April 21, 2005


The Debate Over Nest Egg Math: Economists who closely study retirement savings widely disagree when it comes to even the most basic assumptions (Howard Gleckman, 4/25/05, Business Week)

Are American workers saving enough for retirement? For years, the conventional wisdom has been no. But now, just as companies finally are trying to get people to save more, a provocative study is questioning just how bad the problem is. [...]

[U]niversity of Wisconsin economist John Karl Scholz figures that at least 80% of Americans are squirreling away enough to reach optimal retirement targets. And even many of the 20% who are undersaving are close to reaching their goals. "Finding gloom and doom stories about Americans heading over a cliff is like catching fish in a rainbarrel," says Scholz. "I'm a skeptic." [...]

If the test is 75% of preretirement income, just 48% of households age 47-64 would pass, Wolff figures. But 70% of families could meet a far more modest goal: annual income of at least twice the poverty level -- enough for a decent, if not lavish, retirement, when supplemented with Medicare/Medicaid health benefits and other senior subsidies. [...]

Another question: What to count when figuring out how much wealth retirees actually have? All economists include 401(k) and IRA accounts, benefits from traditional pensions, and Social Security income, as well as other financial assets. But many exclude the value of owner-occupied homes, arguing that seniors must still pay to live somewhere.

But others say many elderly will sell their homes, move into less costly residences, and cash out hefty capital gains. Or they could take out reverse mortgages -- a technique where seniors sell their ownership in a home to an investor who agrees to pay them a fixed monthly sum for as long as they live in it.

Americans save more than any other people, but we could be better.

Posted by Orrin Judd at April 21, 2005 12:00 AM

> But many exclude the value of owner-occupied homes,

So according to these people, I'm no better off
with a paid-off house? Huh?

We should keep in mind that people who sell financial
services have an interest in exaggerating how
much of their product we need.

Posted by: Bob Hawkins at April 21, 2005 9:48 AM

Bob: "Some" people . . . thanks ;)

Posted by: John Resnick at April 21, 2005 1:10 PM

Define "comfortable."

One person's comfortable might not be another's.

This is one reason we're buying a home, big gamble.

No pension, possibly very little SS and means-tested to boot.

Better than spending it on vacations and jewelry.

Posted by: Sandy P at April 21, 2005 4:14 PM

"House" indeed.

We already have our plan in place. The month before I retire (at age 59 or 60), the house goes up for sale. I'll regret losing the 3.625% mortgage, but not the $1000/month real-estate tax and $125/mo water/sewer/garbage bill. Or the $200/mo (average) heating bill. We'll move to somewhere warmer and smaller than Chicago--maybe Branson or Arkansas--and buy a similar house for 1/3 the price of our current house.

Just the house, and retiring will seem like getting a huge raise!

Posted by: ray at April 21, 2005 8:39 PM

But others say many elderly will sell their homes, move into less costly residences, and cash out hefty capital gains. Or they could take out reverse mortgages...

Scholz includes home equity. Wolff doesn't but agrees that at least some home value should be counted. Scholz figures that if only half of home equity is included in wealth, the percentage of people saving enough for retirement falls from 83% to less than 60%.[Emp. add.]

Half of home equity sounds about right, since if every retiring Boomer tried to sell her home in Chicago and move to Phoenix, Chicago home values would drop and Phoenix retirement condo prices would rise.

My sense is that Americans are not saving enough to live as they expect to do in retirement, but also that few, if any, Boomers will starve in the gutters.
However, there are millions of people who will have to work part-time in semi-retirement to get by.

Posted by: J. Tiberius K. at April 23, 2005 7:37 AM