Miami Herald
March 13, 2005
How will you afford to retire?
Baby boomers are nearing their golden years but have nowhere near enough money for traditional retirement.
By Gregg Fields and Harriet Johnson Brackey
He has an education, and he has a good job.
What Hector Varas doesn't have is an adequate retirement fund.
Varas, 50, has worked since he was 18. But becoming a teacher -- and acquiring a master's degree -- means he still has $10,000 in student loans to pay. His mortgage won't be paid off until he's 74.
''Will I be able to retire comfortably?'' the Pompano Beach middle school teacher asks. ''No.'' If he works until he's 70, his pension and Social Security together should provide him $3,000 monthly.
For Varas and the roughly 75 million other baby boomers now solidly in middle age, the retirement years are increasingly looking less than golden.
This huge generation has puny savings, fewer pensions than their parents and relatively small stakes in company retirement plans such as the 401(k), which takes its name from the section of the tax code that created it.
Take a couple, in their early 60s, earning $62,000 a year and hoping to retire at 65. To generate 80 percent of their preretirement income -- the minimum needed to maintain preretirement living standards, experts say -- they'd need a nest egg of $225,330, according to one federal study.
It isn't there. For people aged 55-64 who participate in 401(k)s, the typical balance was $42,000 in 2001.
But even that number overstates boomers' preparedness for retirement: Most have neither 401(k)s nor individual retirement accounts. In fact, at the end of 2001, only 25 percent of all Americans over 21 had 401(k)s and only 17 percent had IRAs.
''Let me tell you, the average does not tell this story very well,'' said Notre Dame economics Professor Teresa Ghilarducci. ''The bottom 40 percent of workers don't have anything.''
Considering that boomers start turning 60 next year, time may be running out even for that group's younger members, who have 20 or more years of working life left.
Part of the problem is simply that life spans have grown as corporate safety nets have shrunk, making the economics of retirement more complicated.
In previous eras, employers provided retirement security through pensions that pay a set amount each month.
But those plans -- a hallmark of the large industrial corporations that once dominated the economy -- are in decline.
Only 21 percent of all workers are covered by traditional pension plans today, versus 37 percent 20 years ago.
''By and large, defined benefit plans are a post-World War II phenomenon,'' said John Shoven, director of the Stanford Institute for Economic Policy Research. ''Firms were interested in lifetime attachment of employees. Now, no one talks about lifetime employment anymore.''
In the absence of pensions, individuals' nest eggs need to be bigger and generate an investment return a lot longer than in previous eras. The average life expectancy of a 65-year-old woman today, for example, is 19.4 years, up from 13.6 years in 1940, a more than 42 percent increase. For men, life expectancy at 65 years of age has lengthened by more than 35 percent, to 16.4 years from 12.1 in 1940.
But savings haven't increased to fund the longer lifetimes.
DANGEROUS BEHAVIOR
In fact, the national savings rate has plunged from 11 percent in 1982 to 1 percent today, according to government figures.
''They simply aren't thinking of the consequences of not saving,'' said Harold Evensky, a Miami financial planner.
Some government-sanctioned retirement savings plans have had only mixed success.
The 401(k) plan, which allows workers to make tax-deferred private investments, often with the employer matching some percentage, has become a popular retirement savings vehicle.
The number of Americans participating in 401(k)s has soared to 42 million from 7.5 million in 1984.
That's the good news.
The bad news: Participation rates aren't great, and contributions are low. In 2001, just 5.6 percent of 401(k) participants made the maximum contribution that is matched by employers (usually 6 percent of a worker's annual salary), according to the Employee Benefit Research Institute. Roughly 30 percent of workers who are eligible for 401(k) participation don't contribute anything at all.
The average account contains just $45,000, not nearly enough to fund a comfortable retirement.
''They can be great,'' Alicia Munnell, a Boston College economist and retirement expert, said of 401(k) plans. ''But when we look at accumulated balances, they just aren't there.''
One possible bright spot not accounted for in savings figures: home equity, an extremely valuable asset. In a 2001 study, it accounted for half of the net worth of older baby boomers.
Some of those nearing retirement view home equity as a de facto savings account.
''Retirement plan? I plan to keep working, try to stay healthy and hope property values keep going up,'' said Susan Aarons, a real estate agent whose northeast Miami home has increased sharply in value since she bought it in 1996.
The danger, experts say, is that home equity isn't cash. To use it, you either must borrow against your house -- and repay the money -- or sell and move somewhere cheaper.
Evidence suggests that South Florida's unique ethnic and economic mix will mean the looming retirement crisis hits especially hard here.
Only 32.6 percent of Hispanics participate in any kind of retirement plan, according to statistics from the Congressional Research Service. For blacks, the number is 49.1 percent. That compares to 59.3 percent of white non-Hispanics.
Also, service industries are less likely to offer retirement programs.
And Miami-Dade County's above-average poverty rates are another important variable: Nationally, only 28 percent of workers in the lowest-wage quintile participate in retirement plans, versus 72.5 percent of high-earners.
Finally, there's the cost of living.
In South Florida, the median price of an existing single-family home is approximately $300,000 versus $188,000 nationally. So, many families must spend more of their income on house payments instead of saving for retirement.
What does it all mean? Primarily that retirement as it is now defined will have to change.
''People think retirement is a God-given entitlement and it's been around forever,'' said Ken Dychtwald, president of Age Wave, a research firm specializing if boomer demographics. ''But it was only in second half of the 20th century that we had retirees with decades of time on their hands.''
Dychtwald recently concluded a major national study for Merrill Lynch that found that 76 percent of boomers intend to keep working in retirement. However, they expect alternating periods of work and leisure rather than full-time work.
A CASE STUDY
That's the goal of Deborah Radosevich, of Miami. She is 50, and her husband, Mark, 49, is president of a firm that buys and sells gas stations and convenience stores.
''We anticipate retiring before 65, hopefully by 56-58, and we would live on savings and personal assets,'' she said. A part-time special-events planner, she'll still be raising their son, Nicholas, who's only 2 years old.
''I am going back to school part-time and plan to get a nursing degree,'' she said. ''It will take a little while longer than usual, but no hurry.''
For some boomers, working in retirement isn't just about the money. More than 60 percent in Dychtwald's survey said mental stimulation is a motivating factor.
Nancy Clark, a North Miami acupuncture physician, concurs.
''I don't plan to retire at age 65, from where I sit now,'' said Clark, who is 49. ''I will probably not be able to, for starters. And I also believe that one needs to continue to be productive to stay physically and mentally healthy.''
Her conclusion: ''I see myself working in some capacity until I die.''