By David Pitt
A third of middle-income workers probably will run out of money after 20 years of retirement and significantly more lower-income workers will deplete their savings after 10 years, according to a study released July 13.
The Employee Benefit Research Institute (EBRI), a nonpartisan research group based in Washington, said its retirement readiness study found that living longer, saving too little and inadequate planning for health-care costs will leave many retirees short of money to pay basic living expenses.
The study finds that 64 percent of workers earning less than $30,000 a year will run out of money within 10 years of retiring. About a third of workers making between $30,000 and $70,000 will run out of money after 20 years of retirement. One in 10 workers making more than $70,000 won’t have enough money.
“Early” baby boomers, meaning people who are now aged 56 to 62, have a 47 percent chance of not having enough money to pay basic retirement costs and uninsured medical expenses, the study concluded.
“Late” boomers aged 46 to 55, as well as Generation X workers aged 36 to 45, have about a 45 percent chance of running short on cash.
The study should wake up workers to the reality of today’s retirement challenges, said Jack VanDerhei, research director for EBRI and author of the study.
“Stop deceiving yourself that you are going to have enough money for retirement,” he said. “If you believe that there is a chance you’re going to be at risk, you must start doing some financial planning and do it now.”
Some workers, particularly those in lower income groups, are likely to be forced to continue working into retirement. The same is true for those near retirement and behind on saving.
Young and middle-age workers still have a chance to improve their retirement lifestyle by saving more. If workers aged 46 to 55 making between $30,000 and $70,000 saved an additional 4 percent of their pay, they would have a 90 percent probability of having enough money.
Older workers and those in lower income groups would have to save unrealistically high percentages of their income — some 25 percent or more — to get there, VanDerhei said.
Although the results seem rather grim, they do show there has been some improvement since 2003, when a similar study was done.
The early baby boomers group had a 60 percent change of running short of cash seven years ago, but that figure fell to 47 percent in the latest study. Similar improvements were seen in other age groups.
The reason can be attributed largely to the widespread use of automatic enrollment and automatic escalation of contributions in 401(k) plans, VanDerhei said.
Auto enrollment, which has grown rapidly in the past few years, is used by more than 57 percent of large companies, according to a recent survey by business consultant Towers Watson. Under auto enrollment, companies place a new worker in the 401(k) plan unless the worker chooses to withdraw. The practice is credited with significantly increasing the number of retirement savers because most people won’t bother to opt out. Auto escalation increases a workers retirement savings level as pay increases.
The updated EBRI study factors in retirement plan changes, such as the automatic features, financial market performance and employee behavior.
It is based on a database of 24 million 401(k) participants.