US News and World Report™

US News and World Report™

Retirement Realities
By Tim Smart and Paul J. Lim with Randy Dotinga, Arnold Markowitz and W. Thomas Smith Jr.
06/03/2002

When 73-year-old Alberto Casados wants to impress his girlfriend, he takes her to the Moon Cafe in downtown San Diego for a $3.50 breakfast of hot cakes and hash browns. It's not the least he can do but the most. Casados has income of $750 a month from Social Security, in a county where the median home price tops $300,000. And he is plagued by health problems. Still, retirees like him "should be thankful they're still alive and able to do something for someone else who needs help," says Casados, who plans a December wedding to his 51-year-old sweetie.

Ted and Thelma Ferguson certainly entered retirement differently. They amassed a sizable nest egg in 401(k)'s, IRAs, and other investments before retiring three years ago. The California couple recently sold their Silicon Valley home, which they bought in 1970 for $35,000, for $725,000 and moved into a three-bedroom house in a Del Webb retirement community near Sacramento for about half the selling price of their old home. Ted, 63, a former software salesman, golfs, while Thelma, 62, a former service representative at SBC, enjoys the fitness center and the tennis courts. They're considering pottery and photography classes, but right now, they are focused on decorating the new home.

Affluent or poor, planner or procrastinator, there are more than 34 million retired Americans, a figure that will swell to 69.4 million in 2030. And guess what? For the most part, they're enjoying it. Those who prepare for retirement both financially and psychologically view it as "a whole new life" or a "continuation of life as it was," report 78 percent of people over 55 surveyed by financial services firm AIG Sun America.

That may be a comfort to many, especially angst-ridden, pre-retiree boomers worried about their drooping 401(k) statements and the end of the frothy bull market. With many of them still paying college bills and with current retirees facing the lowest savings rates in decades, the biggest worry often is how they'll be able to afford it. But while many experience some loss, retirement is often a time for much happiness and exploration, for being thankful for small favors or for larger ones. With proper planning, it truly can be the "golden years."

"Retirement works out quite well for people," says Ithaca College professor Joel Savishinsky, author of Breaking the Watch. "It is not the kind of trauma it has often been pictured in the past." And far from pining away for office politics or worrying how to fill empty time, typical is the experience of Pat O'Brien, 65, who retired 18 months ago from her job proofreading documents for a law firm in Stamford, Conn. "The biggest surprise is I just don't know where the time goes," she says.

Pat and husband, Jim, 70, who retired in 1995 as a manager for Allied Signal, relocated to the Connecticut River town of East Haddam, where they are active in the historical society, a church group, a women's exercise club, and the American Legion. "It's been very enjoyable for me," says Pat, who gleefully notes that when it snows, "I don't have to worry about getting on I-95 to go to work." Unlike Jim, though, she misses the stimulation of work. "My husband, when he retired, that was it. But if we had not moved up here, I would still be working."

Getting a life. Whatever it is--work, family, faith, hobbies, or just puttering around the yard--retirees need to find those things or something new that matters most to them to sustain themselves in retirement. Surprisingly, money alone does not seem the prime concern. "They realized there was a lot more to retirement than putting together a portfolio," says Savishinsky, who followed a group of retirees in Shelby, N.Y., for about six years. "It was more about putting together a life." Among his discoveries: It's important to "know thyself," have passions to indulge, and be prepared for the unexpected.

Earlier this year, aging expert Ken Dychtwald joined AIG SunAmerica and Harris Interactive in surveying 1,000 pre-retirees and retirees about their attitudes. Based on this work, the team grouped respondents into four categories: ageless explorers (27 percent), comfortably contents (19 percent), live for todays (22 percent), and the sick and tireds (32 percent). Among the survey's strongest findings: that those who had prepared for retirement, irrespective of their wealth or income, tended to be the most satisfied.

Dychtwald says the results of his research should serve as a "wake-up call" for today's 76 million boomers, the oldest of whom, born in 1946, are beginning to enter the retirement world. If so, it will be just one of many. The generation of 40- and 50-somethings has led a life of instant gratification; and as they progressed through life's stages, they rewrote the rules of every phase from adolescence to parenthood. Now, they must begin planning for the day when work is no longer Job 1. And they are doing so amid the worst stock market and economy in over a decade. Still, Dychtwald thinks boomers will reshape retirement, preferring not to go quietly into the dark night, choosing to continue working some, starting new enterprises, and otherwise stretching out their transition years. "They're beginning to take notice of their moms and dads and formulating which version of aging they're going to emulate," he says.

The toughest reality for boomers may well be their own unrealistic expectations for retirement. In a 1999 survey of boomer attitudes for AARP, researchers Roper Starch found that 80 percent of those queried said they planned to work at least part time in retirement. Yet the percentage of current retirees who actually work is far less, fewer than a third.

But their views about work may reflect a need, as much as a desire. New York University economist Edward Wolff studied wealth and income data from the 1980s and 1990s, finding that despite the unprecedented stock market boom, more than 40 percent of households headed by someone 47 to 64 will not be able to replace even half their pre-retirement income with savings and Social Security. The culprit? The corporate world's shift from pension plans to self-directed 401(k)'s. The switch "appears to have helped rich, older Americans but hurt a large group of lower-income Americans," says Wolff. Boomers "are not going to be destitute. The point is they are going to be less well off than people 20 years older, and they will experience some disappointment in their standard of living."

In some cases, life just got in the way of planning. Richard Howes spent the better part of his adult years preparing for the Grand Ole Opry, not grand old age. A general contractor by day and aspiring songwriter by night, the 51-year-old moved with his wife and two daughters from California to Nashville in the early 1990s, hoping to strike it big in the music biz. But as often happens in country songs, hearts were broken, troubles arose, and hope was lost along the way. Two years ago, Howes and his wife divorced and, as a result, he rang up more than $27,000 in credit card debt. He has cut that by half but adds: "First, I have to retire the debt. Then I can retire me."

Plan early. Unfortunately, retirement is coming for Howes, whether he's ready or not. While nearly half of all workers expect to hang 'em up when they're 65 or older, most retire earlier. For some, it's because they can. Others must, for health reasons or because they are laid off in the twilight of their careers. First, the bad news: While more than 60 percent of pre-retirees and retirees say they've saved for their golden years, about 40 percent of retirees have saved less than $50,000.

But there's good news, too: Workers are starting to plan at an earlier age. Cornell University researchers have been studying employees at six major upstate New York corporations. While those who recently retired started planning at age 47, the not-yet-retired started, on average, at 44.

There are other changes afoot that might bail out the boomers and late bloomers. People are living longer and healthier. While that means they will need more money to last through a longer retirement--now averaging 20 years or more--they will have more time to accumulate wealth and continue working, if needed. The key for many will be structuring their finances to allow 401(k)'s, IRAs, and other tax-deferred accounts to grow untapped for as long as possible (story, Page 80).

Someone like would-be songwriter Howes--with little or no savings--might be able to work longer, until, say, 71. That gives him 20 years to build a nest egg. Put $5,000 a year away for 20 years, and he would still have close to $220,000 at retirement, assuming a 7 percent annual return. And despite all the talk about Social Security, it and pensions are likely to provide much of the average retiree's needs. Retirees surveyed by the Employee Benefit Research Institute said personal savings represented just 17 percent of their income and that Social Security took care of 44 percent.

Making do. Perhaps the most encouraging fact is that you can probably get by on less than you think or than is often proclaimed. For a 65-year-old couple earning $50,000 a year to maintain their standard of living in retirement, they'd need pretax income of $37,000, given lower costs for such things as transportation and clothing, taxes, and other expenses, according to research by Georgia State University's Center for Risk Management & Insurance Research. Social Security should take care of nearly $24,000 of that for the typical 65-year-old couple, Georgia State researchers say. So, they would need about $13,000 a year from savings and other sources. "One of the faults of the financial planning field has been that we keep saying you need $1 million to retire," says William Gustafson, professor of family financial planning at Texas Tech University.

Many retirees are relieved to find they don't need to be millionaires to live comfortably. "For me, it was anxious uncertainty until I realized, gee, I think I can make it," says Bill McDonald, 64. He retired in 2000 after 32 years as a reporter and columnist for the State newspaper in Columbia, S.C. McDonald, who had been earning $42,000 a year when he retired, now counts a retirement income of $22,800 drawn from a pension and Social Security. He does freelance writing, sells antiques, and has about $30,000 in income from rental properties he bought over the years. "I'm great on investment properties but poor on liquidity," he says.

In Miami, Robert L. Burgess credits a willingness to be flexible for a comfortable retirement. Burgess, 66, retired almost two years ago as general manager of Sylvania Lighting International. His retirement income, principally an annuity based on a three-year average of living costs, roughly equals his prior expenses. He and wife, Pat, have a spacious home in a Miami suburb where real-estate values have more than doubled since they bought in 1991. They have season tickets to the Miami Dolphins (his) and the Miami Heat (hers). He plays golf three times a week, and they have a time-share condo in St. Maarten. Even his health seems to be better, largely because he has more time to walk and play golf. Still a little restless, he has become a volunteer warden at his Episcopal church. "The church was struggling; they needed some leadership," he says. Pat's no slouch, either, having taken cooking, sewing, tennis, and golf classes as well as doing some TV commercials and modeling over the years. "You take what the fates give you," he says. "I consider myself a very lucky person."

So do many retirees. But there is one concern that looms far above all others. That's the high cost of healthcare and, particularly, prescription drugs (story, Page 82). In a recent report, AARP researchers found that while someone 50 is likely to live an average 30 more years, he or she is doing so with at least one chronic medical condition. While cancer is the leading cause of death for those ages 50 to 74, after that heart disease claims the most lives. Adding to these woes, a greater number of those ages 50 to 64 are living without insurance. "They worry a lot about long-term care," says Sandra Vickery, director of the Bourne, Mass., Council on Aging. "They don't want to end up in a nursing home."

Test run. For some, the answer to the unknown question of what retirement holds is to practice it well before it becomes a reality. Consider Skip Stein, 57, and Moya Ann Mullins, 56, of Lemon Grove, Calif. The suburban San Diego couple are five years or so away from retirement. But about seven years ago, they bought a $70,000 weekend cabin in Big Bear Lake, in the San Bernardino National Forest. Stein, who works as a manager for a microfilm company, and Mullins, a schoolteacher, have always been adventurous, outdoorsy types. Last year, they climbed Mount Whitney, the tallest peak in the lower 48 states. So when the couple settled on Big Bear, they decided to make the cabin a retirement test run. That way, says Stein, "we'd have an idea if that's where we want to be as opposed to, say, buying a farm in South Dakota at retirement and discovering that we don't like it later on."

Stein and Mullins are part of a trend: Gone are the days when retirees trek en masse to Florida or some other warm-weather locale. Nowadays, retirees stay closer to home, often moving 50 miles or less from their former homes, perhaps to a smaller abode.

Most weekends, the pair head up to Big Bear, where she supervises remodeling the kitchen area and he works on building out the garage to house a toolshed and art studio. Of course, as energetic as they are today, they might not feel like climbing mountains in their 80s or 90s. Stein and Mullins are thinking of buying a modest motor home one day and driving across the country. Says Stein: "We're up for anything." And with a little planning, and some luck, so might we all be.

THE RETIRING LIFE

51 percent say retirement is better than expected

26 percent say it is about the same

19 percent say it is worse than expected

Source: Retirement Confidence Survey

MEDICAL WOES

47 percent of 50-to-64-year-olds have at least one chronic illness

51 percent of 65-to-74-year-olds have at least one

37 percent of 75-to-84-year-olds with one

Source: AARP

GRAYING OF AMERICA

34.7 million

Population of 65 plus as of 1999

69.4 million

Projected number in 2030

Source: AARP