Faced with the difficult task of managing assets to last them the rest of their lives, current retirees are doing a reasonably good job.
The Employee Benefit Research Institute of Washington recently issued a brief examining the financial health of retirees between the ages of 65 and 75 each year between 1992 and 2004. EBRI found that the majority appeared to be starting their retirement reasonably successfully in terms of income and remaining assets. The average participant had total wealth of $100,000 or more, including the value of their home.
EBRI collected the data from the annual Health and Retirement Study that is sponsored by the National Institute of Aging and the Social Security Administration and administered by the Institute for Social Research at the University of Michigan.
Fifty-three percent of individuals who had recently reached age 65 were found to have had no decline in household income, EBRI found. Looking at all retirees over the 12-year period, 71% experienced no decrease in total wealth. About 60% had a decline in either household income or total wealth, but only 20% had a decline in both, the brief noted.
"New retirees are off to a good start, but they are not out of the woods yet," said Mathew Greenwald, president of research and consulting firm Greenwald & Associates of Washington. Stretching assets in retirement is "going to become harder, not easier, due to rising healthcare costs and factors such as inflation escalating," he added.
"People need to understand how much money they can spend a year and budget money so they have assets left over when they die," said Craig Copeland, senior research associate at EBRI and author of the brief.
Research has shown that to stretch out retirement money, individuals should spend less than 5% of their assets each year in retirement in order to increase their chances of not running out of money in 30 years, EBRI noted.
"When individuals retire, they have time to sit down and go over a budget and look at all options to decrease spending and prioritize where money should be spent," said Don Cassidy, executive director of the Retirement Investing Institute in Denver.
Retirees would benefit from working with a financial adviser and putting a long-range financial plan in place, experts say. Goals should be established and revisited every three to five years, Greenwald noted. "Most retirees would rather have some money left over when they die, rather than ask their kids for money to help them live," he said.
Investors have become more sophisticated about retirement planning, said David Wray, president of the 401(k)/Profit Sharing Council in Washington. People, of any age, get into trouble when they spend without a plan, and the key is to manage consumption, he said. A plan is especially critical in retirement when people are not generating income, he noted.
Consumption is reduced at some point in retirement, and it usually happens naturally, Wray said. The retirement spending curve resembles a U-shape, as when people first retire they spend more money and travel because they're younger, have more energy and are healthier, he said. After that, spending money levels off, and at the end of life, spending goes back up because individuals may need more assistance and healthcare costs begin to rise, he said.
As lifespans extend, the need for individuals to be smarter about money management goes up exponentially, Wray said.
However, the retirement outlook is bleak for individuals who have experienced declines in total wealth, EBRI noted. Over the 12-year period, the median decline in total wealth was 50% for the group, an average annual decline of 5.5 %, the analysis found.
Individuals who are losing wealth at a rapid rate can often attribute that to spending too much money or making poor investment decisions, Copeland said. It is more realistic to cut spending by 10% than to hope to make 10% increased returns on investments, Cassidy said.
When wealth has been lost, individuals need to slash all expenditures, which could mean downgrading to a smaller house or car and eliminating vacations, Copeland said. Retirees who have drained their assets too much in retirement can also get a part-time job if they are young and healthy enough, Cassidy said.
Individuals receiving the largest amount of pension fund money did the best job of maintaining wealth, while those with small pension fund income or no pension fund at all, did the worst, Copeland stated.
Sixty percent of individuals in the study did not have pension income, and future generations will face an even smaller possibility of pension income, as companies increasingly eliminate pensions in favor of defined contribution plans, EBRI noted.
"Retirement, for many individuals, means significantly reducing an existing standard of living, and some people won't learn that until there is no choice but to do so," Copeland commented.
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