American workers are feeling more confident about being able to retire than they were last year, but their expectation to stay in the workforce longer to make up for a savings shortfall and the fact that 54% of the population has less than $25,000 saved has retirement experts extremely worried.

"The idea that you can continue on working longer is really a pretty risky proposition," said Daniel Houston, president of retirement, insurance and financial services at The Principal. "Half the time, people retire before age 65, whether it's due to their health, their spouse's health or that they find their skills are no longer needed."

According to a new study on retirement confidence by the Employee Benefit Research Institute and Mathew Greenwald and Associates, the consequences of an unplanned, early retirement can be heavy.

"Retirees who retire earlier than planned are more likely than those who retire on time or later to say they are not confident about having enough money for a comfortable retirement or about paying for basic expenses, medical expenses and long-term care expenses," the EBRI study found. "They are also more likely to report their spending in the first five years of retirement was lower than in the five years before they retired."

EBRI's annual Retirement Confidence Survey measured record-low drops in public confidence in 2008 and 2009.

While confidence is improving, many people are worried about what life will be like in their golden years.

According to this year's survey, only 16% of workers said they are very confident they will have a comfortable retirement, down from 27% in 2007. Less than a third (29%) expect to have enough money to cover basic expenses. When asked about their ability to pay for medical expenses, only 12% think they will have enough, and when it comes to long-term care, only 10% expressed high levels of confidence.

Early Retirement

Workers who don't have enough savings often say they expect to retire a little later or never retire in order to cover their savings shortfall, but often that is unrealistic.

The study found that nearly a third (31%) of workers retired before age 60, and another 30% retired between the ages of 60 and 64. Twelve percent actually remained in the workforce through age 65, and 12% retired between the ages of 66 and 69. Only 8% kept their jobs through age 70 or older.

In 2008, the number of people who were forced to retire earlier than planned jumped to 51%, with only 4% retiring later than expected. In 2009, the number of people who retired earlier fell to 47%, while the number who retired later climbed to 7%. In 2010, just 41% retired earlier than planned, while 4% retired later (see chart).

"One reason for the difference between workers' expectations and retirees' experience of retirement age is that many Americans find themselves retiring unexpectedly," the survey said. Many of those who retired earlier than planned cited negative reasons, such as health problems or disability (54%), changes at their company such as downsizing or closure (26%), having to care for a spouse or family member (19%), or changes in the skills required for their job (16%).

Woefully Unprepared

Preparations for retirement seem to be getting worse, with a growing percentage of workers reporting that they have virtually no savings or investments. Besides the more than half with less than $25,000 in total savings and investments, excluding their homes, 27% have less than $1,000 in savings, up from 20% in 2009.

Fewer than half of all workers (46%) say they have tried to calculate how much they will need to save for retirement.

"We've been at this issue for more than 25 years in the 401(k) sector," Houston said. "We still only have six in 10 people participating, which means that four in 10 aren't participating."

Houston said he is troubled that the average deferral rate is still about 6%-7%.

"You and I know that it takes a salary deferral rate between 11% and 15% in order to save enough to retire on," he said. "We need to get people into a plan and get them to participate at a reasonable level."

Reliance on the support of Social Security and pension plans is tamping down (77% and 56%, respectively, down from 88% and 62% in 2005), replaced by 75% of people expecting to rely on employer-sponsored retirement savings plans as the crux of their retirement strategy.

Houston said some workers' salary deferral rates may have dropped during the recession as they made changes to move money to higher priorities, but said he was heartened by the fact that during the malaise of the past two years, 75% of workers stayed the course and stayed fully invested.

"This study is good news for asset managers," he said. "Americans are starting to feel more optimistic about their financial futures, and now is the time to back that up with action. Get started by figuring out how much may be needed for retirement and create a plan to get there. Keep spending in check and make savings a priority."

(c) 2010 Money Management Executive and SourceMedia, Inc. All rights reserved. 

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