... not retiring as imagined, and the second home mortgage does not improve matters ...
insidevc.com
All but richest near-retirees won't be able to quit working
By Mary Deibel, Scripps Howard News Service
May 3, 2002
Never mind the bear market ripping up your retirement plans: It's the 1990s Wall Street boom and explosion of 401(k)-style retirement accounts that could cause an income bust for all but the richest near-retirees, wealth expert Edward Wolff warns.
Using Federal Reserve consumer data, the most detailed measure of Americans' household wealth, New York University economist Wolff finds that a growing share of workers nearing retirement will have less income to live on than today's pensioners:
The typical household headed by someone 47 to 64 actually saw its retirement wealth shrink 11 percent from 1983 to 1998 -- the last year for which the Fed has household data -- and "it may be that many households are worse off than they were in 1983 or 1998" because of the sharp stock market sell-off since then.
Average household net worth on which non-Social Security retirement income depends stood at $110,400 in 1998 for those 47 to 64 and $133,700 for their elders.
Only households worth more than $1 million enjoyed a consistent increase in wealth once inflation is factored in. All other classes -- even those worth between $500,000 and $1 million -- saw retirement wealth fall from 1983 to 1998.
More than 40 percent of near-retirees won't be able to replace even 50 percent of pre-retirement income once they don't have a paycheck and must count on pensions, investments and Social Security. (The financial planner's rule of thumb is that you need at least 70 percent of your working income in retirement to maintain your living standard.)
Almost 20 percent of pre-retirees 47 and older will have retirement income below the poverty line, with blacks, Hispanics, singles and renters worse off than white married counterparts. By contrast, only 1 in 10 current retirees is officially poor.
One reason most near-retirees likely will be strapped once they stop working is because pension coverage stagnated the last two decades: Only 73 percent of workers have a traditional pension, 401(k)-style savings plan or both, and coverage by traditional pensions fell from 68 percent of workers 47 and older in 1983 to 46 percent in 1998.
Another reason for financial pressure on workers with 401(k) plans is that "what should have been the best of times turns into something closer to the worst of times when you look closely," Wolff says:
Only the wealthiest workers could afford to sock away the old $10,500-a-year maximum in their 401(k) while others lacked the money to "max out" and fell behind in saving.
Many rank-and-filers with traditional employer pensions had them replaced with do-it-yourself 401(k) plans that reaped double-digit returns during the bull market '90s and didn't require thrift on their part to build a retirement nest egg. With the market on a downward tear, near-retirees must sacrifice to rebuild their nest eggs.
Congress and President Bush are giving them a chance to play catch-up: Last year's 10-year tax cut increases maximum contributions so workers can save up to $11,000 this year in a 401(k) or $12,000 if you're 50 or older, with IRA contributions for 2002 up $1,000 to $3,000 or $3,500 for the 50-plus crowd.
But here, too, people must have the cash to stash away, Wolff says.
Jeff Faux, president of the Employment Policy Institute, a liberal Washington think tank that published Wolff's study, cites the report as evidence not to convert all or part of Social Security to private investment accounts. The report "shows we've been trying to fix the part of the retirement system that's not broken," he says.
Congressional Republicans and the White House have sparred over taking up Bush's promise to set up private Social Security accounts before the November elections. Democrats hope to make privatization and the Social Security cuts it would require for future retirees a centerpiece of the 2002 campaign.
Meanwhile, 80 percent of baby boomers tell AARP pollsters they plan to work past retirement because they'll need the cash.
"I used to look forward to the freedom of retiring, but by the time I can afford it I may be too old to enjoy it," says Karen Monahan, a fiftysomething retailer from suburban New York, summing up the near-retiree mood.
Mary Deibel's e-mail address is deibelm@shns.com.
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