The Retirement Dilemma: Keep Working?

Americans nearing retirement have too much debt and nowhere near the savings they need to live comfortably for 20-odd years

By David Wyss

As the first cohort of the baby boom generation this year hits 63—which is the average age of retirement in the U.S.—the big question is: Are they financially ready to retire? That question is only going to gain urgency in the next several years as more and more boomers jump into the pool of retired Americans. Unfortunately, statistics suggest that retirement isn't going to be nearly as comfortable as most boomers had hoped.

Declining wealth, brought about by lower stock prices and falling home values, has hurt older households substantially. Americans lost 18% of their net worth last year, and the decline has disproportionately hit households of those nearing retirement. But even before the asset bubble burst, Americans looked ill-prepared for retirement. A year later the situation is no better.

The Center for Retirement Research (CRR) at Boston College estimates that 43% of Americans are "at risk," meaning they would be unable to maintain their current standard of living in retirement. The good news: Most Americans seem to understand their situation. Only 19% of the population says they are prepared when they really aren't, according to a CRR survey. The bad news is that they don't seem to be doing much about it, whether through saving, paying off debt, or taking advantage of preretirement investment opportunities available to them.

Simply put, many Americans are not financially prepared to stop working because of a variety of issues. Many households have no real retirement plan, period. The average American family has not saved enough to retire and maintain the standard of living they've enjoyed in previous years. Moreover, at a time when they should be free of burdens such as mortgages, many pre-retirement households still have a high level of debt when they should be planning for reduced earnings. Watching their retirement savings dwindle or fretting about looming layoffs, workers now have far less confidence that they'll have sufficient funds for their golden years than they did in 2007, according to the Retirement Confidence Survey done in April 2009 by the Employee Benefits Re?search Institute and Matthew Greenwald & Associates.

will social security and medicare hold up

Historically, most Americans have relied on government programs to fund their retirement, but they're also losing confidence in this option, according to the survey. With good reason: The financial vulnerability of those set to retire soon is matched by increasing cracks in that foundation. New projections for federal entitlements such as Social Security and Medicare indicate that both will run out of money sooner than expected—well within the lifetimes of most boomers.

It's probably too late to do much for the first wave of boomer retirees—they're already too close to retirement. Even most younger Americans will have to rethink their retirement strategies because no magic cure exists. The solution may lie in a combination of actions such as raising the age to collect full Social Security benefits and Medicare to be more in line with longer life spans, working beyond retirement, and aggressively cutting debt.

Alicia Munnell and Steven Sass put a likely answer to this problem right in the title of their recent book, Working Longer: The Solution to the Retirement Income Challenge, (Brookings Institution, Washington, D.C., 2008). Two years ago the average American expected to retire at age 63. Now it's 65, according to the Retirement Confidence Survey. But it's unclear if all workers will actually work that long, since the same survey also showed that 47% of retirees stopped working "earlier than planned."

For quite some time, Americans have not had enough savings to finance retirement, but a look at total financial assets shows the situation has worsened. At the end of 2007 the median household in the 55-to-64 age group had total financial assets of only $72,400 according to the 2007 Survey of Consumer Finances (SCF), which the Federal Reserve does every three years. Based on the performance of financial markets over the last year, that number is probably now down to $55,000.

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