IMHO: Chances Are…

Now, sometimes those fallbacks aren’t completely well-formed (ask my wife), but to my way of thinking, assuming that everything will work out “according to plan” is just tempting fate.

When it comes to saving for retirement—or, more accurately, to having enough saved for retirement—workers have long had a set of “Plan Bs,” though not always completely well-formed, to put it mildly.  They have assumed that if they weren’t saving enough at present, they would “catch up” by saving more “later”; they have assumed market returns to grow their accounts that defied reality (if not common sense); and some have gone so far as to assume they had a pension coming in situations where it was clear that no such safety net would be present.¹ 

And then, this past week, a study published by the Employee Benefit Research Institute (EBRI) threw cold water on what has, IMHO, been a “best case” assumption by a growing number of workers: that they would close any retirement savings gap…by simply working longer (see Delaying Retirement no Guarantee of Being Able to Afford Retirement). 

Now, real-world data has shown (and shown for some time now) that the median retirement age for Americans is not even as old 65 (it’s been 62).  Still, the headline to the EBRI press release conveyed a much starker message: “Delaying Retirement Past 65 No Guarantee of Households Being Able to Afford Retirement.”  In fact, the study says that, even if a worker delays his or her retirement into their 80s, “there is still a chance the household will be “at risk” of running short of money in retirement.”²    

Well, the truth is, there’s also a chance that a meteor will land on your head on the way to work—though it’s a small one.  And though actuarial tables and the like purport to provide some kind of statistical certainty to an assessment of how long we’ll have on this “mortal coil,” the reality is more complicated.  People defy those odds every day, both by living well beyond projected life expectancies, and sometimes by—well, life is sometimes shorter than we think it will be. 

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¹ Indeed, those are all assumptions that, dutifully plugged into a retirement planning calculator, can “solve” many projected retirement savings gaps.  However, human nature (and the markets) being what they are, in real life, they tend to be little more than wishful thinking.

²Admittedly, determinations of retirement security are best done at an individual level, though our industry (and those who occasionally write about it) is frequently inclined to take the easy way around these issues. But, as the EBRI researchers noted, “a retirement target based on averages (such as average life expectancy, average investment experience, average health care expenditures in retirement) would, in essence, provide the appropriate target only if one was willing to settle for a retirement planning procedure with approximately a 50 percent “failure” rate.”  In other words, as the researchers noted, “the problem with using a 50 percent probability of success, of course, is that the household is in a position where they will “run short of money” in retirement one chance out of two”—a clear problem if you happen to be one of those who run short.   

That said, EBRI noted that how workers fare financially after retirement is directly tied to three factors: their salary level at retirement, how long they work beyond 65, and how much they save in a defined contribution retirement plan during their working lifetime.  In fact, the EBRI researchers cited that “a major factor that makes a difference” in their ability to meet basic and uninsured health-care costs in retirement is “whether they are still participating in a defined contribution plan after the age of 65.”  The researchers said that factor “makes at least a 10 percentage point difference” in the majority of the retirement age/income combinations.³  In fact, for those “Generation X” workers, those who have been—and continue—saving in a defined contribution account could basically decrease their “at risk” probability by a third. 

Ultimately, the research should remind us of a couple of things, IMHO: first, that the assumption that we’ll be able to work past “normal” retirement age is just that—an assumption.  Second, and more important, that even if that assumption pans out, it cannot be assumed that that, in and of itself, will prove to be sufficient. 

But finally, and I think most important, is that one thing individuals can exercise some control over in the “here and now” is their current—and continued—participation in defined contribution plans.  And that’s also something that can directly—and significantly—improve their chances of a financially viable retirement.

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The EBRI Issue Brief is at http://www.ebri.org/pdf/briefspdf/EBRI_IB_06-2011_No358_Defr-Ret.pdf

³ Now, you can’t make those kinds of projections without some assumptions, and EBRI has outlined a number that it made in its calculations, not insignificantly that there is no job change and/or disability prior to age 64, that wage growth continues at average national wage growth after age 64, that contribution acceleration stops at age 65, and that Social Security is deferred until the earlier of retirement age or 70, among other things.  That said, the researchers cautioned that “[g]iven the paucity of data with respect to many wage and benefit conditions for workers beyond age 65, several assumptions with little empirical verification were needed to produce the initial results. In most cases, the assumptions made were optimistic in terms of their impact on the value of deferring retirement age. Therefore, the percentages of households with adequate retirement income...should be seen as a best-case estimate, especially at the more advanced retirement ages.”  To their credit, the EBRI researchers upgraded their modeling to take into account recent trends in automatic enrollment, contribution acceleration, and target-date fund defaults.