America’s Retirement Crisis, Part I

America is facing a serious retirement crisis: Many Americans are not confident that they will be able to enjoy a comfortable retirement, and many retirees face longevity risk or the danger of outliving their life savings. The 2008-2009 economic downturn drastically changed the financial landscape and caused significant shifts in the way that many Americans view their retirement. One economic study estimates that approximately 46 percent of Americans die with less than $10,000 in assets, many of them lacking even home equity and relying largely on Social Security benefits to meet their expenses. Most shockingly, many of the households surveyed in the study entered retirement in good financial health, but factors such as unexpected health expenses, market losses and increased lifestyle expenses combined to erode their financial security.

Understanding the problem.

According to a financial study, Americans age 75 and older lost one-third of their financial assets and one-sixth of their total net worth between 2007 and 2010, resulting in many retirees struggling to make ends meet. While the economy has recovered somewhat in the years since, retirees and pre-retirees have much less time to make up lost ground. In addition, from 2007 to 2010, an AARP study found that the percentage of Americans age 75 and older with credit card debt rose from 18.8 percent to 21.7 percent, while the rate fell in every other age group. So, more than one-fifth of elderly Americans may be relying on credit cards to cover everyday expenses, leaving little to no buffer for any major financial emergencies, such as medical treatments and unexpected expenses.

Underestimating retirement.

It is important to have an accurate estimate of your post-retirement living expenses to project how your nest egg should be. Some retirement calculators predict that retirees will spend as much as 20 percent less in retirement than they do currently. However, a 2008 study found that, on average, most retirees did not significantly reduce their expenses after retirement. Retirees with a median net worth of $104,000 reduced their expenses by the greatest amount, 13.8 percent, but those in the wealthiest quartile (net worth of $1 million) actually increased their post-retirement spending by 7 percent. Health care costs are one of the major contributors to increased living expenses after retirement. According to Kaiser Family Foundation, from 1999 to 2012, health care insurance premiums increased by a staggering 172 percent compared to inflation at 3 percent and wages at 50 percent.

Life expectancies for both men and women have increased steadily over time. In 1945, American men lived an average of 62.9 years, while American women lived an average of 68.4 years. By 2010, average life expectancies had increased to 75.4 and 80.0 years, respectively. Many retirement plans were not designed with the possibility of living more than two decades in retirement in mind. Longer lifespans also may increase the effect that health care costs may have, and many retirees face the issue of paying for assisted-living facilities or retirement communities when independent living is no longer possible.