Time for a reality check on retirement income

By Scott Burns, Special to the Times
Published May 29, 2007

You and I see this every month in magazines: Advertising offers world-girdling cruises, and mind-boggling automobiles being enjoyed by energetic silver-haired seniors.

But the news articles warn us of dementia, incipient poverty and the inevitability of long-term care.

Is it possible that retirement - for most people, most of the time - is somewhere in between?

To explore this, I read two studies, the 2007 "Retirement Confidence Survey" by the Employee Benefit Research Institute, and a study by the Social Security Administration, "Income of the Population 55 or Older, 2004." Here is what I learned:

- Most of us are clueless about retirement. The Research Institute is too polite to actually say "clueless, " but it notes that few workers are aware of the impact of receding pensions. Or of the rising age for full Social Security benefits.

Worse, only 66 percent of workers have saved for retirement. Only 43 percent have even attempted to calculate how much they will need.

- We're wrong about our sources of retirement income.

Those still working expect that personal savings will provide 50 percent of retirement income. They also expect that some employment will provide 11 percent and Social Security only 14 percent.

But retirees report that Social Security actually provides 40 percent of their income, while savings provide 24 percent. Employment accounts for 2 percent.

- In spite of this, retirement matches or improves upon workers' expectations.

Only 6 percent of workers expected to feel "well-off" in retirement, but 8 percent of retirees do feel "well-off." Retirees discovered their post retirement spending compared favorably with their pre-retirement spending.

- In retirement, income falls steadily. The Social Security study figures show that income falls dramatically as people age:

The median income for married couples declines from $68, 612 at ages 55 to 61 to $28, 490 for couples 80 and older.

For singles, the decline is less severe, dropping from $24, 000 in the lower age range to $13, 321.

For a variety of reasons, these figures understate actual living standards in retirement. Taxes tend to take a smaller bite in retirement. Also, many seniors have no payment obligations and own their homes mortgage-free.

- Social Security is very important for all but the rich.

Even for those whose incomes are higher than 60 percent of all households but the wealthiest 20 percent of households, Social Security was usually the largest single source of income. In 48 percent of those households, it accounted for at least half of all income.

- Income from assets, on the other hand, plays a small role for most people. In the bottom 80 percent of all households, income from assets accounted for 50 percent or more of income in less than 4 percent of households.

Does that mean we shouldn't save and invest? Hardly. It's just a reminder that retirement income is primarily a political and social contract.

On the Web:

- EBRI Issue Brief No. 304: www.ebri.org/pdf/briefspdf/EBRI_IB_04a-20075.pdf

- Income of the Population 55 and Over, 2004: www.ssa.gov/policy/docs/statcomps/income_pop55/2004/incpop04.pdf

Measuring wealth

Q: Some time ago, you wrote a column about how to tell when you are rich. I should have cut it out and saved it, but I didn't. Can you supply me with that definition?

I am 80; my wife is 72. Our net worth is between $1-million and $2-million. We own our home and have excellent health insurance. On top of that, we have three adult children living close by. There is seldom a day that we do not talk to each one on the phone. They always express their love to us in their own way.

So, I think we are rich.

A: You are definitely rich - and not because of your incidental million or more in net worth.

My favorite story about knowing when you are rich is told about Joseph Heller, the novelist who wrote Catch-22. At a fashionable party in Nantucket, someone pointed to another person at the party.

"He runs a hedge fund. He's worth $100-million or $200-million."

"He'll never have what I have, " Heller responded.

"Oh? What could that be?" Heller's friend asked.

"Enough."

That story is a good thing to remember when you check where you are on my Wealth Scoreboard. You can find it on my Web site, www.scottburns.com.

Scott Burns has been a financial writer and editor for more than a quarter of a century. Questions about personal finance and investments may be sent to scott@scottburns.com.

[Last modified May 28, 2007, 13:57:56]