We may be even worse off than we thought in retirement. Instead of savoring the good life during their golden years, far too many retirees face the prospect of eking out an existence like a "battered kettle at the heel" in William Butler Yeats' bleak image.
Here's a stunning figure: A substantial fraction of people die with virtually no financial assets -- 46.1 percent with less than $10,000.
Many of these households have no housing wealth and rely almost entirely on Social Security. They're disproportionately in poor health, according to economists James M. Poterba, Steven F. Venti, and David A. Wise in Were They Prepared for Retirement? Financial Status at Advanced Ages in the HRS and Ahead Cohorts.
And no, it doesn't look like these folks achieved the ideal (at least among those with no desire to leave an inheritance) of dying broke, enjoying your money until only your last dollar or so is left when you croak.
These three scholars are among the best and the most careful in the business of understanding retirement. (The HRS stands for the Health and Retirement database. AHEAD is the Asset and Health Dynamics Among the Oldest Old cohort first surveyed in 1993.) The databases allowed them to follow a group of middle-aged and older Americans, as well as their financial assets as they age until death.
They looked at the adequacy of finances in retirement a different way. Many studies use a benchmark "replacement rate" to figure out how well-prepared people are for retirement. In essence, how much do you need to maintain the same standard of living before retirement while you're in retirement? It's a rough rule-of-thumb. The common replacement rate range is 70 to 80 percent. It's disturbing that many of the households the scholars studied looked OK based on an income replacement rate analysis at retirement. But as they got older, it appears that many didn't have enough assets to deal with steep medical bills and other money shocks or "to pay for entertainment, travel, or other activities."
In other words, many of the studies that use a replacement rate analysis may be too optimistic in their assessment of retirement -- and those studies aren't exactly starry-eyed to begin with.
I don't want to paint too gloomy a picture of the study. For example, the financial picture is far more optimistic for older couples.
Still, the study suggests we need far greater urgency on two big public policy issues on retirement. The first is that the health of Social Security is vital. However, the current move in Washington to shore up Social Security by making it a less generous retirement program is a mistake. Instead, the safety net should be made more generous.
The other takeaway is that the 401(k) retirement savings plan is poorly designed to be the primary retirement savings vehicle for the average worker. Three decades after the 401(k) emerged on the pension scene, its flaws are too great. We can do better -- much better.
Thanks to Squared Away Blog for the pointer. (Check it out.)