Running Out of Money

Unfortunately, the data are clear that things play out and turn out quite poorly far too often and thus mirror the retirement preparedness research quite accurately.

The NBER study was centered on people who were age 70 and older in 1993 and kept looking at these seniors and their financial situations every two years for as long as they remained living (through 2008). It relied upon data collected in the ongoing Health and Retirement Study sponsored by the National Institutes of Health. 

Interestingly, the financial outcomes among three different sorts of retiree were often quite disparate. As a whole, married couples are far better off than single people. Only 26% of people in two-person households had annual incomes of under $20,000 and less than $10,000 in other financial assets at death. The number of retirees in that category among single people who had been married in retirement increased to 36% and, among those who had been single throughout retirement, the proportion increased to fully 52%. 

The NBER study also provides some other interesting findings. For instance, those who enter retirement with more money live significantly longer. Moreover, retiree home equity declines substantially in the years just prior to death on account of major events such as the death of a spouse or entry into a nursing home facility. The basic findings of most retirement research are confirmed once again.

For obvious reasons, people without significant assets do not get a lot of attention from financial professionals. But it is clear that the message that we all need to save more and probably a lot more for retirement is not getting out and not being heard. Unless and until it does, financial professionals will not have a pool of prospects that is nearly as large as they would like and those they have will not have nearly as much money as either the advisors or the clients would like. To make matters worse, for the reasons described by the CRR research noted above and on account of a shaky economy since 2008 (which period was not covered by the NBER research), we can expect that the number of retirees without significant wealth can only increase, perhaps by a lot.

It is perfectly understandable that we in the investment management and financial planning businesses tend to focus our time and energy on investing retirement savings and on how best to distribute those asserts during retirement. However, it is also in our best interest to work at getting the message out about the "golden rule" of investing: save as much as you can as early as you can. As William J. Bernstein points out in his book The Investor's Manifesto: "Each dollar you do not save at 25 will mean two inflation-adjusted dollars that you will need to save if you start at age 35, four if you begin at 45, and eight if you start at 55. In practice, if you lack substantial savings at 45, you are in serious trouble."

Bernstein notes that while a 25-year-old should save at least 10% of his or her salary, a 45-year-old would need to save nearly half of his or her salary to get the same effect. "Most 45-year-olds will find this nearly impossible," he writes, "if for no other reason than the necessity of paying living expenses, payroll taxes, and income taxes." 

Working toward the implementation of this golden rule would be a great thing for the economy (more investment) and the future (better retirement prospects). As Michael Burry (profiled by Michael Lewis in The Big Short) pointed out in his recent UCLA commencement address, we tend toward the "gospel of drunk drivers and cheating spouses" by taking on enormous long-term risk for short-term and limited gain. Instead, may we work toward and find effective means of reversing that tendency by emphasizing, reiterating and demonstrating the need for all of us to begin putting first things first.