The Great Recession of 2008-2009 blew up many a retirement plan, and now we have the data to prove it and finally understand just how damaging the boom and bust cycle has been. The Employment Benefit Research Institute (EBRI) Retirement Confidence Survey was published this month, and the news is grim.
How could it not be? For the past 15 years, far too many Americans jumped from one asset bubble (rising stocks in the late 1990s into early 2000) to another (real estate from 2000 to 2006) hoping that the increasing value of the asset would do the work to fund retirement, instead of relying on boring old savings. I can recount dozens of conversations with former clients who said some variation of, "Why do I need to save so much if I keep earning 12 percent a year on my retirement funds?" or "I'll just sell my house and use the equity for retirement."
It was a hard sell to convince these folks that saving was a more reliable way to reach their retirement goals.
The problem was that the two asset bubbles made many people lazy. Americans went from a personal savings rate of about 8 percent in 1985, down to 1.5 percent in 2005, back to 4.6 percent today. The combination of a falling savings rate and two bubbles bursting has put many in a precarious state as they approach retirement.
According to EBRI, Americans' confidence in their ability to retire comfortably is at historically low levels. Just 14 percent are very confident they will have enough money to live comfortably in retirement. Part of the reason why confidence plunged is because the Great Recession decimated asset values so severely. Household net worth still remains 7 percent below where it was in July 2006, the peak of the nation's housing bubble. But an equally significant impediment to a healthy retirement is the weak labor market. Of those surveyed, 42 percent said job uncertainty is the most pressing financial issue facing most Americans today.
Without income from a job, retirement account values remain stagnant, and households are forced to spend savings, which have been depleted over the past five years. In fact, 60 percent of workers report that the total value of their household's savings and investments, excluding the value of their primary home and any defined benefit plans, is less than $25,000.
With such a low level of savings, 25 percent of workers have changed their expectations about when they might stop working. In 1991, 11 percent of workers said they expected to retire after age 65; and now in 2012 that number has grown to 37 percent. Most experts believe the number of people who will continue to work throughout their 60s will increase dramatically.
There is one major risk that arises with the "I'll just keep working" retirement plan: What if you can't keep working, either because your job doesn't exist or because you physically aren't able? Half of the current retirees surveyed say they left the workforce unexpectedly due to health problems, disability or changes at their job, such as downsizing or closure.
These statistics point to an obvious solution: Save more as quickly as you can. How much more? That depends on your specific circumstances. As I noted in a recent column ("Weighing retirement? Get on the scale," Act 2, March 10), EBRI has a terrific calculator called the "Choose to Save Ballpark E$timate," which should help the 56 percent of workers who have not tried to calculate how much money they will need to have saved by the time they retire in order to live comfortably in retirement.
There aren't a lot of easy answers, but I have seen great progress when retirees and near-retirees focus on the parts of their financial lives over which they exert control -- their expenses. For many, this may mean downsizing, while for others, it may mean reducing spending on everyday discretionary items or accelerating debt pay-down. It's never too late to start building your retirement confidence.
Note to readers
In my column last week, "Keep or shred: Taking stock of all that paper," I failed to mention an important caveat for people applying or intending to apply for Medicaid. Applications for Medicaid often call for financial records or samplings of records going back up to five years. Charges to replace missing or shredded documents can be steep. If you think you might apply for Medicaid, it is important to archive the last five years' worth of your financial account statements either in hard copy or digital form. If you're not comfortable scanning and saving digital records before shredding the hard copies, you might ask computer-savvy family members or friends for help.