I recently came across an article on The Wall Street Journal's MarketWatch website that made me do a double-take. The article - "Half of Americans Die With Almost No Money" by Andrea Coombes - cites a National Bureau of Economic Research report that finds that almost 50% of US retirees die with less than $10,000 in cash savings. The report first talks about cash savings and later about net worth.
So, on cash savings - the report does clarify that things aren't as bad as they seem because many who die with less, have comfortable retirements because of pension plans and social security payments. Nonetheless, it highlights the cold hard fact that those without pension plans and whose social security payments are low, indeed struggle profoundly through retirement, with no money for basic emergencies such as unexpected medical expenses, or even money for small comforts or modest vacations. These people are leading lives at or below the poverty line.
It also highlights that those with less in savings, even if they have pension plans and social security - are ill prepared to absorb financial shocks such as natural disasters or other crises that require liquid capital. The report also found that almost all retirees - and less well-off retirees in particular - saw their savings decline substantially through their retired years as the money they would have received from savings earnings have ground to a halt, failing to replace what was spent.
Okay... next, on net worth, the report finds that things don't look quite as bleak, and that it does not pay to be single. Single retirees, on average, had a net worth of $142,000 - this includes their savings, social security and pension benefits, home equity, gold and silver, and other assets. Single retirees whose spouses had passed away earlier had an average net worth of $253,000 - considerably higher, and the highest net worth - $692,000 on average - was where both spouses were mostly together through retirement.
So from a net worth perspective, things don't look quite so bad... but still, a big chunk of a retiree's net worth is tied up in his home - not something that you can readily sell to take care of other expenses. So you need to have substantial cash savings too. And, yes, home equity lines of credit or reverse mortgages that let you stay in the house while you're alive can help retirees so it's not necessarily all bad.
Another thing couples should prepare for is the death of the pension-earning spouse. An immediate end to cash flow for the surviving spouse may cause severe economic hardship in the ensuing years. One way to offset this is to take out an insurance policy on the pensioner that will pay off at his or her death, replacing the lost income. Remember I always say; life insurance is for income replacement purposes only.
The report also cites that married couples have more by way of home equity relative to single retirees, and that the rich tend to live longer because they have better access to healthcare, exercise, diet, recreation and pleasure-giving pursuits, without the stress of poverty.
Where We Go From Here
Since many of us do not have pension plans like our parents, pensions as a source of monthly income will be a privilege only for a select few. And frankly, with states struggling to balance their budgets, pension benefits may continue to decline. Bottom Line... if you are expecting a pension, know that it may be reduced in the future.
Then there's social security... and while I believe that we will continue to receive social security paychecks, I'd rather prepare for retirement without counting on them - if only to give yourself a margin of safety in case our country's heavy national debt burden and large budget deficits cause a significant change in benefits in the future.
So that takes us to stocks and our own savings. As many of you know, stocks returns have been essentially flat between 2000 and 2009, and as of September 2012, stocks are up 16.5% over the past 12 years. That is an annual return of about 1.3%, not counting for dividends. So while I strongly believe in the power of stocks and compounding to generate wealth, I want you to know that there will undoubtedly be periods such as 2000 to 2012 where your stock holdings will not deliver their projected 6%-9% long-term average return that many retirement calculations assume.
And with interest rates at all-time lows, bonds aren't likely to give you anything significant to bank on.
So... what should you do? Well, find ways to supplement your social security and pension with other monthly income generators like dividends, real estate investments and foreign investments. I'll stop here for now and follow up, next week, on how you can supplement your retirement with income that is less dependent on the vagaries of the stock market.
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