Like Humpty Dumpty, many middle-class Americans’ nest eggs are broken, and all the financial planners in the kingdom can’t put them back together.
That’s the finding of a new study by Bank of America’s Merrill Edge, which finds that more than ever before, 50- and 60-year-old Americans are putting off retirement as the limp economy wreaks havoc with their golden years.
This study reveals some shocking findings. More than half of the respondents said they’re planning to retire later than they thought they would 12 months ago. That’s a year-over-year increase of 16 percent from November 2011, according to the Merrill Edge Fall 2012 report.
And, as has been widely reported, when they do retire, a dwindling number will fund it through company-funded pension plans, compared with today’s more common 401(k) defined-contribution plans.
The Merrill Edge Report discovered many investors had skimped on savings: More than half of respondents had saved less than $250,000 for retirement. That might fall short — by a very wide margin — of what many retirees need to live comfortably in retirement, experts warn.
One lasting effect from the recession is that all savings balances have been hit hard — not only retirement accounts, but also home values, which many people count on to fund part their retirement, says Brent Neiser, director of strategic programs at the National Endowment for Financial Education.
With the other legs of the retirement stool being broken, many people are facing the option of having to work longer, he adds.
And so many Americans on the brink of retirement have no choice but to work to make ends meet.
* Their investment portfolios are in tatters. Many stumbled badly in the stock-market routs of 1999 and 2009. Their portfolios rose on the Internet and housing bubbles, but many were too gun-shy to get in early on the bounce-backs.
* Many homeowners lost a huge amount of equity that had built up in their homes over a lifetime as the housing market imploded in the wake of 2008’s financial crisis.
* Massive waves of job losses have also cut into retirement savings, either by forcing deferral of contributions or by necessitating loans for current expenses.
* On top of all this, many middle-class Americans are helping their children who have been hit hard by the recession and may have moved back home or are being subsidized by a parent nearing retirement.
Add to these a sharp rise in the cost of living, and plenty of questions remaining about future health-care costs, and pre-retirees are struggling to shore up their finances in today’s low interest-rate environment.
The investment adage that the closer you are to retirement the more of your funds should be allocated in bonds has really hurt most retirement plans. Gone is the era of meteoric double-digit returns in US and municipal bonds. Those have been replaced by conservative, low-yielding fixed-income and savings accounts.
The Center for Retirement Research at Boston College says that in the wake of the Great Recession, 51 percent of today’s working households are “at risk” in funding their golden years.
That’s based on the National Retirement Risk Index, which calculates the share of American households that would be unable to keep up their pre-retirement standard of living in retirement.
Many financial advisers say that retirees need to be able to draw on about 80 percent of their annual pre-retirement income to finance their golden years spending..
The Merrill Edge Report identified “obstacles” to retirement. Health-care costs were the No. 1 concern for the mass affluent (consumers with $50,000 to $250,000 in overall household investable assets), followed by fear that golden agers will outlive their retirement assets.
Brad Pine, a financial adviser in Garden City, NY, says that many who are nearing retirement with sizable portfolios are staying clear of riskier, higher-yielding instruments.
But they then worry that they won’t generate enough return on their present investments to fund a long retirement.
“These are people who are well-off but are just not prepared for retirement now,” said Pine. “So they have to work a couple of more years than they had planned.”
The tough-luck stories are not uncommon. Pine recalls how a client in his early 60s had invested heavily in one seemingly gangbuster stock rather than take Pine’s advice to diversify his portfolio and spread the risk. “The stock got demolished and lost a huge value,” Pine said. “He’s now talking about prolonging his retirement.”
Today for Americans, working longer is the key to financial security, according to the Center for Retirement Research.
The average retirement age has risen in the past decade from 62 to 64 for men, and from 60 to 62 for women, the academic researchers found.
Their sobering conclusion: Five years of additional work would solve today’s retirement challenges for most.
In fact, about 85 percent of households would be prepared for retirement by age 70 compared to 30 percent for age 62.
“I can tell you that planning for retirement is a huge topic of conversation,” said Pine. “Investors can make plans today, but so much can then change within five years.”