought, just assuming that a comfortable retirement automatically awaits those reaching the age of 65.