Health care, variable payouts factor into retirement puzzle

Forty years of saving for 30 years of retirement isn’t turning into a sound equation for a growing segment of Americans.

Low-income Americans are most at risk to run out of money just 10 years after retirement, according to a recent study by the Employee Benefits Research Institute, but even top earners are at risk. More than one in 10 of the wealthiest retirees will be broke 20 years into their retirement.

Although the Great Recession has cracked many retirees’ nest eggs, Jack VanDerhei, one of the authors of the EBRI study, said even a robust stock market wouldn’t save many retirees from being penny-pinched.

“It’s less bad luck in retirement than it is either poor planning or inadequate resources for health care,” he said. “Most households do not have long-term care insurance. If they end up with a potentially lengthy hospital stay, they will burn through those assets, especially if there’s a spouse still to be cared for. Many times that’s totally exhausted even a sizable retirement account.”

The EBRI study, last done in 2003, evaluated national retirement income adequacy based on a database of 24 million 401(k) participants. The newest version takes into account many new retirement plan changes, such as auto-enrollment and auto-escalation of contributions in 401(k) plans, as well as updates on the financial market and employee behavior.

Although this year’s study showed risk across the income and age spectrum, the results were generally better than in 2003. VanDerhei attributes that largely to the Pension Protection Act of 2006, which led to widespread adoption of automatic enrollment in 401(k) plans.

VanDerhei said the automatic enrollment is pushing participation rates above 80 percent, but managing the funds that accumulate still can be a challenge. In defined-contribution plans like a 401(k), annual payments aren’t always guaranteed and steady like those of defined-benefit plans, such as a pension.

“The nice thing about defined-benefit plans is, it doesn’t matter how smart or not you are, you’re not going to run out of money,” he said. “While there certainly are defined-benefit annuity options to individuals, the problem is, they may look at a $300,000 account and say they can get by on $25,000 a year and, through their own investment acumen, live off that for the rest of their life. That doesn’t always happen.”

Caledonia, Ill., financial planner Perry Randall said retirement discussions need to focus not only on the savings but also on the spending.

Expenses are typically cut by 20 percent after retirement, but that’s still a lot of money to keep on hand for the next 30 years, he said.

“This is a long haul. People often aren’t prepared for that,” he said. “People in their retirement usually become a little more sober because they realize this is it. I think most people recognize that their assets have a limited ability to provide for them.”

For those who are nearing retirement, financial strain may be on the horizon.

Bob Cleveland, director of services for the Northwestern Illinois Area Agency on Aging, said that not only are more seniors seeking financial assistance but their adult children are, too.

“I’ve definitely seen more calls from adult children saying Mom and Dad don’t have the money anymore,” he said. “Whereas adults may have relied on their kids to pay for those things in the past, even the caregivers don’t have the money. They just don’t have the resources anymore, either. Extended families are having a tougher time covering senior living expenses.”

Lillian Craig, a receptionist at NIAAA, is working to support her elderly mother. The 57-year-old was laid off from Rockford Products and has spent her savings making ends meet for her mother’s care, leaving her retirement savings nonexistent.

“I’m in my own doughnut hole — I’m too old for some services, but too young for others,” she said. “You think you’re getting close to retirement, but then you find out you can’t.”

Reach Rockford Register Star staff writer Sean F. Driscoll at 815-987-1346 or sdriscoll@rrstar.com. Read his blog at blogs.e-rockford.com/seanfdriscoll/.