Navigating Retirement Uncertainty: Economic Insights

1. Workforce Planning: Aging and EmploymentModule 10: Economic Considerations: Incentives and Disincentives and WorkBarbara McIntosh, Ph.D., SPHR • 2014 The development of this content was made possible through the support from a grant from the Alfred P. Sloan Foundation.

2. Module 10: Economic Uncertainty: Overview • Reasons for working rest on economic uncertainty. • Traditional sources of income in retirement: • Pensions. • Retirement savings. • Social Security. • Total money income of older Americans. • Key cause of uncertainty–health care costs. • How much money is needed in retirement?

3. Specific Reasons to Work (AARP, 2014) • Need the money: 60%. • Need to maintain health insurance coverage: 25%. • Need to support other family members: 23%. • Need to pay for health costs for self and family: 13%. • Enjoy the job/enjoy working: 18%. • It makes me feel useful: 10%. • To be able to interact with people: 9%. • Gives me something to do, keeps me busy: 7%. • To save for retirement: 18%. • To qualify for Social Security: 7%. • To fulfill pension requirements/qualify for pension: 6%.

4. AARP: Reasons for Working

5. Employment Driver: Economic Uncertainty Major questions: • How long am I going to live? • How long am I going to remain healthy? • Is health care going to be affordable? • Shortages of providers. • Increasing costs. • Can I afford old age in general? • What about cost-of-living increases? • Can I depend on my family/others? • Is my family going to depend on me (sandwich generation)?

6. Economic Uncertainty Sources of income in the retirement years? The three-legged stool traditionally supported retirement: • Pensions. • Savings. • Social Security. • NOW: Earnings.

7. Sources of Income in 1962 and 2011 for People Ages 65+

8. The First Leg: Pensions • Shift from defined benefit to defined contribution. • Employer: accountability issue. • Employee: short time to take advantage of compound interest. • Importance to the individual? • Pensions are not a major source of income for the majority of older persons. • Shrinking numbers of workers are covered by pension plans. • Pensions are more important for higher-income workers who need to make up a larger share of their income in retirement to maintain their standard of living.

9. Decline in Participation in Defined Benefit Plans:1981-2011

10. Pensions: Employers’ Concerns • Employers are still offering defined benefits, but employer liability is a major concern. • Pensions are at risk of underfunding.

11. Pension Funding

12. The Second Leg: Retirement Savings Savings accounts: • About 36% of workers have less than $1,000 in savings and investments to be used for retirement. • 60% of workers have less than $25,000. Workers Retirees • Less than $1,000 36% 29% • $1,000 to $9,999 16% 17% • $10,000 to $24,999 8% 12% • $25,000 to $49,999 9% 8% • $50,000 to $99,999 9% 7% • $100,000 to $249,999 11% 11% • $250,000 or more 11% 17% Source: Hellmich, N. (2014, April 1). Retirement: A third have less than $1,000 put away. USA Today. Retrieved from http://www.usatoday.com/story/money/personalfinance/2014/03/18/retirement-confidence-survey-savings/6432241/

13. Percentage of Workers Saving for Retirement: 2004 and 2014

14. Risky Investments and Increasing Debt Risky behavior—withdrawing funds with job loss. Shrinking investments: • Housing/real estate. • Stock market. Debt is weighing heavily on many people, with 58% of workers and 44% of retirees saying they have a problem with their levels of debt. Total Debt20002011 55 to 64 years old $42,654 $70,000 65 years and over $12,072 $26,000

15. Median Household Debt, 2000 and 2011

16. Perceptions of Debt

17. Start Saving Early: Example • $5,000 engagement ring at age 25. • Penalty if withdrawing from 401(k). • Must take out $7,142 to clear $5,000. • At age 60: opportunity cost? • Ring reduced retirement security by $76,252 if 7% annual rate of return. • Ring reduced retirement security by $200,000+ if rate of return was 10%.

18. Savings Calculators AARP Retirement Calculator This simple tool gives you a quick read on whether your retirement savings are likely to be sufficient to last through your retirement, after Social Security and any other pensions are taken into account. Economic Security Planner The Economic Security Planner was developed by Boston University Professor Laurence Kotlikoff and other leading economists. ESPlanner takes where you are now financially and then calculates the optimum amount to save and spend going forward to achieve a stable living standard, now and through retirement. 

19. The Third Leg: Social Security • 87% married and 85% nonmarried people ages 65+ received Social Security benefits in 2011. • As income source in 2011: • 90%+ of income for 22% couples/45% nonmarried. • 50%+ of income for 52% couples/74% nonmarried. • Income redistribution: • Poverty. • Income replacement. • Low-income earners versus high-income earners. • Gender. • Occupational differences.

20. Age for Full Benefit for Retired Workers

21. Social Security Beneficiaries by Age

22. Social Security

23. Drawing Social Security: Alternatives The AARPSocial Security Benefits Calculator The decision of when to take Social Security retirement benefits (you can claim as early as age 62 or as late as 70) is a complicated and a highly individual one. The later you claim, the bigger your check

24. Social Security • Pressures for change: • Ratio of workers per beneficiary: • 1950—16.5 workers per beneficiary. • 2004—3.3 workers per beneficiary. • 2031—2.1 workers per beneficiary. • Financial sustainability: • In 2010—Dipped into trust fund. • In 2031—System is broken; trust fund reserves are projected to become exhausted. • The Social Security Board of Trustees projected in 2010 that changes equivalent to an immediate reduction in benefits of about 13%, or an immediate increase in the combined payroll tax rate from 12.4% to 14.4%, or some combination of these changes, would be sufficient to allow full payment of the scheduled benefits for the next 75 years.

25. Dependency Ratio Revisited

26. Median Income of People Ages 65+

27. Aggregate Income for People Ages 65+ by Source in 1962, 2011

28. Total Money Income of Older Americans • In 2012, people ages 65 and older had a mean income of $31,742. • In 2012, 50% of those 65+ had an income less than $19,604. • In 2012, the median earnings for individuals 65+ was $25,000; mean income was $44,470. In 2012: • 18.2% had income under $15,000. • 28.5% had income under $20,000. • 41% had income $20,000-$49,999. (Approx. 80% had income under $50,000.) • 6.6% had income of $100,000 or more.

29. Income Sources as a Percentage of Total Income for Persons Ages 65+: 1990 to 2012

30. Only 44% Planning Financially for Retirement

31. Worker Confidence About Money in Retirement

32. Financial Uncertainty: Key to Working Longer

33. Health Care Biggest Financial Worry 23% of older adults (ages 50-64) reported health care expenses to be biggest financial worry. Source: Mercer. (2013, November 18). Workers shy from savings amid retirement health worries. Retrieved from http://mthink.mercer.com/workers-shy-from-savings-amid-retirement-health-worries/

34. Health Care Benefits (Elephant in the Living Room) • Private plans: • Cost increases have been in the double digits each year. • Increased premiums. • Reduced coverage or employers dropping coverage. • Impact of Affordable Care Act (ACA) uncertain. • Medicare (Part A: hospital insurance trust fund that pays for inpatient hospital care for people over age 65): • Dipped into trust fund in 2012. • Funds will be exhausted in 2026. • Drug benefit costs are skyrocketing.

35. How Much Is Needed? Long-Term Care? 70% of individuals ages 65+ will need long-term care (at-home, assisted living or nursing home care) • Women will need an average of 3.7 years of care. • Men will need an average of 2.2 years of care. (11% of men and 28% of women will need 5+ years of long-term care.) Average costs: • Homemaker services: $43,500/year • Home health aid: $46,000/year • Adult day care: $16,900/year • Assisted living: $42,000/year • Nursing home: $87,000/year

36. Worker Confidence in Other Financial Aspects

37. Confidence in Medicare

38. How Much Is Needed in Retirement? • Depends on lifestyle (replacement rate). • Depends where you live—costs. • Depends on general health, family history. • Depends on family support needs in expected retirement years: • Later childbearing years mean later college expenses. • Parents living longer may mean long-term care support of them. Fidelity: rule of thumb—save 8x your ending salary. See retirement calculators available online.

39. Trend in Worker Expectations Regarding Later Retirement

40. Economic Uncertainty: Summary This module covered the following topics: • Reasons for working rest on economic uncertainty. • Traditional sources of income in retirement: • Pensions. • Retirement savings. • Social Security. • Total money income of older Americans. • Key cause of uncertainty—health care costs. • How much money is needed in retirement?